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Tuesday, 24 October 2017

The not-so-slow-motion steel trade war

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  • James Saft - June 2014

As a symbol of the year thus far and a taste of things to come you could not do much better than China’s imposition of tariffs on European and some Asian steel.

China announced last week that new “anti-dumping” tariffs ranging from 14% to 46% would apply to steel producers from the European Union, Japan and South Korea, alleging that it suffers “substantial damage” from unfair trade.

This bit of tit-for-tattery follows tariffs imposed this year on various types of Chinese steel by the EU and the US.

China reserved the highest new tariff for a specialized kind of steel made in Britain by Tata Steel, which itself touched off something approaching a panic when it said it will effectively abandon its operations there, threatening a chain of production sustaining tens of thousands of jobs.

The cross-currents here are complex and mostly malign, as players in China, Europe and the US seem increasingly willing to risk a trade war amid mounting economic and especially political pressures.

This apparent sea-change in the global attitude towards trade, and indeed globalization, poses a set of risks not just for the jobs and industries affected, but for economic growth and asset values.

“If this is not a trade war, I don’t know what is,” Gareth Stace, director of industry group UK Steel told Britain’s Daily Telegraph.

“We’re literally drowning in a flood of Chinese imports globally. We’re certainly not seeing a flood of European steel into China.”

China is widely accused by its trade competitors of selling its steel abroad for less than the prices it imposes in its home market, a practice called dumping. China has massively built up its steel industry, which now has nearly a 50% global market share, and is seeking to shelter the sector from the full impact of its strategy of trying to build up domestic consumer consumption rather than fixed investment in steel-hungry projects like highways and factories.

That means slowing growth and less demand for commodity-like products like steel at home, threatening Chinese jobs.

And here comes Trump

China, which has a well-deserved reputation for less than full compliance with its trade agreements, might well feel threatened by the huge change of tone in the US national conversation about trade.

That the US imposed much higher tariffs on Chinese steel in March than Europe was willing to venture in January comes as no surprise given the noises coming from presidential candidates on the subject.

Donald Trump, the most likely Republican nominee, has thrown out his party’s playbook, threatening to slap tariffs on China and promising to achieve everything shy of fine weather every weekend through this tactic. He’ll not succeed, either in winning the office, or in improving growth or the lot of lower income workers via the tactics he has outlined.

It isn’t just Trump. Hillary Clinton, the likely Democratic nominee, has also changed her tune on trade, pushed by the success of Trump and, more importantly, criticism of trade deals by her party rival Bernie Sanders.

In Britain, Tata has said it wants to sell its operations, but there is no clear buyer or way for one to operate profitably under the arrangements now prevailing. Britain’s Conservative government has faced fierce domestic criticism in part because it has been unwilling to go along with calls for the EU to change rules to allow it to impose higher tariffs. The Conservative Party, at least that part represented by Prime Minister David Cameron, is campaigning in favour of a vote to remain in the EU in an upcoming June referendum. It would be easy for this story, with its elements of a once-proud British industry fading into nothingness, to fan anti-EU sentiment, even though membership in that club does not rank very highly among that industries’ long list of weaknesses, structural and cyclical.

In short, the list of people willing to say the global trade system is iniquitous is getting longer and more powerful. What comes of that is extremely difficult to say.

The economic risks, if not the political rights and wrongs, are a lot easier to outline.

Average world tariff rates have declined from as high as 40% in the early 1990s to about 6% by 2010, according to World Bank data. That’s at least coincident with a similar path for global inflation, from as high as 30% in the 1990s to about 3.3% today. Surging trade and lower barriers to trade also coincided with higher financial asset values, not to mention income disparity.

A rolling back of free trade might be expected to reverse all that, and hit growth hard to boot.

(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)

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