In two previous reports, the Specialty Steel Industry of North America (“SSINA”) has described how the Government of the People’s Republic of China (“China”) has been using a wide range of direct and indirect subsidies as well as other support measures to carry out the Chinese government’s overarching plan to encourage the development of the Chinese specialty steel industry and to ensure its on-going viability.
This report supplements SSINA’s earlier studies by explaining how China has been protecting and fostering, on an enormous scale and contrary to China’s international legal obligations at the World Trade Organization and at the International Monetary Fund, the long-term development of the primary downstream industries in China’s specialty steel sector by means of a striking array of illegal subsidies and other interventionist measures.
These downstream industries represent competitors of SSINA’s customer base, which is struggling to compete with Chinese companies subsidized by their government.
• The Chinese government’s industrial policies have encouraged and directed certain “pillar” industries, which the Chinese government considers to be essential to China’s national economy and security.
These favored industries – “the life-blood of the national economy” – include many of the specialty steel sector’s primary downstream industries.
• State-owned enterprises in these “pillar” industries have been modernized and restructured to create large enterprises that are the principal actors or “national champions” in their industries and to displace imported products into China’s domestic market.
• The Chinese government has implemented a raft of direct and indirect governmental support measures to carry out its industrial policies, many of which violate China’s international legal obligations.
These governmental support measures include:
- massive amounts of direct subsidies that the Chinese government has conferred upon specialty steel mills and downstream industries in China’s specialty steel sector, such as debt-to-equity swaps, subsidized financing, tax subsidies, export subsidies, and subsidies contingent on the use of Chinese goods in place of imports; and
- carefully-crafted indirect support measures, such as non-tariff barriers and other administrative procedures, that encourage the production and exportation of goods produced by downstream industries in China’s specialty steel sector.
The Chinese government, for instance, imposes stiff taxes to discourage Chinese steel producers from exporting raw materials or semi-finished specialty steel products,but excuses or rebates taxes to encourage exportation of downstream products subject to a greater degree of manufacturing and value-added in China by not imposing similar export taxes and by providing rebates of taxes upon exportation.
• The Chinese government’s interventionist industrial policies to develop downstream industries in the specialty steel sector and the support measures used to carry out those policies have had a devastating impact on domestic industries and their workers in the United States by giving Chinese firms an unfair advantage when competing against U.S. domestic firms in the United States, in China, and in third counties.
In 2007 alone, the Chinese government’s industrial policies resulted in unfairly-traded exports that contributed to the United States’ US$262.1 billion trade deficit with China and the loss or displacement of more than 366,000 jobs in the United States.
• China’s interventionist industrial policies have also unduly influenced the investment decisions of U.S. domestic firms operating in downstream industries in the specialty steel sector by providing an incentive for U.S. firms to cease manufacturing and curtail research and development in the United States and to relocate their production facilities to China.
The billions of dollars invested in China by U.S. automakers provide just one example of the benefits Chinese industries are reaping from their government’s industrial policies and the harm caused by the policies to companies and workers in the United States.
General Motors, for instance, plans to increase its investment in China by over US$1 billion in each year between 2007 and 2009 and has committed to purchase US$10 billion annually from Chinese auto parts producers by 2009.
• Perhaps the most critical component of China’s overall plan and the Chinese government’s single greatest subsidy is China’s substantial undervaluation of its currency.
Through protracted, large-scale interventions in the exchange markets, the Chinese government has kept the renminbi undervalued by an estimated 30 percent to 40 percent relative to the U.S. dollar for many years. This undervaluation is contributing to dangerous global imbalances in trade and investment and has enabled China to amass at least US$2 trillion in foreign reserves.
It can reasonably be expected that some of this vast pool of funds will be applied to further protect and strengthen China’s specialty steel sector.
