The American Iron and Steel Institute, the Steel Manufacturers Association and the Specialty Steel Industry of North America—the three leading steel associations in the United States—released the following point-by-point response to China’s white-paper defense of its trade policies:

•     n   The CCCMC paper does not address at all the major problems of Chinese government subsidies to the steel sector. These subsidies, which have been described at length in several recent papers by U.S. steel producers, have already provoked a WTO challenge by the United States. With assistance from these subsidies, China’s crude steel production increased by 200 million metric tons from 2003 to 2006—an amount roughly equal to twice the total crude steel production in the United States.   Steel from China does not have a right to unfettered access to the U.S. market, with little regard for WTO rules.
•     n   The CCCMC would like people to believe that recent Chinese government policy will help resolve the existing “imbalances” in China’s steel market. But, as noted above, China’s government policies are, in large measure, the cause of the current problem. Because of these policies, China went from being a net importer of 34.7 million tons of steel in 2003 to being a net exporter of 33.2 million tons last year. In other words, China’s trade balance with respect to steel shifted by almost 68 million tons in only three years. This incredible shift not only threatens U.S. steel producers; it is also disrupting markets around the world.
•     n   With regard to the CCCMC’s claim that exports account for only 10 percent of total Chinese steel production, this completely overlooks the fact that this represents an enormous figure, given the sheer size of China’s steel industry. China exported 52.1 million tons of steel products last year. That volume exceeds half of all steel production in the United States, which was 98.5 million tons in 2006. Moreover, during the first quarter of 2007, the increase in China’s net steel exports accounted for nearly 58 percent of the year-on-year increase in China’s crude steel production. This shows that increases in Chinese production are being driven to a large extent by higher export volumes.
•     n   While the CCCMC may assert that China’s steel industry “presents no threat to industries in other countries,” significant injury has already occurred. U.S. imports of steel from China rose from 2.3 million net tons in 2005 to 5.4 million net tons in 2006—an increase of 133 percent in a single year. These heavily subsidized imports took sales from domestic producers even with respect to high-end items like corrosion-resistant steel, and welded and seamless tubular products.  In terms of adverse effects downstream, the damage and job losses took place in many product lines, from fence posts to auto parts. In January 2006, the Chicago Federal Reserve attributed the large job losses in the U.S. auto parts industry in recent years directly to the dramatic increase in auto parts imports from China. 
•     n   The CCCMC is correct that increasing Chinese steel demand contributed to global steel price restoration in the post-2002 period. But the problem is that any benefits from this increase in demand are more than outweighed by the unprecedented increase in government-supported production that has taken place during this same period. For example, between 2005 and 2006, China’s apparent steel consumption rose by 9 percent, but its steel production increased by 17.7 percent. A main result of these divergent growth rate lines is that China is now a major net exporter of steel products, and global producers are facing severe and unfair competition from import surges of subsidized Chinese steel.
•     n   Neither market forces nor China’s economic expansion requires that China become self-sufficient in steelmaking, let alone a major net steel-exporting nation and the world’s number one steel exporter. In fact, China has to import enormous volumes of iron ore in order to supply its government-supported factories. While it is difficult to talk about the “costs” of steel production in China—given that China is not a market economy—there can be little doubt that China is not a low-cost steel producer.
• Market forces also do not require that China “balance” steel capacity/production and consumption. Instead, they require that China allow the market to determine the proper ratio between production and consumption. In any event, China’s steel trade is far from “balanced.”  Chinese steel exports (at a rate of 7 million tons/month) are upsetting the global supply/demand balance. While the CCCMC says that this is a “temporary phenomenon” to be solved by the end of 2008, U.S. mills—already facing a surge of steel imports from China—should not have to rely on the “good intentions” of the Chinese government, particularly in light of China’s track record in turning goals into meaningful results.
• Despite the CCCMC’s claims, there is no reason to believe that Chinese steel capacity and consumption will be brought into “balance.”  According to the International Iron and Steel Institute, China’s apparent demand for finished steel in 2008 will be 442.8 million tons.  Assuming a yield loss of 10 percent, this translates into demand for crude steel of 487.1 million tons. However, Steel Business Briefing recently reported that, according to the China Iron and Steel Association, China’s total steelmaking capacity at the end of 2007 will be 550 million tons per year. These projections indicate that, even if China added no steel capacity in 2008, its capacity next year would still exceed demand by almost 63 million tons.
• Other sources support a similar conclusion.  Recently, World Steel Dynamics analyzed Chinese capacity and demand with respect to seven key steel products: hot-rolled coil and strip, cold-rolled coil and sheet, galvanized sheet, cold-rolled electrical sheet, plate, wire rod and rebar. It reported that, in 2006, Chinese capacity to make these products exceeded Chinese demand by 40.2 million tons. It also predicted that, by 2010, this gap will have widened to 74.5 million tons.
• The CCCMC paper points to recent changes in tax policy by the Chinese government that will allegedly discourage exports. But the Chinese government has a pattern of temporarily increasing and decreasing value-added tax rebates and export taxes for its own purposes, and the American steel industry cannot count on such policy announcements because these manipulations of market dynamics have had limited success in the past, they often change and they do not address the fundamental problem of a steel industry dominated by government decree rather than market forces.  Indeed, China’s most recent announcements of VAT rebate eliminations and export taxes continue to reflect a government policy of intervening in steel and raw market markets by “channeling” or targeting exports of pipe and tube and other high-value steel products and by taxing or restricting exports of key raw materials and inputs.
• There are, no doubt, several reasons for China’s failure so far to close down obsolete, heavily polluting steel capacity (including subsidies and the need to maintain “social harmony”). But the reason the CCCMC gives—”the continued strength of both the Chinese and global markets”—hardly explains why these inefficient and environmentally un­ friendly facilities remain in operation. 
• China’s central government has made many positive-sounding policy pronouncements in recent years—to shut down obsolete steel capacity, enforce environmental standards for steel facilities and promote consolidation in the Chinese steel industry—but such pronouncements, by and large, have yet to translate into real-world results.
• Much of the new capacity being built in China will belong to state-owned enterprises such as Baosteel and other major producers. Plainly, China’s government could stop new capacity at plants that it controls if it really wanted to.  Unfortunately, it appears that China (1) wants to continue to direct and control steel industry development, (2) is unwilling to allow market forces to work and (3) does not want to end government ownership of, support for and intervention in the steel sector and related sectors. 
• While steel continues to be a good example of what is wrong in China’s economic development and in the U.S.-China trade relationship, it is not the only example of how China is intent on becoming the “world’s factory” thanks to massive government subsidies.
• It should also be emphasized that—despite urgings by the IMF, the U.S. administration, Federal Reserve Board Chairman Ben Bernanke and representatives of many other nations—China maintains a vastly undervalued currency that results in a subsidy estimated at 40 percent or more on its exports. This major concern is not addressed in the report.
• America’s steel industry supports the U.S.-China Steel Dialogue as a way to clarify some of the key points at issue. We believe strongly that there would be less steel trade friction between the United States and China if market forces and transparencyof government directives and non-market behavior—governed the Chinese steel sector. In sum, instead of relying upon additional government intervention as a means to solve problems, China should simply trust the market to work efficiently. 
• One obvious step in this direction is to move toward private ownership of steel mills, with a full and fair opportunity for non-Chinese companies to own Chinese steel producers. Another needed step is complete elimination of subsidies for Chinese steel production. Other forms of market intervention, including currency manipulation, efforts to control raw material markets and dictating the structure and operation of the Chinese steel industry, should also end if China hopes to move toward true market status.

Changes of this type would begin to alleviate the serious concerns that U.S. and other global producers have regarding China’s market-distorting practices. Unfortunately, the May 2007 CCCMC paper does not provide grounds for confidence that China intends to move in this direction, concluded the U.S. trade association officials.

Senate Bill Targets China
Currency Practices

The top Democrat and Republican on the Senate Banking Committee introduced legislation last month giving the U.S. Treasury Department stronger tools to confront China’s currency practices.

“Treasury still refuses to officially identify China as a currency manipulator, despite evidence that the Chinese government is continuing to undervalue its exchange rate against the U.S. dollar,” says Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat. “This legislation will put American policy where it belongs—on the side of American workers and businesses.”

Dodd and Sen. Richard Shelby, an Alabama Republican, chastised a recent Treasury report on foreign currency practices that stopped short of formally labeling China as a currency manipulator.

Last week, the lead Democrat and Republican on the Senate Finance Committee unveiled their own currency bill.

Many lawmakers believe China deliberately undervalues its yuan currency by as much as 40 percent to give Chinese companies an unfair advantage in international trade.

The U.S. Treasury Department has pushed China to move to a more flexible market-oriented exchange rate policy, but has frustrated many lawmakers and manufacturers by refusing to label China as a currency manipulator.

Dodd and Shelby have said their bill would change the definition of currency manipulation to make it harder for Treasury to avoid making that finding for China.