China’s Trade Reliance May Limit Retaliation On Steel – Analysis

By Michael Lelyveld

China’s heavy reliance on trade may make it less likely to launch tough retaliatory measures in response to U.S. tariffs on steel, experts say.

According to World Bank figures, the value of China’s trade accounted for 37 percent of its gross domestic product in 2016, compared with 26.5 percent for the trade ratio of the United States.

The numbers suggest that China would sustain more economic damage if retaliatory measures lead to a trade war following President Donald Trump’s announcement of tariffs on imported steel and aluminum last week.

That calculation could influence China’s decisions on what types of retaliatory steps to take or whether to bring a complaint to the World Trade Organization for settlement under a lengthy process.

Experts say China’s greater vulnerability to trade restrictions would likely be only one of several factors that could temper its response to U.S. tariffs, but it may put Beijing at a disadvantage in the event of a showdown with Washington.

“With equivalent retaliation, China has more to lose than the United States, both because China is more dependent on exports to the United States than vice versa, and because the United States is better positioned to find alternative markets than is China,” said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington.

On March 1, Trump surprised U.S. trading partners by announcing plans to slap tariffs of 25 percent on steel and 10 percent on aluminum from all countries.

While China ranks only 11th among steel exporters to the United States and fourth among aluminum exporters, it is seen as a primary target of the tariffs due to its huge production and influence over world prices.

China produced 49 percent of the world’s crude steel and 56 percent of aluminum, according to industry groups.

Markets have been on alert for retaliation since last April when Trump ordered the Commerce Department to investigate steel imports from China and other countries under provisions of a 1962 trade law dealing with national security risks.

Commerce Secretary Wilbur Ross submitted his findings in January that current imports “threaten to impair the national security,” setting the stage for tariff and quota decisions by April 11 for steel and April 19 for aluminum.

Under the Commerce Department recommendations, tariffs on steel could have risen to “at least 53 percent,” while aluminum tariffs could have reached 23.6 percent.

Retaliatory threats

Last week, Trump jumped the gun by announcing his tariff decision at a White House meeting with industry officials.

“You will have protection for the first time in a long while and you’re going to regrow your industries,” he said.

The statement drew angry responses and retaliatory threats from the European Union and other trading partners. But initial reactions from China were more cautious and restrained.

The U.S. move “seriously damages multilateral trade mechanisms represented by the WTO and will surely have huge impact on normal international trade order,” said Wang Hejun, who heads the Ministry of Commerce (MOC) trade remedy and investigation bureau.

“If the final measures of the United States hurt Chinese interests, China will work with other affected countries in taking measures to safeguard its own rights and interests,” said Wang in a statement cited by the official Xinhua news agency.

The MOC issued a similar statement on Feb. 28 after the Commerce Department made a final determination calling for anti-dumping and countervailing duties on Chinese aluminum foil in response to petitions from U.S. producers last March.

China’s greater dependence on trade for its economy may moderate its retaliatory measures and keep its responses from mounting into a trade war.

“China is not about to enter a trade war,” said Dale Jorgenson, Harvard University economics professor.

“Quite the contrary. China’s five-year-old administration has announced that they plan to increase their role in the global economy both in terms of trade and in terms of investment,” said Jorgenson, speaking before the tariffs were announced.

“I don’t think the determining factor is going to be the trade share. I think it’s the policies that are involved,” he said.

China expects big gains from its “One Belt, One Road” initiative to develop trade routes and infrastructure through Asia and Africa to Europe with projects and investments in more than 60 countries.

But those anticipated gains could be at risk from the unpredictable consequences of a trade war.

Subsequent statements from Chinese officials have been relatively restrained ahead of a formal U.S. announcement this week, perhaps in hopes that terms of the tariffs may be modified.

“China urges the U.S. to use trade protection tools with restraint and comply with multilateral trade rules so as to make a positive contribution to international trade order,” Foreign Ministry spokesperson Hua Chunying said Friday.

Speaking on Sunday before the start of China’s annual legislative sessions, Zhang Yesui, spokesman for the National People’s Congress (NPC), tempered a warning with a call for cooperation.

“China doesn’t want a trade war with the United States, but if any U.S. moves hurt China’s interests, we will not sit idle,” Zhang said. He added that “differences do not necessarily lead to confrontation,” according to Xinhua.

On Monday, Premier Li Keqiang steered clear of invective as he addressed the opening of the NPC.

“China calls for trade disputes to be settled through discussion as equals, opposes trade protectionism and will resolutely safeguard its lawful rights,” said Li, as quoted by The Sydney Morning Herald.

Tit-for-tat moves

In a Washington Post opinion piece last month, Peterson Institute senior fellow Chad Bown raised concerns over the risk of a trade war after China responded to U.S. tariffs and quotas on solar panels and washing machines by launching an investigation into U.S. sorghum exports.

“Beijing’s reaction resembles a similar retaliatory move in 2009 — and one that ultimately saw U.S. chicken farmers lose out,” Bown wrote. If tit-for-tat retaliation breaks out, “matters could quickly escalate beyond U.S. sorghum farmers and pose a far greater threat to both economies,” he said.

Three weeks later, in a possible sign of moderation, the MOC announced that it had ended anti-subsidy and anti-dumping duties on U.S. broiler chickens, first imposed in 2010, after finding that the measures were “unnecessary.”

Reuters reported that the move followed a WTO ruling against the duties in January, but the Communist Party-connected Global Times quoted an industry official as saying that China’s decision “will help relieve tensions over trade between the two countries.”

The World Bank’s trade-to-GDP data can be read as a map of China’s development over time. While trade is still a major contributor to China’s economy, it plays a smaller role than it did in 2006, when its share of GDP peaked at 65.6 percent.

The declining share of trade over the past decade coincides with the rise of consumption and services as factors in China’s GDP growth. But these may be only partial explanations for the drop in the trade share to 37 percent.

Based on the raw numbers, China might seem more willing to risk retaliation on trade than it would have been a decade ago.

But Gary Jefferson, a Brandeis University professor of international trade and finance, points to the complex forces of development behind the numbers.

Jefferson draws a distinction between the ways that the trade and GDP numbers are influenced by manufacturing for export as opposed to assembling products such as mobile phones.

If a country manufactures a product like steel, using all the domestic inputs it needs such as energy, iron ore, labor and technology, it can then export the total value of the product, reflected in both trade and GDP.

“Basically, what it’s exporting is all the value added of that steel, starting from scratch,” Jefferson said.

In assembly operations for high-tech goods, a country may import semiconductors or other electronic components and export the finished product, which is highly valued as trade but not so much as GDP.

“Their value added is perhaps only 10 percent of what the total eventual value is,” Jefferson said.

As time passes and the country develops and originates more of the high-tech components used in assembled exports, its economy climbs up the value chain, causing GDP to rise while the trade ratio declines.

That process may account for the steep drop in China’s trade-to-GDP ratio over the past decade, making it a less reliable clue to what China will do.

Aside from such indicators, the trade tensions are taking place in a larger context.

“There are so many other issues swirling around the trade debate that it may be that the tariffs and quotas themselves aren’t going to decide the issue,” Jefferson said.

China’s growing access to Belt and Road countries may make U.S. restrictions on steel imports less of a problem than they would have posed a decade ago, he suggested.

Political cards on the table

Political factors such as China’s willingness to enforce sanctions on North Korea may also play a part in the trade dispute, Jefferson said.

One likely option for China in the event of U.S. trade measures on steel and aluminum would be to bring a complaint to the WTO, where a resolution typically takes two years or more, allowing both sides to cool off.

“They’ve got to do something. They’ve got a lot of political as well as economic cards on the table,” Jefferson said, adding that the WTO process would be consistent with China’s efforts to project the image of a responsible player in world trade.

Dale Jorgenson agreed that China is likely to see the WTO process as an appropriate recourse.

“China has worked through the WTO, so I think they will continue to do that. It’s one of their principle means,” he said.