Advertisement
Advertisement
Steel workers protest in London. Photo: EPA
Opinion
Inside Out
by David Dodwell
Inside Out
by David Dodwell

What lies behind the temptation to beat up on China over global steel crisis

You don’t have to spend too many hours on European soil to hear China being demonised for one sin or another. And as I have just landed in the UK, the complaints focus on steel “dumping” and the struggling South Wales steel workers who face imminent redundancy as the massive Indian-owned steel plant faces closure.

Steel is a sore subject in many parts of the world as recent recession, in particular a sharp cutback in steel consumption in China, has left most of the world’s steel manufacturers haemorrhaging horribly. And as China was in the boom years the main driver for plump profits for the world’s steelmakers, so it is fair to acknowledge that in the downturn, China has played a large part in spreading pain.

A perfect storm of other highly political forces have amplified controversy – including Britain’s national debate on whether or not to stay in the European Union, large job losses in a traditionally strong trade union area, and fierce US opposition to China winning “market economy” status – controversies that come to a climax in the next two months.

Out of global production of around 1.7 billion tonnes a year, China at its peak accounted for over two-thirds. Out of 1.5 billion tonnes used worldwide, China’s manufacturers accounted for just under a half – with the European Union the second biggest user, accounting for a bare 10 per cent. So both as producer and user, China’s role has been critical for a decade or more.

As demand inside China has tumbled to 700 million tonnes with the global recession dragging on, so production has been cut by about 100 million tonnes – but that still leaves the country with large stockpiles, and a surplus, even after production cuts, of around 400 million tonnes. As China’s manufacturers have tried to reduce the stockpiles, they have inevitably been pouring increasing volumes of cheap steel onto world markets.

A worker at a steel plant in Handan, in China's northern Hebei province. Photo: AFP

In such circumstances, complaints from European and US steel makers that Chinese steel is being unfairly “dumped” are inevitable. Note, I always put the word “dumped” in inverted commas because more often than not dumping claims come from powerful industrial oligopoly interests in complaining countries, where these industrial lobbies have extraordinary and longstanding influence on political leaders – in particular during election times.

Claims are normally built on rigged numbers – and nowhere more so when the target country is deemed a “non-market economy” – as China is. Under normal World Trade Organisation rules, a new WTO member should, after 15 years of membership, be entitled to graduate to “market economy” status – at which point proving dumping becomes much trickier. And guess what – China will at the end of this year celebrate its 15th anniversary of WTO membership, and therefore expects to be rewarded with market economy status.

The result: a fierce assault by US industrial lobbies to block China’s graduation. Controversy over steel “dumping” is a political gift horse for US and European steelmakers, and it is being worked as noisily as possible.

Tata Steel’s forlorn steel plant in South Wales illustrates very clearly the complexity of the issue. The plant was bought at the top of the steel boom in 2007 for US$9 billion, and was never a cost-efficient producer. By today, US$2 billion has been written off. By comparison with other British or European steel plants, the Port Talbot plant in South Wales seems a basket case, hobbled by high British corporate taxes and expensive electricity.

Even worse – and a clear warning to much industry in Europe and the US – it is hobbled by a pension plan that Tata Steel is anxious to walk away from, and which no future investor is willing to take on. Tata has already poured US$125 million into the pension fund, and has promised US$180 million more, but the fund – which has 4,700 contributors, and around 130,000 people to support – has liabilities of more than US$2 billion, and an existing deficit of US$700 million.

Cheap Chinese steel is clearly a crippling additional problem for Tata Steel, but few other steelmakers are any more comfortably placed while the world recession continues. World leader Arcelor Mittal from France has not made a profit for four years, and the Australian steelmaker Arrium has just fallen into voluntary administration.

Steel workers gather outside the head office of Guofeng Steel Company in Tangshan in China's northern Hebei province after it shut down production at one of its plants, leaving them facing redundancy. Photo: AFP

China’s steelmakers lost an estimated US$1.76 billion last year. Only Korea’s Posco seems to have been able to keep its head above water, lifting prices to take advantage of a sudden improvement in steel prices inside China in the first quarter of this year.

Within Europe, debate continues to rage over whether anti-dumping duties should be imposed on China’s steel. And despite the controversy in Britain over the fate of steel in south Wales, it seems the relative free market sentiment that prevails in the UK government means that Britain – while it remains a member of the EU – will continue to block swingeing anti-dumping duties on China’s steel. We should not forget that Europe-wide, significantly more companies and workers benefit from using cheap steel than suffer because of it.

More than anything else, the steel rumpus illustrates the grave impact on the world economy in the wake of the 2008 financial markets crash, and the mounting pressure in so many economies for protectionist responses as local workforces feel no sign on improvement in secure jobs or income levels.

Of course, in China too the fragility of the global economy is frustrating efforts to implement urgently needed domestic structural reforms and build a stronger consumer economy. Cutting surplus capacity in steelmaking and other state-owned parts of China’s “command” economy will cost not a few thousand jobs, as in south Wales, but perhaps millions of jobs across the country.

The state of the world steel industry is but one illustration of the dreadful harm inflicted on the world economy by the excesses through from 1990 to 2007 – harm that may still be felt for several years to come. The temptation to beat up on China may be hard to resist at present, but we should remember that despite all the sins we want to blame on China, it is China that will play the pivotal part our recovery.

David Dodwell is Executive Director of the Hong Kong-APEC Trade Policy Group.

Post