By Andrzej Zwaniecki
USINFO Staff Writer

Washington – The Bush administration is concerned about the state-supported expansion of the Chinese steel industry and problems such rapid growth creates, a Commerce Department official says.

The United States alleges the Chinese government is providing subsidies to its steel industry that violate World Trade Organization (WTO) rules, fuel an excessive expansion of that sector and negatively affect the United States’ and other countries’ steelmakers, Under Secretary for International Trade Franklin Lavin told a U.S. steel industry gathering February 7.

For example, the Chinese government returns to exporting companies 50 percent of their income taxes if they sell 70 percent of their product abroad, he said.

Bilateral talks on the issue helped to clarify certain concerns, according to a report on subsidy enforcement issued February 1 by the Commerce Department and the Office of the U.S. Trade Representative (USTR).

But this cooperative approach has failed to produce the “results we desire,” Lavin said.

On February 2 the administration filed a petition with the WTO requesting formal consultations with China on WTO-inconsistent supports granted to companies in a range of industrial sectors, including the steel, paper and wood industries. Several subsidy programs challenged by the United States involve export subsidies; others include incentives to purchase domestic equipment and accessories rather than imported ones.  (See related article.)

In addition, Lavin said, China expands its steel and other industrial sectors without proper regard to environmental standards.

The Commerce official said that China’s steel production has more than doubled over the last four years to 418 million metric tons in 2006, making China the world’s largest steel producer and exporter.

But more worrying than its current huge output is China’s planned further expansion of its steel industry, he said, which could bring that nation’s total production capacity to more than half a billion metric tons in the next few years. So far the administration has not seen any evidence that the Chinese are planning any closure of inefficient steel mills, Lavin said.

At the beginning of this decade, major steel producing countries, including the United States and China, sought an international agreement under auspices of the Organization for Economic Cooperation and Development (OECD) to curb steel subsidies that encouraged excess capacity, thus depressing steel prices. But, before those nations were able to agree on specifics, steel prices went up fueled by strong global growth, particularly in China and other Asian emerging market economies, and the talks stalled.

Continued expansion of the global steel industry far exceeds the growth in demand for steel products, according to a letter sent to the OECD by six major steel industry groups from the United States, Canada and Mexico. Their estimates show that increases in worldwide capacity might exceed demand by as much as 200 million metric tons by 2008.

The groups said that planned state-supported expansions, particularly in Brazil, China, India and Russia, likely will lead to an increasing number of steel trade disputes and that any slowdown in global growth will only magnify the problem.

More than half the anti-dumping and subsidy cases handled by the Commerce Department are related to steel.

Steel industry groups also said that overcapacity in one country quickly can destabilize pricing throughout the entire global steel industry because firms with excess capacity have strong incentives to export their excess production.

The full texts of Lavin’s remarks and the subsidy report can be viewed on the Commerce Department Web site. The full text of the USTR press release on the WTO subsidy action is available on the USTR Web site.

For more information on U.S. policy, see The United States and China.