The trade war with China is already here

June 7, 2016 10:24 AM (UTC+8)

 

Donald Trump’s threats to hit China with protectionist tariffs of up to 45% on the goods it ships to the US go down well with his supporters on the campaign trail, despite ruffling feathers among free marketeers within his own party. Experts and commentators are less impressed, suggesting The Donald’s proposed trade war could cost US jobs and potentially trigger a global downturn.

us-china-trade-warWhat Trump and his opponents fail to acknowledge, however, is that the US is already engaged in a vicious trade battle with China centered on steel exports. China’s overproduction has decimated steel producers all over the world after the country upped its output from 128 million tons in 2000 to 822 million tons in 2014. American steel makers have already lost billions of dollars as a result of China dumping its steel exports on the US economy, while their counterparts in countries from Brazil to Britain have been left facing bankruptcy. Unsurprisingly, American and European steel mills are pushing their governments to take action.

In the face of growing international pressure, Beijing has repeatedly promised to slow its steel output, but the numbers tell their own story. March saw the highest level of Chinese steel production in history. The China Iron & Steel Association revealed the country churned out 70.65 million tons in just that one month alone. Despite falling back in April overall, average daily production rose from 2.279 million tons to 2.314 million tons, another record high, according to Reuters.

China mills defiant

So far, party bosses have been unable to stem the tide of steel producers. Mills in Hebei province have repeatedly flouted orders from Beijing to slash their output, while new power plants meant to support increased levels of production popped up in the region. The reason? While the Central Committee does exact a level of control over the biggest SOEs, many small or mid-sized local producers have sprouted up as a result of the advantageous crediting conditions China’s 2008-2009 stimulus package contained. These companies have increased their share of the steel market, growing from 55% in 2012 to 66% in 2015.

An employee watches as steel bars are lifted by a crane at a steel factory of Dongbei Special Steel Group in Dalian, Liaoning province March 13, 2013. REUTERS/China Daily
An employee watches as steel bars are lifted by a crane at a steel factory of Dongbei Special Steel Group in Dalian, Liaoning province March 13, 2013. REUTERS/China Daily

China’s failure to rein in its steel producers has prompted US regulators to launch an investigation  into complaints received from United States Steel Corp that its Chinese competitors stole its secrets and rigged prices. U.S. Steel claims it has evidence that Chinese hackers stole confidential data on production processes involved in the manufacture of a new high-strength, super-lightweight steel that is popular among car makers. Among the 40-odd Chinese producers investigated are some of the biggest SOEs, such as Baosteel Group, Hebei Iron and Steel Group, and Jiangsu Shagang Group. The launch of the probe comes after the Department of Commerce slapped more duties on corrosion-resistant steel and cold rolled steel imported from China, hiking tariffs on the latter to an eye-watering 500%. U.S. Steel is pushing for a halt to nearly all steel imports from China under section 337 of the main US tariff law.

And it’s not just the US. In February, thousands of steel workers held a protest in Brussels, calling on the European Union to protect them against cheap imports from China, which they claim are destroying European jobs. The European Parliament reacted promptly and passed a resolution that dealt a deathblow to hopes Beijing would receive Market Economy Status later this year. The much-coveted designation would have eased the access of Chinese exports to the European bloc, and China threatened a trade war with the EU if MES is not awarded.

Environmental toll

Frayed relations with the West aside, China’s rampant overproduction of steel and other commodities is having a devastating impact on the country’s already gravely polluted environment. Shockingly, nearly 75% of the country’s steel producers fail to meet China’s rather lax environmental standards. It is no coincidence that China’s smoggiest province is the steel heartland of Hebei, home to hundreds of steel mills operating with little oversight. The top steel-making city of Tangshan has even ordered mills in the area to reduce production temporarily in a last ditch attempt to cut air pollution and set up dust removal teams.

Despite China imposing stricter penalties on firms that violate new environmental laws introduced last year to cut the deadly smog that engulfs many of its cities, private and public companies alike have kept the wheels of industry turning, looking to turn a quick profit. Sierra Club, an American environmentalist group, released a video exposing the 21 industrial tycoons responsible for 10% of China’s CO2 emissions. These businessmen have amassed billions by flaunting environmental regulations, leading some commentators to suggest the increased fines are still not punitive enough to force manufacturers to adopt greener processes and that the Chinese government’s “War on pollution” is little more than window dressing.

While paying lip service to cracking down on companies that contribute most to its rampant carbon emissions – which are now higher than those produced by the US and Europe combined – the Chinese government continues to prop up industries from paper to steel with subsidies that result in below-cost production, contributing to the overproduction that is blighting so many industries around the world, along with the environment.

With its economy slowing, China is unlikely to kill the subsidies that allow its commodity producers to turn out products at below-market prices, making an escalation of its trade war with the US and the continued destruction of its environment all but inevitable.

Jon Connars is an investment risk analyst and researcher with an expertise in the ASEAN region who currently shuttles between Singapore and Bangkok.

Copyright 2016 Jon Connars

The opinions expressed in this column are the author’s own and do not necessarily reflect the view of Asia Times.

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