When looking back in history, December 23, 2015 may be the date the global trade wars officially began. On that day, as we reported at the time, the U.S. imposed a 256% tariff on Chinese steel imports.
It did so perhaps with good reason: with its local end markets mothballed, China was desperate to dump as much excess capacity as possible offshore with shipments of steel, oil products and aluminum all reaching new highs according to trade data from the General Administration of Customs, and the result was a dramatic drop in US prices.
On the other hand, with Chinese mills, smelters and refiners all producing far more than can be purchased domestically amid slowing domestic demand, as well as the government’s anti-pollution crackdown, China’s decision to ship the excess overseas was also understandable.
As Bloomberg wrote at the time, “the flood of Chinese supplies is roiling manufacturers around the world and exacerbating trade frictions. The steel market is being overwhelmed with metal from China’s government-owned and state-supported producers, a collection of industry associations have said. The nine groups, including Eurofer and the American Iron and Steel Institute, said there is almost 700 million tons of excess capacity around the world, with the Asian nation contributing as much as 425 million tons.”
2016 was expected to get even worse: Colin Hamilton, head of commodities research, said the the price of hot-rolled coil, used in everything from fridges to freight containers, may decline about 13 percent next year. China’s steel exports, which have ballooned to more than 100 million metric tons this year, may stay at those levels for the rest of the decade as infrastructure and construction demand continues to falter.
To be sure, it was India who launched the first shot, when it announced that it plans to step up its protection for debt-laden domestic steelmakers by imposing a minimum price on steel imports among other measures, Steel Secretary Aruna Sundararajan said in December. The import curbs are necessary to ensure a “level-playing field” for Indian companies after restrictions imposed in September failed to stop a decline in prices, she said.
And then it was the US’ turn, when shortly after India unleashed protectionist measures, the US Department Of Commerce announced that corrosion-resistant steel imports from China were sold at unfairly low prices and will be taxed at 256 percent. The move was clearly aimed at China: imports from India, South Korea and Italy would be taxed at lower rates, while imports from Taiwan and Italy’s Marcegaglia SpA would not face anti-dumping tariffs.
We left it off by saying that “now that the US has fired the first trade war shot, it will be up to China to retaliate. It will do so either by further devaluing its currency or by reciprocating with its own protectionist measures against the US, or perhaps by accelerating the selling of US Treasurys. To be sure, it has several choices, clearly none of which are optimal from a game theory perspective, but now that the US has openly “defected” from the “prisoner’s dilemma” game, all bets are off.”
To be sure, just a few weeks later China proceeded with another dramatic devaluation of the Yuan, which may or may not have been accompanied by an aggressive selling of Treasury.
However the missing link was China unveiling its own protectionist response: a necessary and sufficient condition for fully symmetric trade wars.
It did so earlier today when, accused of flooding world markets with cheap steel, it imposed its own anti-dumping duties as high as 46.3% on electric steel products imported from Japan, South Korea and the European Union, the Ministry of Commerce said on Friday.
According to Reuters, the overseas suppliers include JFE Steel Corp, Nippon Steel and Sumitomo Metal Corp and POSCO, the ministry said in a notice posted on its website (www.mofcom.gov.cn). The ministry did not identify any EU supplier.
What is curious is that China, by far the world’s biggest steel producer, imports relatively small quantities of high-end steel products, including electric steel used in power transformers and generators. In other words the move was mostly symbolic, and a confirmation that China now believes it is being treated unfairly enough to where it can demand in-kind protectionism which will only escalate as the end demand to the global supply glut is simply not there.
The tariffs come at a time when the UK is up in arms over the decision by Tata Steel, the owner of much of UK’s steel industry, to sell its local plants in the process liquidating about 15,000 jobs. Tata blamed a flood of cheap Chinese supplies which means now that China has re-escalaed, thousands of newly laid off ironworkers in the UK (and elsewhere) will have a new global target which to blame for their troubles.
We doubt it will end there, because one trade wars begin, the logical consequences of currency wars, they rarely end amicably or on short notice, and on numerous occasions devolve into outright, conventional wars.
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