China Threatens Retaliation To Trump's Steel "Protectionism"

Days after Donald Trump signed an executive order to probe steel imports, mostly from China, Beijing responded warning such a move could trigger a trade dispute between the United States and its major trading partners, who are likely to take retaliatory steps, the official China Daily said in an editorial on Monday.

"By proposing an unjustified investigation into steel imports in the guise of safeguarding national security, the U.S. seems to be resorting to unilateralism to solve bilateral and multilateral problems," the China Daily said. The probe could result in efforts by the United States to curb imports that will affect the interests of a number of its major trade partners, including China, the editorial warned.

"If the U.S. does take protectionist measures, then other countries are likely to take justifiable retaliatory actions against U.S. companies that have an advantage ... in fields such as finance and high-tech, leading to a tit-for-tat trade war that benefits no one," it said.

The article called on the United States, the world's top economy, to use the settlement mechanism under the World Trade Organization to resolve the dispute over steel. Reducing imports will not alter the weak competitiveness of U.S. steelmakers, help restore U.S. manufacturing or bring back jobs, as President Trump hopes, it said.

As Reuters puts it, "the article was the strongest official response yet to U.S. President Donald Trump on Thursday launching an investigation of China and other steel producers for dumping cheap steel products into the United States."  It was a marked shift from official comments on Friday. China's Foreign Ministry spokesman Lu Kang said in a briefing the country needed to ascertain the direction of any U.S. investigation before it could make a judgment.

In addition to China, in Japan, the world's second-biggest steel producer after China, the head of its steelmakers' group expressed concern over Trump's protectionist policy.

"We are greatly concerned over Trump's protectionism, although we hear he has softened his tone on some issues with a grasp of reality," Japan Iron and Steel Federation chairman Kosei Shindo told a news conference on Monday.

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Separately, in a parallel move yet one which appears to justify Trump's threat to curb Chinese steel imports, 29 Chinese steel firms had their licenses revoked as Beijing kept up its campaign to tackle overcapacity in the sector. Nonetheless, analysts quoted by Reuters said the revocations were unlikely to be a direct response to Trump's plan, but rather a part of China's reform measures aimed at reducing surplus steel capacity that many estimate at around 300 million tonnes, about three times Japan's annual output.

An employee works at a steel factory in Dalian, Liaoning Province, China

China's Ministry of Industry and Information Technology released a list on Monday of 29 firms that will be removed from its official register of steel enterprises. Most have already stopped producing steel, but some had illegally expanded production or violated state closure orders.

"It's all enveloped in this strategy to improve the financial condition of the industry which has been weighed down by excess capacity for some time, partly as a result of inefficient operations," said Daniel Hynes, commodity strategist at ANZ.

As reported before, China has been aiming to shed between 100 million to 150 million tonnes of excess capacity over the 2016-2020 period, although recent reports showed that much of the capacity that had been planned to be taken offline had in fact remained operational. It also plans to shut around 100 million tonnes of low-grade steel production by the end of June.

On Monday, another 40 steel firms have been asked to make changes in areas such as environmental protection and safety. The majority of the companies were accused of failing to comply with emergency output restrictions during heavy pollution periods, and they must fully "rectify" their violations within a prescribed period, the industry ministry said, without giving a specific time frame. Hynes said China may take a more gradual approach in shutting inefficient mills rather than force "a lot of closures at once" and cause a spike in steel prices, which is what happened in the third quarter last year.

Some more details from Reuters:

China set up an official steel firm register in 2009 to impose order on the poorly regulated industry and to help companies during price negotiations with iron ore suppliers overseas. The register was also supposed to identify the mergers and closures required to meet a target to put 60 percent of China's steel capacity in the hands of its 10 biggest producers by the end of 2015.


However, industry consolidation rates actually fell to 34.2 percent over the 2011-2015 period, from 48.6 percent in the previous five-year period, and China has now pushed back the 60 percent target until 2025.


According to figures published by the official China Metallurgical News earlier this month, 292 out of a total of 635 firms in 12 provinces and cities have already ceased production or shut down completely.

As explained previously, the worry in Beijing is that as more legacy industries are "consolidated" it could lead to mass layoffs, and social instability. Last Wednesday, China's cabinet said that risks of mass unemployment in some regions and sectors have increased and pledged more fiscal and monetary- policy support to address the potential rise in the jobless rate.

The government plans to cut further excess and inefficient capacity in its mining sector and "smokestack" industries this year, part of efforts to upgrade its economy and reduce pollution, but the move threatens to throw millions more out of work.

The State Council said China faces "intensified structural conflicts" in its current job market, but it must place employment as a top policy priority and address the new challenges to keep its employment rate stable.

University graduates and workers from sectors affected by capacity cuts such as steel, coal, and coal-fired power were identified as "key groups" that needed extra support, the guidelines said. Data from the Ministry of Human Resources and Social Security showed 7.95 million students are expected to graduate from university this year in June, 300,000 more than in 2016. Graduates will be encouraged to diversify their employment options, such as working in less-developed countryside areas and working for small enterprises. China will also appropriately reallocate affected workers, it said.

China's official unemployment rate - which only accounts for urban, registered residents - has held around 4 percent for years, despite a slowdown that has seen growth cool from the double-digits to quarter-century lows of under 7 percent. In a guideline post on its website that sets the policy tone on employment issues, the State Council said provincial governments in those regions should take measures such as increasing the stipend for firms under job-shedding pressures.

"If new urban jobs shrink or jobless rate jumps, (China) should step up fiscal and monetary policy support," it said.

Which, of course, would send China right back to square one of its debt-funded doom loop: more stimulus, more debt, more economic inefficiencies, more bubbles, more capital outflows, rinse, repeat.