Government Policy and International Trade Chapter 7 219

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Government Policy and International Trade Chapter 7 219

In the 15 years up to 2015, China increased its steel production fivefold as it forged the steel products demanded by its huge boom in construction and infrastructure spending. By 2015, the country produced 800 million tons of steel a year, half of the world’s annual output. However, in 2015 the bottom fell out of the Chinese domestic market for steel. The economy slowed down, and the government shifted its priorities away from massive infrastructure investments and to- ward boosting consumer spending. By the end of 2015, Chinese steelmakers were estimated to be producing 300 million more tons of steel a year than required for domestic consumption. With prices for steel slumping,

China’s largest 101 steel firms lost more than $12 billion in 2015, roughly twice what they made in profits during 2014. Not sur- prisingly, the Chinese are seeking to export this un- wanted product, even if it is at a loss. China exported more than 100 million tons of steel for the first time in 2015, making its steel exports alone larger than the pro- duction of any other country in the world except for Japan. The prices for Chinese steel products appear to be at least 10 percent lower outside of China than within the country. Those low-priced exports are having a devastating im- pact on steelmakers around the globe. American produc- ers have responded by clamoring for action from the U.S. Commerce Department to stop what they perceive to be the illegal dumping of steel products below the costs of production. Moreover, they have argued that cheap steel from China has also persuaded producers in India, Italy, South Korea, and Taiwan to dump their excess produc- tion on the world market, further harming U.S. produc- ers.

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In November 2015, the Commerce Department ruled that all of these countries except Taiwan were dumping steel and placed duties as high as 236 percent on some imports of foreign steel. In late December, the Commerce Department ruled that China was also selling corrosion- resistant steel at unfairly low prices and placed an addi- tional 256 percent tariff on such imports. This erected a huge barrier to certain Chinese steel imports into the United States. The European Union also took similar steps. The United Kingdom has been particularly hard hit by Chinese imports. Chinese imports now take 45 percent of

the UK market for steel rebar, up from nothing in 2010. Overall, steel imports from China doubled between 2014 and 2015. The United Kingdom lost some 4,000 steelmaking jobs in the second half of 2015 as the Chinese grabbed market share. Elsewhere in Europe, the Luxembourg- based steel giant ArcelorMittal blamed dumping by Chinese firms for a $8 billion loss in 2015. In response, in January 2016, the EU placed a 13 percent tariff on imports of Chinese steel. EU steel- makers called this totally inadequate, particularly given the much large tariffs levied in the United States. In mid-2016, the EU responded by placing tariffs as high as 22 percent on imports of non–stainless steel prod- ucts from China. For its part, the Chinese government remained unmoved. In fact, it may have added fuel to the fire in December 2015 when it cut export taxes on several types of steel, signaling perhaps that it was dou- bling down on a strategy to encourage domestic pro- ducers to export their surplus production rather than close mills.

Sources: Sonja Elmquist, “U.S. Calls for 256% Tariff on Imports of Steel from China,” Bloomberg News, December 22, 2015; “China’s Soaring Steel Exports May Presage a Trade War,” The Economist, December 9, 2015; “Steel Imports from China Investigated by the European Commission,” BBC News, February 12, 2016; Ivana Kottasova, “Europe Tries to Protect Steel Jobs with Tariffs on Chinese Imports,” CNN Money, January 29, 2016; Jones Hayden, “China-Russia Steel Hit with 5-Year Anti-Dumping Tariffs,” Bloomberg, August 4, 2016.

Case Discuss ion Quest ions

1. Does the evidence suggest to you that China is dumping excess steel production on world markets?

2. Absent of any response from other nations, how long can China pursue this policy?

3. Who is harmed by this action? Who might benefit? 4. What alternative policy might China pursue? What

are the costs and benefits of this alternative policy to China?

5. Are the EU and the United States correct to im- pose significant antidumping duties on imports of Chinese steel? What will the benefits of such policy be? Are there any drawbacks?

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Is China Dumping Excess Steel Production?

220 Part 3 The Global Trade and Investment Environment

6. Can you think of any unintended consequences that might occur as the result of the imposition of antidumping duties on Chinese steel imports by the United States and the EU?

7. What other steps could be taken in the long run to reduce the probability that producers in China

and elsewhere will dump their excess production at a loss on world markets?

Design Elements: Implications (idea): ©ARTQU/Getty Images; Problem (jigsaw): ©ALMAGAMI/Shutterstock; All Others: ©McGraw-Hill Education.


1. For a detailed welfare analysis of the effect of a tariff, see P. R. Krugman and M. Obstfeld, International Economics: Theory and Policy (New York: HarperCollins, 2000), ch. 8.

2. Christian Henn and Brad McDonald, “Crisis Protectionism: The Observed Trade Impact,” IMF Economic Review 62, no. 1 (April 2014), pp. 77–118.

3. World Trade Organization, World Trade Report 2006 (Geneva: WTO, 2006).

4. The study was undertaken by Kym Anderson of the University of Adelaide. See “A Not So Perfect Market,” The Economist: Survey of Agriculture and Technology, March 25, 2000, pp. 8–10.

5. K. Anderson, W. Martin, and D. van der Mensbrugghe, “Distor- tions to World Trade: Impact on Agricultural Markets and Farm Incomes,” Review of Agricultural Economics 28 (Summer 2006), pp. 168–94.

6. J. B. Teece, “Voluntary Export Restraints Are Back; They Didn’t Work the Last Time,” Automotive News, April 23, 2012.

7. G. Hufbauer and Z. A. Elliott, Measuring the Costs of Protection- ism in the United States (Washington, DC: Institute for Interna- tional Economics, 1993).

8. Sean McLain, “American Cars in Japan: Lost in Translation,” The Wall Street Journal, January 26, 2017.

9. D. Anderton, “U.S. Magnesium Lands Ruling on Unfair Imports,” Deseret News, October 1, 2004, p. D10.

10. S. Oberbeck, “U.S. Magnesium Plans Big Utah Production Expansion,” Salt Lake Tribune, March 30, 2006.

11. Robert E. Scott. “Growth in US–China Trade Deficit Between 2001–2015 Cost 3.4 Million Jobs,” Economic Policy Institute, January 31, 2017.

12. Alan Goldstein, “Sematech Members Facing Dues Increase; 30% Jump to Make Up for Loss of Federal Funding,” Dallas Morning News, July 27, 1996, p. 2F.

13. N. Dunne and R. Waters, “U.S. Waves a Big Stick at Chinese Pirates,” Financial Times, January 6, 1995, p. 4.

14. Peter S. Jordan, “Country Sanctions and the International Business Community,” American Society of International Law Proceedings of the Annual Meeting 20, no. 9 (1997), pp. 333–42.

15. “Brazil’s Auto Industry Struggles to Boost Global Competitive- ness,” Journal of Commerce, October 10, 1991, p. 6A.

16. For reviews, see J. A. Brander, “Rationales for Strategic Trade and Industrial Policy,” in Strategic Trade Policy and the New International Economics, P. R. Krugman, ed. (Cambridge, MA: MIT Press, 1986); P. R. Krugman, “Is Free Trade Passé?” Journal of Economic Perspectives 1 (1987), pp. 131–44; P. R. Krugman, “Does the New Trade Theory Require a New Trade Policy?” World Economy 15, no. 4 (1992), pp. 423–41.

17. “Airbus and Boeing: The Jumbo War,” The Economist, June 15, 1991, pp. 65–66.

18. For details, see Krugman, “Is Free Trade Passé?”; Brander, “Rationales for Strategic Trade and Industrial Policy.”

19. P. R. Krugman, “Is Free Trade Passé?” Journal of Economic Perspectives 1 (1987), pp. 131–44.

20. This dilemma is a variant of the famous prisoner’s dilemma, which has become a classic metaphor for the difficulty of achieving cooperation between self-interested and mutually suspicious entities. For a good general introduction, see A. Dixit and B. Nalebuff, Thinking Strategically: The Competi- tive Edge in Business, Politics, and Everyday Life (New York: Norton, 1991).

21. Note that the Smoot–Hawley Act did not cause the Great De- pression. However, the beggar-thy-neighbor trade policies that it ushered in certainly made things worse. See J. Bhagwati, Protec- tionism (Cambridge, MA: MIT Press, 1988).

22. World Bank, World Development Report (New York: Oxford University Press, 1987).

23. Frances Williams, “WTO—New Name Heralds New Powers,” Financial Times, December 16, 1993, p. 5; Frances Williams, “GATT’s Successor to Be Given Real Clout,” Financial Times, April 4, 1994, p. 6.

24. W. J. Davey, “The WTO Dispute Settlement System: The First Ten Years,” Journal of International Economic Law, March 2005, pp. 17–28; WTO Annual Report, 2016, archived at https://www.

25. Information provided on WTO website, tratop_e/dispu_e/dispu_status_e.htm.

26. Data at

27. World Trade Organization, Annual Report by the Director General 2003 (Geneva: WTO, 2003).

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