WTO Convenes Panel to Address Chinese Resource Hoarding
The World Trade Organization has agreed to investigate whether China’s export duties on nine commodities that are used as raw materials for various basic industries provide a trade-distorting competitive advantage to Chinese producers.
We believe that these export restraints – which we call resource hoarding – provide subsidies to Chinese producers of aluminum, chemicals and steel in two ways. First, restraining exports of key raw materials lowers the price of these inputs to the local market and in effect subsidizes domestic producers who would otherwise have to pay market prices for these inputs. Second, keeping these raw materials off the global market effectively raises the price to non-Chinese producers by restricting the global supply of these key raw material commodities. These export restraints are key to the country’s mercantilist policy of favoring certain “strategic” industries like steel.
Unique US, Europe and Mexican Joint Complaint
The investigation was prompted by complaints from the US, the EU, and Mexico that Chinese export restrictions were discriminatory and violated WTO rules. The Chinese government defended the tariffs saying they are intended to inhibit overproduction and emissions as well as conserve scarce natural resources.
Reverse Protectionism Favors Higher Cost Producers
While the first-order impact of this resource-hoarding affects these particular raw material costs, the second order impacts are far more profound. By subsidizing lower-than-market raw material costs for high cost producers in China, Beijing is also effectively inflating the cost of non-controlled raw materials that impact the rest of the globe. Lower-than-market coke prices, for instance, allow high cost Chinese mills, which must reach to the open market to buy iron ore, to allocate greater resources to purchases of other raw materials. So the price-distorting impact of these subsidies reaches well beyond the particular commodities involved.
Negotiated Settlement Likely End-Game
We believe that the Chinese will likely come to a compromise ahead of the panel’s study as this is the second-go-round on this issue and the violations of WTO rules – and China’s own ascension agreement – are clear. Beijing will most likely end up phasing out many of these export restraints and seek to provide other mechanisms for subsidizing the higher cost producers through tax and other policies which will continue to distort the competitive market.
Disclosure: No Positions
