The United States is set to slap penalty duties on imported Chinese steel pipes, heightening trade tensions between the two powers.
This is the largest countervailing duty case filed against China, based on the value of trade. The US International Trade Commission (ITC) said it had made a "final" decision that the "subsidized" pipes adversely impacted the domestic steel industry, paving the way for the Commerce Department to impose countervailing duties of up to nearly 16 percent on the pipe. The ITC will forward in writing a formal determination to the Commerce Department in the first week after the New Year's holiday.
The ITC ruling comes amid rising trade tensions between the United States and China. In September, the United States announced it would place duties on Chinese-made tires to protect the local US industry, sparking the first major trade dispute under Barack Obama's presidency.
Stimulated by government policies, China produced around 550 million ton steel in 2009, up 50 million tons over the past year, with a surplus of 20 million tons. The country now has a whopping production capacity of 660 million tons, with 58 million more tons of capacity under construction, its overcapacity amounting to 200 million tons. This will somehow need to be absorbed by China's frenzied infrastructure investment or it will flood the world market.
There is, however, another perspective to this case: climate change. China has overtaken the US as the largest emitter of greenhouse gases (GHG), to which steel industry contributes no small part.
Just before the Copenhagen climate conference, China promised to lower emissions per unit of GDP by 40 to 45 percent by 2020. As many countries, developed and developing, pointed out, this is the promise of merely a slowdown and not a cut of emissions, and pressure on China to get serious is increasing. The US Congress is even now considering levying penalties against imported products from high emission processes, and also including in climate change legislation additional tariffs on imported steel and other energy-intensive products to offset alleged competitive harm to domestic industries, should other countries not commit to equivalent GHG reductions. China is the key target, and he steel issue threatens to pass currency valuation as the most contentious trade issue between it and the United States.
While China has made no binding promises, Beijing is not paying mere lip-service to climate change, having realized that it is in its interest to improve energy efficiency, particularly in the steel sector. Improving its energy efficiency is the most cost effective way that China can lower its GHG emissions.Â
A case study of Hebei Province, China's leading iron and steel producer (18 percent of the nation's total iron and steel output in 2007), illustrates the benefits of improved energy efficiency, with reduced GHG emissions being a favorable side effect. The case study also demonstrates the difficulties Beijing faces in pushing local governments to shut down small and inefficient steel mills.Â
Low energy efficiency is one reason Hebei's contribution to the nation's economic growth lags behind coastal provinces. Gross industrial output created by Hebei's large companies in 2007 came to US$230.5 billion (RMB1,705.5 billion), accounting for 4.2 percent of China's total; industrial value-added was US$65.2 billion (RMB482.3 billion), about 4.1 percent of the nation's total. The same indices for coastal Jiangsu Province, also a major steel producer, were roughly three times those of Hebei (13.2 percent and 11 percent respectively).Â
Increasing energy efficiency and reducing GHG emissions in Hebei's steel industry depends on closing old, inefficient mills. However, both the provincial government and the public are unwilling, or unable, to force closure of many of those mills. Hebei Province relies heavily on energy intensive industries. It has attracted 112 of China's Top-1000 energy consuming enterprises, with steel companies the most important. The industrial profit generated by the province's large ferrous metal producers was US$6.8 billion (RMB50 billion) in 2007, 27.3 percent of the province's total industrial profit produced by large companies in all industries. In 2008, steel employed some 450,000 workers, 15 percent of the province's total employment. As the unemployment rate has risen in Hebei, neither the provincial government nor the public wants to see it rise further through the closing of any mills, efficient or otherwise.
The province has taken one major step to try to improve the steel industry's energy efficiency. It consolidated the province's top two steel groups and launched the Hebei Iron & Steel Group ("HBIS") in 2008, now China's #2 steel producer. The intention was to improve the competiveness and efficiency of Hebei's steel industry. A recent Chinese study, however, points out that China's giant iron and steel producers are not necessarily any more efficient than smaller ones. Technology plays a more important role in improving efficiency, particularly energy efficiency.
Steel is a major employer in China and, as in the United States, there is little political will to sacrifice steel industry jobs on behalf of climate change. Industry consolidation is inevitable in China as it has been in the United States, but data do not support the perception that fewer, bigger steel mills must translate into reduced GHG emissions. It is not so much size as age that matters. Inefficiency may drive smaller, older mills out of business, but they are unlikely to be shuttered merely because of a desire to clean up the environment.
( Jing Zhu is with Baker & Hostetler LLP in Washington D.C )