China's Economic Cyclone: Its State-Owned Enterprises Are a Dark Cloud over the Global Economy

By Mastel, Greg | The International Economy, Winter 2018 | Go to article overview

China's Economic Cyclone: Its State-Owned Enterprises Are a Dark Cloud over the Global Economy


Mastel, Greg, The International Economy


The Trump administration's decision to tackle the international trade problems of the steel and aluminum industry has sparked a vigorous debate. Intense arguments have been made about "protectionism," "free trade," and "national security." Each of those debates is legitimate, but they miss the central dynamic driving international trade distortions in steel, aluminum, and numerous other sectors.

The blame for current trade problems in these key sectors lies in Beijing, not in Washington. The global problems in steel and aluminum are mostly due to the dangerous industrial policy China has pursued in these sectors largely through its state-owned enterprises.

AN ECONOMIC CYCLONE CREATED IN BEIJING

In its Section 232 national security analysis, the U.S. Commerce Department focused on a number of countries. It is certainly true that U.S. imports of steel and to a lesser extent aluminum come from a number of countries. Steel problems, in particular, have been an issue between Washington, Tokyo, Seoul, and Brussels for decades.

Since 2000, however, the global trade problems in steel, aluminum, paper, chemicals and many other sectors have been made in China. The picture in steel is particularly stark. In the twenty-first century, China has become the world's largest producer and exporter of steel. According to work by the Duke University Global Value Chains Center drawing on the work of the OECD, since 2000 China has added more steel production capacity than the rest of the world combined. China now accounts for almost half of the world's excess production capacity of steel. Since 2000, China's share of global production of primary aluminum has gone from just 11 percent to well over 50 percent. This sort of relentless growth in production and exports inevitably devastates the global market.

IMPACT ON THE U.S. MARKET

For some products, notably stainless steel, the impact of Chinese production on the U.S. market is direct. Stainless steel produced in China comes directly into the U.S. market and displaces U.S. production and U.S. workers.

In many cases though, the picture is more complex. Because of the transportation realities and because Chinese steel products are often the target of antidumping laws in the United States and other developed markets, Chinese steel sometimes does not find its way directly into the U.S. market. But the tidal wave of Chinese production since 2000 still has an enormous impact. First and foremost, the rising volume of Chinese production, which has increased regardless of market signals, depresses global prices and as a result U.S. prices for industrial products.

The constraints on Chinese steel often mean that it is exported to third markets rather than the U.S. market. But those Chinese exports displace steel production by other countries, such as Brazil, Turkey, and India, into the U.S. market. Indirectly, the surging U.S. steel imports are largely due to Chinese production flooding into the global market.

WHY IS CHINA OVERPRODUCING? …

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