naked capitalism

China is not playing nicely in the sandbox.

The nitty gritty of trade seldom gets the attention it warrants, but enough mercantilist measures can trigger retaliation, which most observers agree would merely precipitate a race to the bottom.

And China, which in many ways has the most to lose from protectionism, has been tempting fate. China has quietly reverted to a hard peg of the RMB against the dollar, even though keeping the currency weak is tantamount to a subsidy. We noted earlier that China was ramping up aluminum production despite signs of considerable oversupply. Now China is offering what amounts to an explicit subsidy to steel exporters. From MetalMiner, “New China Export Rebate Sure to Fuel the Trade Wars” :

The trade wars continue to rage on as China has just offered a new 9 percent VAT rebate for flat-rolled steel products and hot rolled ferro-alloy products starting June 1, according to this article. The tax changes extend beyond steel to include more than 600 items according to this report. These changes were implemented as part of an overall Chinese economic recovery plan.

The new rebate for steel, however, will have the effect of two things. First, it will promote exports of steel products (vs. production for domestic consumption) as the 9% can only be claimed if goods are exported. It will further stimulate aggressive anti-dumping action on part of the US domestic steel industry (we have another anti-dumping case to report shortly).

In all fairness, China was a net importer of steel products for the months of April and May and has seen a huge drop in demand (like all other global steel producers mind you) since the beginning of this year. We knew it was only a matter of time before China would begin tinkering with the VAT scheme again.