Chinese Steel Export Rebate to Fuel Trade War?

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.

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  1. Brick

    What I would argue is that china is positioning its self so that it can float its currency.This comes at a time when china announces lenders can issue RMB bonds through hongkong.
    More on the tax rebates can be found in the following link.
    Michael Pettis hints at the implications behind the move in the following link under his stimulus – at what cost article

  2. ronald

    China has no Plan B!! The central planners are busy in China trying to keep the society together today the misleading MSM narratives about China suddenly becoming a consumer driven economy is pure illusion all driven by multi-national corporations along with the financial sector PR depts.

  3. mxq

    add to that a 13bn trade surplus after an unprecedented drop in exports last month. as pettis often points out, china's gross demand might be going higer, but net demand is still solidly negative, facilitating the exportation of unemployment and overcapacity. It's one thing to perform triage on the exporting industry, but its another to stack the deck and make globalization a losing proposition.

    So lets see, oil's doubled since Feb. and China's surplus is as robust as ever and the current US administration has backtracked on almost everything it promised on these two fronts. I'm starting to really wonder if policiticans in general are all utterly useless.

  4. mxq

    sorry, just to add, setser puzzles over the same issue on the trading imbalances in his post, Investment up over 30%, imports down 25%?:

    "To me, though, the biggest puzzle is on the import side. A strong, growing economy driven by a surge in fixed investment would normally be expected to generate strong demand for the rest of the world’s goods, especially if China is growing far faster than the rest of the world."

    hmmmm…sausages, anyone?

  5. Hugh

    I would agree with ronald that China is doubling down on export directed production increasing its already great overcapacity in this area. I would say to that protectionism is increasing quietly in most countries.

    To mxq, "I'm starting to really wonder if policiticans in general are all utterly useless."

    This is one of the those good news/bad news things. The good news is that not all politicians are utterly useless. Think of Lincoln and FDR. The bad news is that all of the current ones are, Democrats and Republicans, with only a smattering of exceptions.

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