China steel pipe in US cross hairs
By Peter Navarro
On June 20, 2008, the US International Trade Commission voted 5-0 to slap stiff
tariffs on Chinese-made circular steel pipes because of the heavy subsidies
China uses. Circular steel pipe is used for home plumbing and sprinkler systems
and for natural gas and steam, and the 21 circular steel producers in the US
employ close to 2,500 workers.
The US circular steel pipe industry blames China for the loss of 500 jobs over
the past three years, and the case was filed by six pipe producers and the
United Steelworkers union. The tariffs to be set will range from 99% to a
whopping 700% and last for five years.
How big a threat is the Chinese steel industry to American steel
producers, not least as US steel producers, it can be argued, have been doing
rather well? Since joining the World Trade Organization, China's steel industry
has grown so fast that its total capacity is now more than the entire capacity
of the US, Japan and European Union combined. The danger to US steel producers
is not so much in the current climate of a boom in steel but rather in a future
scenario of a slowing world economy, reduced steel demand, and Chinese
producers dumping products at below cost because of their subsidy advantage.
This, in fact, is the nightmare scenario of US steelmakers.
The scale of the US jobs lost - 500 in three years - might appear small. Yet
this particular decision is important because it establishes the firm precedent
that US companies harmed by Chinese subsidies can seek countervailing tariffs
to offset China's mercantilist advantage.
Prior to this decision, the US Commerce Department refused to investigate
complaints about Chinese subsidies because it was classified as a "non-market
economy". That constraint has now been abandoned, and this case is likely open
the floodgates for hundreds of more cases from numerous industries.
While this is just one case that has been ruled on, there are three others. The
four cases altogether cover 1.5 million tons of the 2.6 millions tons of pipe
China exported last year to the US.
One problem, however, with this new complaint process is that in order to be
granted tariff relief, a US company or industry has to show that harm has been
done, not just that unfair subsidies are being used. Because the US steel
industry in general has been doing well, it may prove difficult to illustrate
such "harm" for other segments of the industry seeking similar relief.
The decision clearly raises questions for investors. It is clearly bullish for
the US steel industry in general as well as for the individual companies
affected by the decision. Those circular steel pipe companies directly
benefiting include Allied Tube & Conduit, IPSCO Tubulars Inc, Northwest
Pipe Co (NWPX), Sharon Tube Co, Western Tube & Conduit Corp and Wheatland
Tube Co.
Allied Tube is the largest business unit of Tyco. IPSCO was recently acquired
by TMK, Russia's largest manufacturer and exporter of steel pipes. Sharon Tube
and Wheatland Tube are divisions of the John Maneely Company, which is owned by
the Carlyle Group.
The cleanest signal of how investors interpreted the decision was the big spike
enjoyed by the only standalone company, Northwest Pipe, on announcement of the
decision.
US presumptive presidential candidate, Democratic Senator Barack Obama,
immediately endorsed the decision, calling it "the only responsible response"
to China's "egregious and outrageous violations of fair trade". That may well
turn out to be a very shrewd political move and signal that Obama is ready to
leverage the trade issue in rustbelt swing states.
The plants making circular welded pipe are in 13 states - Alabama, Arizona,
Arkansas, California, Illinois, Iowa, Kansas, Missouri, Ohio, Pennsylvania,
Tennessee, Texas and Wisconsin. Both Ohio and Pennsylvania are considered very
important swing states while at least some analysts believe that Arkansas,
Iowa, Missouri, and Wisconsin will be important battlegrounds. Obama's support
could translate into key votes in important battlegrounds.
Peter Navarro is a business professor at the University of
California-Irvine and author of The Coming China Wars.
www.peternavarro.com
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
