LONDON (Reuters) - “Unless China starts to take timely and concrete actions to reduce its excess production and capacity in industries including steel (...) affected governments - including the United States - will have no alternatives other than trade action to avoid harm to their domestic industries and workers.”
Political language doesn’t get any blunter than that.
The stark warning came in a joint statement issued by the U.S. Department of Commerce and the U.S. Trade Representative after what appears to have been a non-meeting of minds at multilateral talks in Brussels to address what is rapidly becoming a global steel crisis.
And Beijing responded in undiplomatic kind.
“Blaming other countries is always an easy, sure-fire way for politicians to whip up a storm over domestic economic woes, but finger-pointing and protectionism are counterproductive,” thundered an editorial from China’s official Xinhua news agency on the same day as the Brussels meeting.
Adding apparent insult to perceived injury, Chinese steel mills lifted headline run-rates to record levels in March and exports accelerated again to an annualized 120 million tonnes.
The reasons behind this resurgent production give cause for doubting that China is going to heed calls to discourage what the United States terms “market-distorting policies”.
Because this is not just about Beijing’s steel policy, it’s about a clash of economic ideology.
FEELING THE PAIN
Everyone is feeling the steel pain.
Britain is in a collective hand-wringing mood over the potential disappearance of its once mighty steel production sector. In Germany, more than 40,000 steel workers took to the streets last week to protest over the impact of Chinese exports.
And, make no mistake, China itself is feeling the same pain.
The country’s major steel mills made combined losses of 11.4 billion yuan ($1.8 billion) in the first two months of this year, hot on the heels of record financial losses in 2015.
The China Iron & Steel Association (CISA), which issued these figures, is clear about what needs to be done - namely the elimination of more excess capacity.
Beijing agrees. It is targeting the closure of 100-150 million tonnes of capacity at a cost of an estimated 400,000 jobs, a figure that dwarfs the social impact of potential steel closures in Britain, not least because China has no equivalent social security net to mitigate the blow.
The problem, though, is two-fold.
Firstly, that capacity closure figure is only around half CISA’s estimate of excess capacity in China’s steel sector, which produces as much as the rest of the world combined.
Secondly, the entire Chinese sector has just been thrown a lifeline in the form of rising domestic prices, improved margins and, for the most financially beleaguered producers, a stay of execution.
The collective willingness to grasp that lifeline explains why the country’s steel output surged last month.
MORE STIMULUS PLEASE
Resurgent steel prices in China are down to resurgent domestic demand and the filling of a de-stocked supply chain in the country.
Mills, in other words, are restarting capacity only because they are being incentivized by “market forces” to do so.
But those “market forces” are directly down to government intervention.
It is now clear that China has unleashed a renewed stimulus package to prop up its slowing economy.
And this stimulus is the same as the last, bigger one used to stave off the impact of the global financial crisis in 2009-2010.
State banks and local governments are once again pumping money into fixed asset investment (FAI). FAI growth accelerated to 10.7 percent in the first three months of this year. Crucially, growth in FAI derived from state entities rocketed to 23.3 percent from 10.9 percent last year.
Combined with micro-stimulus in parts of the property market, this translates into demand for more steel, cement and other building materials.
It’s ironic that all of this runs counter to China’s official mantra about steering the economy away from FAI towards a more consumer-oriented model.
But in terms of the bigger stakes of economic growth and social stability, FAI remains Beijing’s most powerful medicine for economic slowdown.
If that means prolonging the problems of overcapacity in sectors such as steel, so be it.
This is how a centrally planned economy works. Although Beijing superficially embraces free-market concepts, when the going gets tough, the government steps in to shield its population from the potential chaos of unfettered markets.
So when the U.S. Commerce Department calls for a “market-driven” restructuring of the global steel sector “absent the effects of government measures that distort markets”, it’s missing the point as to how China really works.
The other countries taking part in that failed Brussels meeting have offered China a way back into the talks in the form of cooperation on information-sharing and policies to mitigate the social impact of restructuring the global steel industry.
Whether China picks up that olive branch remains to be seen. The acrimonious language used by both sides doesn’t bode well.
The alternative is more trade sanctions. The U.S. statement pointedly added as a footnote that the administration last year started “an historic number of trade remedy proceedings”, including $45.5 million of penalties on steel importers.
Further “robust enforcement measures” will proceed in parallel with continued talks.
The problem is that bilateral sanctions don’t work in a commodity supply chain such as steel.
Chinese exports hit not just the United States but other big Asian steel producers such as South Korea and Japan, which respond by stepping up exports.
India and Japan have already clashed in the World Trade Organization over the former’s move in February to set a floor price for steel imports.
In Australia, where local steel maker Arrium has just gone into administration, the government has already applied 41 anti-dumping measures to imported steel products, including 13 for China and eight for South Korea.
In the steel industry such a proliferation of trade sanctions is commonly known as “whack-a-mole”, a reference to the popular game in which the player has to hit a mole that appears randomly from a series of holes.
What it means is that one set of bilateral sanctions immediately causes a change in steel flows to affect another country, which in turn initiates its own penalties on cheap imports.
This process has not only started but is gathering global momentum as every country seeks to protect its own steel sector.
A global dialogue on steel restructuring is surely the right way to prevent a full-scale global trade war.
But with China unwilling and unable to sacrifice its broader goals of economic growth and stability to steel policy, the danger is that it will be a dialogue of the mutually deaf.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by Dale Hudson
Our Standards: The Thomson Reuters Trust Principles.