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Over-Politicized ‘Overcapacity’ at US-China Dialogue

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Over-Politicized ‘Overcapacity’ at US-China Dialogue

China’s overcapacity has replaced currency manipulation as the latest excuse for U.S. protectionism.

Over-Politicized ‘Overcapacity’ at US-China Dialogue

Treasury Secretary Jacob J. Lew participates in a moderated conversation at Tsinghua University School of Economics and Management in Beijing on June 5, 2016.

Credit: U.S. Department of the Treasury

At the start of this year’s U.S.-China Strategic and Economic Dialogue on June 5, U.S. Treasury Secretary Jack Lew stated, “Excess capacity has a distorting and damaging effect on global markets. And implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminum, is critical to the function and stability of international markets.”

This seems to be a celebrated move away from the zero-sum conflict seen in previous years’ accusations of currency manipulation to a positive-sum attention on significant economic issues. However, it’s an open question whether the United States is sincerely worried about the structural economic headache facing China and global economic health or is merely exploiting this as a justification for its protectionist measures against China’s steel exports.

American and European officials have for some time blamed a glut of Chinese steel in overseas markets for depressing steel prices, causing deep losses and unemployment. Nevertheless, after a U.S. Department of Commerce investigation into the “dumping” of steel products into U.S. markets in May, China was not the only economy affected — India, Italy, Korea and Taiwan also faced penalties. The Commerce Department said that Chinese corrosion-resistant steel would be subject to anti-dumping duty of 210 percent and anti-subsidy duties of between 39 to 241 percent. Various producers in other countries will be subject to anti-dumping and anti-subsidy tariffs of between 1 and 92 percent. Given the expansiveness of the targets, it is more likely that suppressing import competition– protectionism — rather than overcapacity is the real issue at stake for the United States.The call to curtail overcapacity is merely a delicate excuse to dampen Chinese steel exports.

In fact, overcapacity is a deep-seated problem in the Chinese economy and was pointed out by the National Development and Reform Commission (NDRC) as far back as 2003. The reason why the issue has gathered steam recently is arguably due to the fact that China will automatically accede to market economy status at the end of this year, based on its 2001 World Trade Organization accession agreement. This would shield China from being subject to assessments based on the prices in third-party country (which are usually higher) and instead use domestic prices as a gauge — thus chipping away at the legitimacy of the commercial instruments that the United States it has in its quiver to “defend” its industries against Chinese exports. In this sense, stirring up the overcapacity issue could overshadow China’s automatic accession. Fundamentally, overcapacity is not a far cry from previous years’ controversy over exchange rates; both arguments seek to shield various interests from competition with imports.

In 2015, five major U.S. steel producers (including United States Steel) issued a formal trade action, alleging that foreign companies were dumping steel at predatory low prices, forcing them to lay off 12,000 steel workers over the past year. It does not come as a surprise to see a surge in anti-dumping and countervailing actions initiated by the United States this year given the upcoming November general election, for which the steel industry will be a significant voting bloc. After the 2006 U.S. midterm elections, for example, United Steelworkers (the largest labor Union in North America) boasted that its members and their families constituted 23 percent of the total vote and supported Democratic candidates by a substantial 32 percent margin, as suggested by exit polls.

Recently, this union has been fiercely vocal in nudging Congress and the executive branch to pressure China to cut overcapacity. For example, prior to a Congressional Steel Caucus hearing on the U.S. steel industry in April, United Steelworkers (USW) International President Leo W. Gerard released a statement stressing the need to address “the flood of foreign steel into our market, while also forcing China to eliminate its massive production overcapacity.”

The costs of increased competition are concentrated, while the losses emanating from enhanced protectionism are relatively dispersed among myriad stakeholders. This makes steel producers and steel worker unions better organized and more effective in their lobbying activities than steel users like the automobile and construction industries. The fact that they are more vocal, however, does not mean protecting them is in the best interest of the economy. Due to the hijacking of policy, the tariffs imposed on imports increasingly punish healthy and normal competition and become largely damaging to the national economy. For example, the Section 201 (safeguard) action launched in 2002 by the Bush Administration levied punitive tariffs on certain steel products for three years and one day and considerably raised the steel prices and manufacturing costs of steel-using industries. As a result, 200,000 Americans lost their jobs during 2002, based on an examination by the Consuming Industries Trade Action Coalition Foundation. The costs were exorbitant, considering only 187,500 Americans were employed by U.S. steel producers in December 2002.

This incident not only provided an example of the deep-rooted tradition of protectionism in the United States — long before “overcapacity” began to attract attention — but also testified to the damage of stifling free trade. Allowing free trade facilitates both sides to benefit from the division of labor. Each side produces products in sectors where they enjoy a comparative advantage and imports products where another enjoys a comparative advantage. China boasts an advantage in relatively cheap labor and raw materials while the United States’ strength lies in technology and skilled labor. The trade imbalances between China and the United States accrue more to the structural differences in the two economies than alleged “overcapacity.”

The fact that the United States has been increasingly exporting market-oriented foreign direct investment (FDI) and outsourcing assembly lines to sweatshops in developing countries has also reduced its de facto export volume. In this sense, profit-maximizing capitalists seeking cheaper labor costs should take the blame for job losses in the United States rather than China. “Holding China accountable” is a catchy slogan from Donald Trump to attract voters, not a real-life scenario.

Overcapacity, referring to the low utilization rate of capacity, is indeed a macroeconomic risk in Chinese economy, and requires the Chinese government to effectively coordinate a solution. However, it should not be politicized into a global issue, signifying the capture by protectionist interests who use it as a justification for punitive actions. If this trend continues, even if one day China rids itself of overcapacity, vested interests overseas would come up with new excuses for protectionism — which will be devastating not only for Chinese exporters but also American users.

Lu Chen is an international civil servant and a freelance journalist. Her interests include politics, economy and technology.