Photographer: Kevin Frayer/Getty Images

U.S. Push on China Factories Seen as Prelude to Trade Clash

  • Dispute brewing over whether to call China a ‘market economy’
  • China commits to reduce steel capacity but not aluminum

China’s pledge to reduce overcapacity in its steel industry has eased tension with the U.S. but probably won’t be enough to head off a trade clash between the world’s two biggest economies over whether the Chinese have truly embraced market forces.

Treasury Secretary Jacob J. Lew has been pressing China in recent months on the issue of its excess capacity, arguing in the past week that it has distorted global markets for steel and aluminum and may have a “corrosive” effect on the country’s growth. Lew’s arguments echo those made by U.S. steel and aluminum makers, who say state-supported Chinese producers are feeding a global glut of the commodities.

What Lew didn’t mention when he raised this issue at bilateral talks in Beijing this week: His statements are a possible prelude to denying China the prize of recognition as a “market economy” after a 15-year wait -- a designation that would hamper America’s ability to levy anti-dumping duties on Chinese steelmakers.

“It’s a very high-profile issue,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics who served as a Treasury official in the 1970s. Chinese officials “regard it as an insult that they’re treated as a non-market economy.”

When China joined the World Trade Organization in 2001, the terms allowed other countries to ignore China’s pricing data when deciding whether Chinese steel was being “dumped” in foreign markets at below-market prices. But that provision expires in December on the 15-year anniversary of the WTO agreement, and China has argued that other countries must recognize it as a market economy at that time. U.S. manufacturers oppose such recognition.

Possible Retaliation

If the U.S. refuses to grant that status, China will probably appeal to the WTO and retaliate against U.S. companies, Hufbauer said.

Lew said this week that market-economy status “is not an automatic determination” and that the Commerce Department is responsible for deciding on the issue. A Commerce Department official, who asked not to be identified, said in a statement that WTO members aren’t required to recognize China as a market economy on any date, and if China made a formal request, the department would begin a review that includes public comment.

China will “progressively” cut excess capacity in its steel sector, according to a joint statement with the U.S. on Tuesday following the annual Strategic & Economic Dialogue meeting in Beijing, the final one held by the Obama administration. The Chinese promised to “ensure market forces are not constrained,” so that its steelmakers take on a “stronger market orientation.”

China this week restated a promise by its State Council, or cabinet, to cut 100 million to 150 million tons of steel capacity. The OECD estimated in a study last year that there were almost 600 million tons of excess steel capacity globally, double the amount in 2007.

Lew welcomed the commitments China made Tuesday. “We understand each other’s positions quite well and we have an outcome that’s quite strong,” he told reporters in Beijing. He said the U.S. will continue to push for a similar agreement on aluminum, noting he will return to China next month for a meeting of the Group of 20’s finance ministers and central bankers.

“These are international issues and not just U.S. concerns. I rather suspect there are going to be other countries raising these issues as well,” Lew said.

European Debate

The European Parliament signaled last month it would reject any proposal to recognize China as a market economy. The European Commission is due to rule on the matter in July, and European Trade Commissioner Cecilia Malmstroem has indicated openness to granting China that status.

There’s “absolutely no chance” that the Obama administration will provide such recognition, said Scott Kennedy, a China scholar at the Center for Strategic and International Studies in Washington.

“The U.S. decision was made a long time ago, on strictly political grounds,” he said. “The steel industry is located in politically important states.”

Huo Jianguo, a senior trade researcher at China’s Ministry of Commerce in Beijing, said that “China’s export companies will be badly affected” if market economy status isn’t granted.

Chinese officials at the dialogue pushed back on U.S. concerns over excess capacity, with Finance Minister Lou Jiwei saying that while the government is addressing the issue, the economy isn’t centrally planned and private firms wouldn’t take instructions from the government.

He may have a point.

“Excess capacity alone is not an indicator of unfairness,” Peterson’s Hufbauer said. “There are state-owned segments that are very large in many economies.”

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