Fallout from Chinese Subsidies

The Subsidised Primary Product for Chinese Manufacturers means South African Manufacturers cannot compete

RimexRecently, the International Trade Administration Commission of South Africa (ITAC)
determined that prima facie evidence existed that subsidised exports of coated fine paper from China are injuring the South African market. Before an investigation in this regard could be initiated, the Chinese government intervened and the Department of Trade and Industry (dti) asked the South African industry to withdraw its application after consultations with its Chinese counterparts. Therefore, it would appear that the South African government is shying away from any potential trade conflict with China. The same sentiment was raised by the dti recently, where it was explicitly stated that South Africa will not risk future investment, nor the huge trade account with China through investigating possible subsidies being awarded by the Chinese government to its industries, particularly in the steel and stainless steel industries.

However, the risk of trade conflicts in the global stainless steel industry has increased of late. Excess capacity and oversupply, associated trade disruptions and the industry’s low profitability are creating significant challenges for stainless steel companies and spurring calls for more trade protection around the world, according to a study commissioned by Sassda and the South African Iron and Steel Institute (SAISI) about a year ago.
In order to achieve its growth targets, South Africa has no choice but to act against unfair trade, especially against China. Mastering “smart protection” tools such as trade remedies is therefore crucial for South Africa if it were to develop a genuine and viable industrial policy. This includes acting against subsidies being given by the Chinese to their steel and stainless steel industries, giving them an unfair advantage in the international trading arena.

The stainless steel industry in the People’s Republic of China has undergone explosive growth in
recent years, as the government of China and foreign investors directed massive amounts of
capital into the industry. While the Chinese government continues to control, through direct and indirect means, a significant portion of China’s stainless steel industry, joint ventures with foreign partners have become an important part of the industry.

The Chinese stainless steel industry is largely state-owned. The government of China owns a majority stake in numerous Chinese stainless steel producers, including two of the country’s largest stainless steel producers, Shanghai Baosteel Group Corporation (“Baosteel Group”)
(85.41 percent) and Tangshan Iron and Steel (61.31 percent). Also, these government-owned stainless steel producers have implemented ambitious expansion plans.

While the government of China controls a substantial part of China’s stainless steel industry, numerous projects have involved significant private and foreign participation. The Chinese government has used subsidies to attract foreign investment, which brings to China capital and modern production technologies.

This has resulted in the Chinese steel industry, including the stainless steel industry, benefitting from substantial direct aid from the Government of China. Indeed, the Chinese government created the infrastructure for much of the industry and continues to provide substantial support directly to it.

The subsidies are provided pursuant to general industrial policies that promote the production
ofexports and encour
age favoured industries, such as the stainless steel industry, as well as more specific subsidy programs.

The subsidies, moreover, are provided to Chinese stainless steel producers in various forms of government assistance, such as grants and other direct payments, to tax incentives, loans
provided on preferential terms, forgiven loans, non-commercial exchanges of unpaid debt for equity shares, the government provision of raw materials and energy at preferential prices and
an undervalued RMB.

Consequently, the stainless steel industry is a sector that seems to be affected significantly by unfair trade practices. At the same time, however, attention has to be paid to the importance that countries follow WTO rules in relation to the method for determining that unfair trade has occurred, the criteria to be taken into account when determining that unfair imports cause injury to the domestic industry, the procedures to be followed in initiating and conducting investigations and the implementation and duration of measures. That is, while trade remedy measures are a legitimate means to respond to unfair trade actions, they should be applied objectively and in accordance with international rules.

Many of the alleged subsidies in the stainless steel industry involve government provision of inputs at rates of remuneration below market prices through state-owned enterprises (SOEs), while others involve grants, tax breaks, subsidised loans and other forms of support (OECD, 2013). Such government subsidies are likely to promote exports and, when granted to less efficient stainless steel makers, can lead to overall efficiency losses and weaker profitability for the global industry. Recent WTO cases have nevertheless shown ambiguity regarding the provision of subsidies by SOEs.

Fair productsrom the above, it is obvious that Chinese steelmakers not only rely on subsidies for the development of the sector, but that their very survival
depends on the grants they received and are continuing to receive from the Chinese taxpayers. It is therefore not surprising that in recent years, China has continued to issue policies that provide for stainless steel subsidies. In March 2011, China issued its 12th Five-Year Plan to govern its economic and social development from 2011 through 2015.

The 12th Five-Year Plan states that China needs “to fully strengthen the role of industrial
policies,” “stick to the fundamental economic system to keep public ownership in a dominant position,” and “maintain the current advantages in exporting.”

An overview of the frequently used subsidies in the stainless steel industry reveal
the following:

  • Preferential lending through state-owned commercial or policy banks;
  • Provision of electricity for less than adequate remuneration;
  • Provision of inputs for less than adequate remuneration;
  • Export credit insurance reimbursements;
  • Refunds of the real estate and land-use taxes paid by companies in certain industrial districts;
  • Direct transfers of government funds to steel producers in the form of grants.

The USA recently imposed countervailing duties of up to 200% on Chinese wire rod. This was based on the same subsidies that are currently being given to the stainless steel industry.
Were it not for these subsidies, Chinese stainless steel
prices would be on par with prices being offered by other countries dependent on free market principles to sell their goods.

Despite the injurious impact Chinese exports in general have had on the South African manufacturing base, owing largely to political pressure, dti officials have argued that Chinese subsidies help consumers by keeping prices low. However, according to the Harvard Business Review, their research has led them to conclude that, like other monopolies, Chinese companies will raise prices as international competition retreats. Below is a chart, from the International Stainless Steel Forum (ISSF). This shows how, in less than a decade, Chinese stainless steel production now accounts for more than half of global production. This is despite the overcapacity in the industry and trade actions being taken by other countries.

Because of massive Chinese subsidies to several industries, no free trade exists and markets, including the South African stainless steel market, are fighting to survive. To survive, South African companies must seek government support to open Chinese markets and to protect themselves from subsidised products domestically. And national governments and trade blocs must heed these calls. If they don’t significantly increase pressure on the Chinese government and businesses, the devastation that Chinese subsidies have wreaked on other countries’ economies will continue.

George Geringer
International Trade Solutions

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