February 27, 2011 State Power to Dominate Global Steel Industry

Volume 14 | Issue 1

Let’s stick a pin in the reform myth balloon. Despite WTO commitments, China seeks to increase both ownership and control of the global stee

This end run around established agreements calls for a new strategy. The United States, the European Union and other trading partners must develop a game plan that keeps China compliant with both its promises and international legal obligations.

The unprecedented growth of the Chinese steel industry is entirely inconsistent with commercial considerations. From 2000 to 2009, China captured all of the world’s growth in steel production. During that period, Chinese steel production increased by 346 percent, while steel production in the rest of the world decreased by 10 percent. Today, China’s total steel production is on pace to be as much as 630 million metric tons per year, accounting for more than 45 percent of global steel production.

This unparalleled expansion is the result of massive government intervention. For years, the Chinese government has owned, directed and subsidized virtually every aspect of the Chinese steel industry. Today, in violation of its commitments regarding market reforms made upon accession to the World Trade Organization (WTO) in 2001, the Chinese government continues to exercise considerable ownership and control over its steel industry. In addition to owning majority shares in most of its major steel producers, the Chinese government maintains a high degree of decision-making authority over the steel industry and continues to intervene extensively in the operations of individual steel companies. As a result, China’s steel producers operate in an environment where basic market forces do not apply and where commercial decisions are mandated by the government – a clear violation of China’s WTO commitment to “not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises.”

DETAILS IN THE DATA

New data demonstrate that the government’s ownership of its steel producers continues to increase. By the end of 2009, eight of the 10 largest Chinese steel groups were 100-percent owned and controlled by the Chinese government, while 16 of the top 20 steel groups were 100-percent owned and controlled by the government. More than 95 percent of the production of the top 20 steel groups was subject to some government ownership. This massive degree of state ownership allows the government to exercise extensive control over the steel industry and to direct steel producers to act in ways that further governmental aims, such as maximizing tax revenue and employment.

In addition to ownership stakes, the Chinese government continues to exercise extensive control over the steel industry through a number of policy instruments, which have increased the government’s leverage to direct the growth and evolution of the industry. Further, though the government’s 12th Five-Year Plan (covering the period 2011-2015) has not been released, it is expected to continue the trend of increased government control over the steel industry.

China’s policy instruments have been implemented since China’s accession to the WTO and, with each successive policy, the government has asserted even more authority to intervene in and direct the course of its country’s steel industry – again contrary to its WTO commitments. Indeed, the Chinese government has shown no signs of relinquishing control over the steel industry, as the government continues to increase its control over the growth and evolution of the industry.

CHINA’S NEXT STEP

As the next step in its industrial strategy, China is now pursuing its “Going Abroad” strategy, deploying its massive “national champions” overseas to further the government’s objectives, which include exploiting natural resources and raw materials, obtaining technology and expertise, and increasing China’s economic and political influence on a global scale. In addition to raw materials, the Chinese government is deploying its state-owned enterprises (SOEs) overseas to invest in downstream industries such as the steel industry. Indeed, China’s various steel policies mandate that certain steel-producing SOEs invest abroad and call for government subsidies and other support to enable these entities to do so – in violation of China’s WTO commitments to refrain from influencing the decisions of its SOEs and to permit SOEs to operate based solely on commercial considerations.

In accordance with these government policies, China’s enterprises are investing abroad at unprecedented rates, confirming what the Chinese Communist Party has already acknowledged – “the pace of Chinese enterprises ‘going global’ has been noticeably accelerated.”

According to MOFCOM, China invested $43.3 billion overseas in 2009, which is almost 20 times more than the average $2.4 billion per year that China invested abroad between 1990 and 2000. The Organization for Economic Cooperation and Development (OECD) and other authorities have suggested that such figures substantially underestimate China’s overseas investments.

THE “ANSHAN” DILEMMA

The Anshan investment (the Anshan Iron and Steel Group) is a prime example of the concerns faced by the United States, the EU, and other countries as a result of China’s pursuit of government-mandated industrial policies. As an SOE, Anshan operates at the direction of the Chinese government and for the purpose of advancing government aims. As such, Anshan operates in an environment where basic market forces can be ignored to achieve government objectives. Moreover, because it receives massive government support, Anshan can obtain cash grants, subsidized financing and other support from the Chinese government, even in the worst economic conditions. As a result, Anshan has significantly less incentive to make production, pricing, or any other business decisions based on market principles.

In short, this type of investment forces private steel companies to compete directly against the Chinese government in the United States, EU, and other markets, creating significant imbalances that harm private companies and distort the steel market. Such market distortions are the very reason that the U.S. government and the OECD have worked for years to remove government ownership and subsidies from the steel industry – an effort that is being severely undermined by these types of investments.

Investments like Anshan also raise national security concerns. Steel sectors around the globe play a critical role in national defense, and in building and maintaining critical infrastructure. Specifically, the Anshan transaction could provide the Chinese government with direct access to, and information concerning, current and future U.S. infrastructure, energy and defense projects that may be critical to national defense. Moreover, as Anshan itself has acknowledged, the investment could provide the Chinese government with potential new technologies in the steel production industry.

The Anshan investment and the increasing number of similar Chinese government intrusions into the United States, EU and other markets raise the question of whether it is appropriate for the Chinese government to compete in these markets against private companies, especially where China restricts investments into its own market. While the United States and the EU should continue to welcome foreign investment, foreign government involvement in our markets raises unique economic and security concerns that may not be adequately addressed within the current regulatory framework.

CONCLUDING THOUGHTS

The Chinese steel industry in its current form is the creation of the Chinese government. Chinese steel producers continue to benefit from massive direct and indirect subsidies, many of which violate China’s WTO commitments. Moreover, despite its WTO obligations regarding market reforms, the Chinese government continues to increase its ownership and control of the steel industry, allowing the government to direct virtually all aspects of the industry. China is now deploying its steel-producing SOEs overseas to compete in private markets, further distorting global steel markets and causing additional harm to market-based steel companies and their workers.

Despite its WTO commitments, the Chinese government has chosen to increase its ownership and control of the steel industry. As a result, the United States, the EU and other trading partners should increase efforts to ensure China’s compliance with its WTO commitments and international legal obligations.

The authors are attorneys in the International Trade practice at Wiley in Washington, D.C. Alan H. Price is co-chair of the practice group and heads the firm’s antidumping and countervailing duty practice. Christopher B. Weld is an associate in the practice group. This article is excerpted from a larger paper prepared by Wiley Rein LLP and available at https://www.wiley.law/resources/documents/Reform_Myth.pdf.

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