Don’t Let China Steal Your Steel Industry
Beijing is rapidly becoming the dominant player in an industry vital to defense and technology companies. If the United States and Europe aren’t careful, they will become dependent.
In Indonesia, a vast new stainless-steel plant can produce an impressive 3 million metric tons of the shiny metal each year. And the plant isn’t even an Indonesian venture. It was built by a Chinese market giant that is using the country to undermine Western competition. Those who think stainless steel is a fringe sector should think again. The unglamorous metal is vital to everything from cutlery to aircraft, tankers, and surgical instruments. China’s sneaking takeover of the global stainless-steel market will put other sectors at risk, too.
The Indonesian plant, owned and operated by the Chinese stainless-steel firm Tsingshan, opened in 2017. The choice of location was no coincidence: Indonesia has the world’s largest reserves of nickel, a key component of stainless steel. More than two-thirds of the world’s nickel is used to make stainless steel. (Regular steel consists almost exclusively of iron, while stainless steel also contains nickel and chromium.) And the plant’s construction was supported by the Chinese government; indeed, it falls within China’s global Belt and Road Initiative.
Then, when the plant had operated for less than two years, the Indonesian government suddenly announced that it would ban exports of nickel starting in January of this year. Predictably, the move caused global nickel prices to skyrocket. But thanks to its Indonesian plant, Tsingshan is shielded from the nickel hike.
In the past two decades China has conquered the stainless-steel market. Though stainless steel may seem unsexy, it’s vital to virtually every other sector, and production is growing faster than that of other metals such as lead, copper, and aluminum. Weaponry, pipelines, ships, and washing machines all contain stainless steel. And in the past couple of decades, the production of steel—the main component of the stainless kind—has shifted dramatically.
In 2004, the world’s top 10 steel producers included only one Chinese company, Shanghai Baosteel; the other top firms were American, European, Indian, and South Korean. Back then, just 25.8 percent of the world’s steel was made in China. In 2018 (the latest year with data available), six of the world’s largest steel companies were Chinese, some of them government-owned, and China accounted for 51.3 percent of global steel production—a figure that doesn’t capture production by Chinese companies in other countries).
On the global top 10 list, South Korea, a former steel giant, is represented only by Posco. In stainless steel, the development is even more stark: in 2005, China produced 12.9 percent of the world’s stainless steel, while Europe produced 34.8 percent and the United States 9.2 percent. By 2018, China had more than quadrupled its share to 52.6 of the world’s stainless steel, while Europe’s share had shrunk to 15.6 percent and the United States had just a 5.5 percent share.
Until recently, steel and stainless steel may have seemed unworthy of concern. Indeed, President Donald Trump’s efforts to protect the U.S. steel industry were met with plenty of ridicule because the measures – supposedly taken to enhance U.S. national security—also penalized companies based in European countries, Washington’s closest national security allies. The U.S. president’s punishment of European steelmakers through Section 232 of the Trade Expansion Act two years ago was undoubtedly ridiculous, but he was right in treating steel as a strategic good; the coronavirus pandemic has shown that Western countries are dangerously dependent on components from China.
Not surprisingly, U.S. firms have long been concerned about the way Beijing financially supports Chinese steel companies. In a 2016 report, a group of U.S. steel industry associations wrote that Chinese firms receive “loans [that] are granted based on alignment with central or provincial governments’ policy directives, rather than creditworthiness or other market-based factors.”
In a 2019 report, the Mercator Institute for China Studies, a German think tank, documented how Beijing’s financing practices vastly distort global competition: The “panoply of financing benefits empowers Chinese companies with advantages over foreign competitors not only at home but also when they engage in foreign takeovers, with relative disregard for commercial risks, allowing them to offer premiums for foreign assets if necessary. These practices disfavor European companies as acquirers of firms and assets,” the authors wrote.
Such government support, of course, results not just in more acquisitions by Chinese outfits but also in lower prices for their goods, too. Over the years, European firms have discovered not just competitive prices by Chinese outfits but also outright dumping. That caused the European Union to, in 2015, impose a 25 percent tariff on Chinese stainless steel. Then, last year, stainless-steel exports from Indonesia to Europe suddenly skyrocketed.
In August 2019, the European stainless-steel industry filed another complaint with the European Commission, again alleging dumping, this time involving Indonesia as well. It was successful: In April, the EU imposed 17 percent duties on stainless steel made by Tsingshan and its Indonesian subsidiaries, and 18.9 percent duties on another Chinese firm. But China preempted the Europeans by raising its anti-dumping duties on European stainless steel from 18.1 percent to a staggering 103.1 percent.
The Indonesian government’s export ban means the EU’s penalties on the Chinese firms may not help European stainless-steel makers much. Without access to the world’s largest source of nickel, and facing crushing anti-dumping duties in China, European and American stainless-steel firms are in massive trouble. China is, one might say, trying to steal their steel business. U.S. firms are somewhat better off than European ones thanks to Section 232, which allows the imposition of tariffs on foreign-produced steel and aluminum. But the tariffs stand to harm European firms more than Chinese ones: Because of Section 232, Chinese firms are trying to export even more to Europe.
In several recent pieces, including one on Chinese corporate bargain-hunting among businesses weakened by the coronavirus, Foreign Policy has highlighted Beijing’s strategy of outflanking the United States and Europe through Chinese acquisitions of cutting-edge Western firms, especially in areas deemed strategic in China’s Made in China 2025 plan for global economic power. But that’s not the only way in which China uses globalization to strengthen its power and weaken these countries. Its ruthless game in the metals market forms another strand of that quest for global economic dominance.
In fact, stainless steel is just the latest sector in which Western firms are being brought to their knees by Beijing-backed firms. Remember the U.S. and European solar-panel industry? A decade ago, Beijing began subsidizing domestic solar-panel production—and Chinese companies, of course, exported their cheap goods. The result: Western solar-panel production plummeted.
Between 2009 and 2017, Chinese companies’ global market share skyrocketed from 1 to 33 percent, while European production unsurprisingly plummeted. By 2018, the top eight global solar-panel manufacturers were all Chinese, the Mercator Institute reported. Although the United States and the EU have turned to tariffs to lessen market injustices, the Chinese firmly dominate the solar-panel market.
Subsidizing and propping up domestic firms is of course not a Chinese invention: Decades ago, North American and European governments did the same thing. But in a globalized market, where firms are supposed to compete fairly against other countries’ firms, such comprehensive support creates unsustainable distortions. That’s exactly what the World Trade Organization was supposed to fix; indeed, systematic government support of domestic companies to the detriment of foreign competitors violates WTO rules.
But for the WTO to take action, the aggrieved party (say, a European company) has to demonstrate “material injury”—and by the time a company is substantially injured it may be too late to save it. The much-maligned EU, though, has tried to advocate for its beleaguered stainless-steel producers.
When Indonesia first announced restrictions of its nickel exports, which would clearly harm European companies and benefit Tsingshan, the European Commission brought a case against it at the WTO. “The measures imposed by Indonesia increase the damage, putting jobs in the EU’s steel industry at risk. Despite our repeated efforts, Indonesia has maintained the measures in place and even announced a new export ban for January 2020. In such circumstances, we cannot stay idle. We need to ensure that international trade rules are respected. That’s why we take today legal action in the WTO to obtain removal of these measures as soon as possible,” then-Trade Commissioner Cecilia Malmstrom said.
Ever-growing Chinese dominance of the stainless-steel market risks making U.S. and European defense contractors dependent on Chinese producers. Imagine the predicament of a arms manufacturer or shipbuilder based in a Western country that has, for example, criticized Beijing’s handling of the coronavirus crisis or its Uighur internment camps. And you don’t need to imagine the resulting plight of Western governments.
Or consider the dilemma that Swedish companies might find themselves faced with. Their government has consistently spoken up for Gui Minhai, a Hong Kong bookseller who had acquired Swedish citizenship and is now jailed in China, with Chinese officials in turn issuing threats such as comparing China to a heavyweight boxer and Sweden to a featherweight one. If the Chinese government wanted to harm Sweden, Chinese stainless-steel companies could surreptitiously delay deliveries to, say, Swedish manufacturers of medical instruments, and the country would immediately feel the pain—especially if Western stainless-steel producers had already been forced out of business.
But the fundamental issue isn’t stainless steel or any other sector: It’s the ability of liberal democracies to act independently. If the global fight for coronavirus medical supplies has taught Western governments anything, it’s that dependence on Chinese components is a risky proposition. Weakened Western businesses will of course make Western countries weaker, too.
Since government subsidies are problematic under WTO rules, in the stainless-steel sector Western governments could introduce quotas for countries including China and Indonesia. Environmental standards present another opportunity. Chinese steel production is twice as carbon dioxide-intensive as that of the United States, while the even more ambitious EU is planning a net-zero-carbon economy by 2050. The United States and the EU could block steel from highly polluting plants and provide research and development grants for domestic companies trying to make their steel greener still. That’s not supporting uncompetitive companies; that’s supporting companies playing by the rules.
Skeptics will argue that punishing Chinese firms would backfire. In fact, considering that China is by far the world’s largest producer, turning out nearly seven times as much steel as the number two, India, banning dirty Chinese stainless steel might lead to shortages in the West. But China produces too much regular and stainless steel; it needs exports. A ban on its dirty products would punish the companies that harm Mother Earth while making the cheapest possible steel, and it would reward those that clean up their mills.