World Views | Unexpectedly, Trump has an opening in China

When it comes to trade, President Donald Trump and the Chinese government are both engaged in pointless, counterproductive protectionism. That may actually represent an opportunity.

As Trump reviews China’s trade policies, he has zeroed in on its alleged “dumping” of steel and related products in the U.S. market, and has threatened to impose tariffs in response. Dumping occurs when a product is exported at a price below the cost of production, which can distort markets and potentially run afoul of World Trade Organization rules.

But there are many problems associated with pursuing a dumping claim. Especially in heavily traded commodities where prices fluctuate widely – like steel – dumping today is selling profitably tomorrow. Producers unwilling to lose market share are frequently (and quite logically) willing to temporarily sell at a loss.

This is exactly what’s been happening in China. For most of the past decade, steel in China was effectively a break-even proposition. From 2010 through 2015, listed Chinese steelmakers lost a total of 902 billion yuan on 7.2 trillion yuan in revenue. Since December 2015, however, prices have surged: Hot-rolled steel coil is up 97 percent while steel rebar is up 115 percent.

This has fundamentally changed the dynamics of the industry. Listed Chinese steelmakers are now enjoying big profits, raking in 48 billion yuan through the first three quarters of 2017 and likely to top 70 billion yuan for the year. Pursuing antidumping claims in such volatile markets makes little sense.

More to the point, China isn’t a major steel exporter to the U.S. Over the past decade, it has generally maintained a market share of between 4 and 5 percent, falling to a paltry 3.3 percent in 2016. Imports that year fell precisely because of the increased prices, making it hard to see how Chinese steel is any kind of a threat to the U.S. It’s even harder to see how Trump’s plan to impose new tariffs on Chinese imports would significantly benefit Americans.

Of course, China isn’t totally innocent in these matters. Long-promised capacity cuts in the steel industry are falling short, as fixed-asset investment continues to add more than is being taken offline. Net capacity is being added faster than output growth, lowering operating rates.

Additionally, there’s no question that state-owned businesses still dominate China’s steel sector. Officials set hard quotas, encourage wealth managers to prop up the stocks of steelmakers, and mandate production cuts to limit coal usage, which pushes up prices. Complaints about such behavior are perfectly valid under international norms of trade.

In a weird way, though, all this represents an opportunity. Because both the Trump administration and China are pursuing fundamentally flawed policies, they both have a chance to make necessary concessions that they might be unwilling to consider in the absence of pressure from an opposing party.

Trump should use the leverage he has created by criticizing China’s steel dumping to extract concessions in other key markets in return for not imposing tariffs. In return, he could pressure China to live up to the trade agreement the two countries reached last spring – for instance, by finally granting Visa Inc. and Mastercard Inc. access to its market.

China, meanwhile, could sell such an opening as the price it has to pay to maintain overseas access for its steel producers. It wouldn’t be risking much, given the local dominance of state-owned banks and mobile- payment systems. But it would gain renewed leverage in global trade negotiations, and it just might expose its payments market to the salutary effects of competition – as the government often says it wants.  

Tensions are understandably high between two countries that want to protect their own while demanding others open up. The strange reality is that those tensions may be just what they need for progress. Christopher Balding, Bloomberg