In the 15 years up to 2015, China increased its steel production fivefold as it

Question

In the 15 years up to 2015, China increased its steel production fivefold as it forged the steel products demanded by its huge boom in construction and infrastructure spending. By 2015, the country produced 800 million tons of steel a year, half of the world’s annual output. However, in 2015 the bottom fell out of the Chinese domestic market for steel. The economy slowed down, and the government shifted its priorities away from massive infrastructure investments and toward boosting consumer spending. By the end of 2015, Chinese steelmakers were estimated to be producing 300 million more tons of steel a year than required for domestic consumption.

With prices for steel slumping, China’s largest 101 steel firms lost more than $12 billion in 2015, roughly twice what they made in profits during 2014. Not surprisingly, the Chinese are seeking to export this unwanted product, even if it is at a loss. China exported more than 100 million tons of steel for the first time in 2015, making its steel exports alone larger than the production of any other country in the world except for Japan. The prices for Chinese steel products appear to be at least 10 percent lower outside of China than within the country.

Those low-priced exports are having a devastating impact on steelmakers around the globe. American producers have responded by clamoring for action from the U.S. Commerce Department to stop what they perceive to be the illegal dumping of steel products below the costs of production. Moreover, they have argued that cheap steel from China has also persuaded producers in India, Italy, South Korea, and Taiwan to dump their excess production on the world market, further harming U.S. producers. In November 2015, the Commerce Department ruled that all of these countries except Taiwan were dumping steel and placed duties as high as 236 percent on some imports of foreign steel. In late December, the Commerce Department ruled that China was also selling corrosion-resistant steel at unfairly low prices and placed an additional 256 percent tariff on such imports. This erected a huge barrier to certain Chinese steel imports into the United States.

The European Union also took similar steps. The United Kingdom has been particularly hard hit by Chinese imports. Chinese imports now take 45 percent of the UK market for steel rebar, up from nothing in 2010. Overall, steel imports from China doubled between 2014 and 2015. The United Kingdom lost some 4,000 steelmaking jobs in the second half of 2015 as the Chinese grabbed market share. Elsewhere in Europe, the Luxembourg-based steel giant ArcelorMittal blamed dumping by Chinese firms for a $8 billion loss in 2015.

In response, in January 2016, the EU placed a 13 percent tariff on imports of Chinese steel. EU steelmakers called this totally inadequate, particularly given the much large tariffs levied in the United States. In mid-2016, the EU responded by placing tariffs as high as 22 percent on imports of non–stainless steel products from China. For its part, the Chinese government remained unmoved. In fact, it may have added fuel to the fire in December 2015 when it cut export taxes on several types of steel, signaling perhaps that it was doubling down on a strategy to encourage domestic producers to export their surplus production rather than close mills.

Questions

1. Can you think of any unintended consequences that might occur as the result of the imposition of antidumping duties on Chinese steel imports by the United States and the EU?

2. What other steps could be taken in the long run to reduce the probability that producers in China and elsewhere will dump their excess production at a loss on world markets?

Explanation / Answer

1. Can you think of any unintended consequences that might occur as the result of the imposition of antidumping duties on Chinese steel imports by the United States and the EU?

There are many unintended consequences, which could arise from the result of US and EU imposing anti dumping duties on China. The main consequences are as follows:

·         It would lead to a global trade with retaliation in imposing trade restrictions against imports across the world citing security reasons. This has already cited by the US while imposing huge tariffs on import on aluminum and steel under section 232 where import duties can be levied if an import is affecting national security. The key countries impacted are China and Russia. This is also against the established norms of GATT and WTO.

·         There would be a breakdown of trade across the world and procuring many items would become very expensive (like automobile and aircraft manufacturing) leading to cost increase, price increase, further spiraling the costs in an upward vicious circle. The consumers would suffer the direct impact of an increase in prices.

·         Increased tariff duties would also impact export as overall price competitiveness of manufacturers would be impacted.

·         The anti dumping duties will also cause a lot of job loss as many plants would shut down across the globe because of loss of orders and business, as many industries are 100% export oriented.

·         The cost of products worldwide will increase, as the economies of sourcing will disappear.

·         On the positive side, it would generate more jobs and give a boost to the dying steel industries in the US and EU.

2. What other steps could be taken in the long run to reduce the probability that producers in China and elsewhere will dump their excess production at a loss on world markets?

The key steps to reduce the probability that producers in China, Korea, India and elsewhere will dump their excess production at a loss on world markets are as follows:

To sum it up US government has to come up with rules and systems to improve existing manufacturing capacity by giving subsidies. This will help to reduce the prices of made in US components and the locally sourced steel prices. Further, it will encourage local manufacturers to source made in US components and steel.

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