Furious China Slams "Irrational" US Trade War, Warns "Will Take Steps"

The main reason stocks in the steel sector are on fire today is because overnight the Commerce Department escalated its trade war with China when it implemented the latest clampdown on a glut of steel imports, when it announced that corrosion-resistant steel from China will face final U.S. anti-dumping and anti-subsidy duties of up to 450%. The final U.S. anti-dumping duties on the Chinese products replace preliminary ones of 256% issued in December 2015.

The department also issued anti-dumping duties of 3 percent to 92 percent on producers of corrosion-resistant steel in Italy, India, South Korea and Taiwan.

The duty hit producers of the flat-rolled steel, which is coated or plated with zinc, aluminum or other metals to extend its service life, with anti-subsidy duties in China, South Korea, Italy and India. Taiwan was exempted.

This follow last week's 522% duty imposed by the US on cold-rolled steel imports from China used in automobiles and other manufacturing, which led to the latest angry rebuke from Beijing: "There's too much trade friction and it's not good for the market," Liu Zhenjiang, secretary general of the China Iron and Steel Association told Reuters when asked if China will appeal U.S. anti-dumping duties at the World Trade Organization. "High taxes are unfair .... China doesn't have a large market share in the United States," Zhang Dianbo, deputy general manager at Baosteel Group, said recently during a Singapore conference.

Fast forward to today when China escalated the war of words.

Cited by Reuters, China's Commerce Ministry said it was extremely dissatisfied at what it called the "irrational" move by the United States, which it said would harm cooperation between the two countries.

"China will take all necessary steps to strive for fair treatment and to protect the companies' rights," it said, without elaborating.

An employee talks on his mobile phone near stacks of rebar at
Shanxi Zhongsheng Iron and Steel in Fenyang, Shanxi Province

China has come under increasing fire from industrialized countries worldwide that have accused it of dumping steel at prices far below production costs to avoid cutting excess capacity in the sector, which faces slowing demand at home. 

Beijing has insisted that it would eliminate 100 million to 150 million tons of annual capacity and said last week it would persist with a steel tax rebate plan to support the sector's restructuring; it has so far failed to do that and instead as a result of the recent credit deluge Chinese production and exports have soared. 

The increasingly more noisy steel trade war has grown into a major irritant as senior U.S. and Chinese officials prepare for bilateral economic and foreign policy meetings in Beijing in early June.

A laborer marks steel bars at a steel factory in Huai'an, Jiangsu province

What is more notable in this escalating war of both words and trade duties is that it comes at a time when none other than China has right of first refusal to hinder the Fed's rate hiking intentions (if indeed such exist). As Deutsche Bank explained yesterday, a rate hike in June or July will be up to China: should the Yuan proceed to slide in a repeat of what happened in August and December, the Fed may be forced to postpone its rate hike once again.

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Meanwhile, the US shows no relent in its trade war with China: the Commerce Department issued anti-dumping duties of 210% on all Chinese-produced corrosion resistant steel. Final anti-subsidy duties ranged from 39 % for many producers to 241% for some of the largest ones including Baosteel, Hebei Iron & Steel Group and Angang Group.

Life for China's exporters is only going to get more difficult: the European Union launched its own investigation of Chinese steel exports two  weeks ago following protests by steelworkers. In Britain, Tata Steel cited low-cost Chinese competition when it announced plans last month to sell money-losing operations that employ 20,000 people.

And just to assure that this is nowhere near the end of the ongoing trade wars, China pushed back against its trading partners in April, announcing anti-dumping duties on steel from the European Union, Japan and South Korea.

Will China merge its ongoing trade war with the just as violent currency war which prevented the Fed from hiking rates so far in 2016, when the tumbling Yuan resulted in two separate S&P500 swoons? The answer will be made apparent with every CNY fixing over the next month and the PBOC's subsequent intervention in the offshore CNY market. What makes this particular reaction by China especially interesting is that it comes in the aftermath of the Shanghai Accord: will the tentative agreement ironed out between the central banks to not create too much FX volatility be respected, or will China do what the US has been warning Japan against for the past month, and proceed by breaching the ongoing currency ceasfire?