China may use subsidies to prop up a range of domestic industries, but oversupply in these sectors has little impact on global trade, a Swiss-based trade watchdog says in a new report on the current steel glut and protectionism.
Some 86% of Chinese exports to Group of 20 countries aren’t from sectors where overcapacity is a problem, Global Trade Alert says. The 101-page study examines whether it’s wise for US trade partners such as the EU and Japan to “double down” on a strategy of cooperating with Washington to crack down on excess Chinese manufacturing capacity.
The authors conclude that there is no compelling case for governments to become upset about a glut in manufactured exports. “From the perspective of the global trading system, a nation’s excess capacity is not the issue per se, but the harm such excess capacity does to trading partners is”, the report says.
The US and other countries have slapped duties on Chinese goods including steel to counter overproduction, dumping and subsidies. World Trade Organization members including the EU, Costa Rica and South Africa – and most recently Turkey, just two days ago – have launched ‘safeguard’ investigations to protect their own steel markets from imports.
Perhaps the most controversial example of trade defence measures to deal with oversupply is the Trump administration’s March decision to levy tariffs on foreign steel and aluminium for what the GTA report calls “widely derided national security grounds”.
The study found that even before Washington imposed the so-called Section 232 duties, the US’ 144 measures to curb foreign steel that are in force today together cover 96.8% of the country’s imports of the alloy.
While the trade distortions that dog the steel sector are a legitimate concern, the study finds that the way that industrialised nations have attempted to address this problem has fallen short.
Referring to the G-20’s Global Forum on Steel Excess Capacity, the report notes that “one failing … is that it relied on member governments to report their own policy intervention. Consequently, G-20 governments grossly underreported their own resort to antidumping actions, antisubsidy tariffs, subsidies and export incentives granted, and other import tariff increases in the steel sector”.
The report calls efforts to target the steel glut a “fool’s errand”, noting that estimates by the Global Forum and the Organisation for Economic Co-operation and Development on Chinese steel production capacity differ by more than 91 million tonnes.
“Worse, headline numbers on global steel overcapacity reported by the Global Forum are misleading,” the study says. “These headline numbers do not take account for the fact that in ordinary times steel firms run at less than full capacity.”
Several surprises
The only reason to focus on excess capacity is to assess how much harm it causes, says the report, titled “Going Spare: Steel, Excess Capacity, and Protectionism”. China is believed to overproduce goods ranging from glass, ships and leather to luggage, paper and batteries, among others. Not only do such excesses cause minimal trade distortion, the report says, but China’s exports of those products accounted for only a small proportion of its total exports and less than 2% of G-20 countries’ manufacturing imports.
“These are perhaps the most surprising results of all in the report,” study co-author Simon Evenett told Borderlex.
But the GTA report also expresses surprise about the frequency with which G-20 governments respond to import surges by raising barriers or granting subsidies to domestic manufacturers.
“For import surges lasting one year, G-20 governments react by raising import barriers 3.6% of the time in sectors where there is no Chinese excess capacity,” it says. “In contrast, in sectors with Chinese excess capacity import barriers are raised 5% of the time. That means that only in one case in 20 have G-20 governments reacted to year-long import surges in Chinese excess capacity sectors by raising trade barriers.”
Governments respond even less frequently by offering aid in response to import surges, the study adds. “For two year-long import surges, only one in 10 import surges in sectors with Chinese excess capacity induces an import-restricting policy response by G-20 governments. That over the past decade G-20 governments reacted so rarely to import surges in excess capacity sectors undercuts their trade policymakers’ contention that excess capacity is a systemic concern.”
