Which pot is calling which kettle black? The “Made in America” has caused quite a stir among vested interest groups, among them China and a number of our industries now profiting from Chinese steel, i.e., Caterpillar.
The whole mess is quite a chuckle. Trade war? Well, in case you haven’t notice, the trade war has been waging from some time now. And, if you do not know how a command economy works, now is the time to don your reading hat, pull out your pipe, and settle down before a cozy winter fire.
A U.S. president has finally recognized the fact, even if many in Congress do not, i.e., those now receiving considerable financial support from American companies now profiting from that war. (Lobbies are such a tangled web.)
Before we jump too quickly into the fray, we should look the ways in which China subsidizes its own steel industry. The U.S. steel industry has put out an interesting document on how China subsidizes its own steel industry. Whoa, you say…obviously this document is not to be trusted.
Well, maybe. Some of its assertions should be scutinzed.
China has the world’s largest steel industry. Indeed, in 2005, China made more steel than the next four largest producers combined. From 2000 to 2005, China’s steel production increased by over 170 percent, as the Chinese industry added capacity at a furious rate. Between 1998 and 2005, China’s steel exports more than quadrupled, as China established itself as one of the world’s leading exporters. This explosive growth in both production and exports would not have been possible without the support of the Chinese government.
Now for the lessons in how a command economy works.
Lesson 1: A command economy actually owns many of the industries that it considers critical not only to its development but also to its control of the market place. Does that give those government own entities an edge over foreign rivals? Indeed it does. On to Lesson 2.
Lesson 2: Laws can be easily fashioned to give not only direct subsidies, cash and land grants, but also prefrential tax treat to all steel companies inside China. These can be in the form of export tax rebates and discounted interest rates in loans, debt to equity swaps, preferential loas…to name only a few. In short, China can write the laws governing those industries. And, wildly enough, because those laws apply to steel industriesinside China, those laws do not violate WTO principles! The question to ask now is: Can foreign steel manufacturers set up shop in China–or can they have a controlling interest in any steel making industry inside China. On to Lesson 3.
Lesson 3: As of 2005, China prohibitedany foreign company from having a controlling stake in domestic steel companies.
The nation will forbid foreign steel producers from taking controlling stakes in domestic steel companies, Qi Xiangdong, deputy secretary general of China Iron and Steel Association, said yesterday.
But, you say, did not we do the same in the Dubai Ports flap? Steel is not quite the same as a port of entry, but if you wish to push this point, so be it. Here is the tricky part, however. China will allow foreign companies to have some interest in its domestic firms, but there is a catch. They must have independent technologies for the production of steel. “Come into my trap,” said the cat, “and bring your own cheese. Oh, you have much nicer cheese! Can we use that, too?”
There are numerous other ways in which a command economy can give advantages to its state-own firms. While the U.S. steel document enumerates many, I would like to settle on a few, so that we can see how a command economy works.
Lesson 4:: Export restrictions can be placed on key materials so that the cost of making a product–for example, steel–can be kept low. China has placed export restrictions on coke, a critical product for the making of steel.
Lesson 5:Through export tax rebates, a command economy can give significant advantage to those industries it wishes grow globally:
China is considering increasing export tax rebates on certain steel products to help the industry, which is one of the worst hit by the growing international financial turmoil.
Minister of Industry and Information Technology Li Yizhong today told a press conference that the ministry is considering encouraging exports of high-end steel products by increasing export tax rebates. However, the ministry will continue limiting exports of high energy-intensive steel products.
At the same time, the government will also help steel enterprises upgrade technologies with discounted loans next year. China’s steel makers are suffering both from high prices for raw materials and from falling product prices.
Yes, Virginia, there is a trade war.
Lesson 6: Be careful when you hear different pots call different kettles black. And I never even mentioned currency manipulation. Or energy subsidies! Think of that!