G20 on Protectionism; to be or not be?

World leaders takes stern stance over excessive protectionism

Protectionism is a word which has existed for over a century and a half but has come into vogue quite recently. Most developing nations share a love-hate relationship with the concept and remain in virtual limbo whether to strategically embrace it or ethically shun it. These nations have championed for open markets to increase revenue through exports but at the same time have imposed tariff and/or non tariff barriers to protect their domestic industries from manufacturing giants like China.

The G20, group of world’s most powerful economies, recently congregated at Hamburg, Germany and among other topics of discussion spoke at length about the ill-effects of extreme protectionism. The concerns, regardless of legitimacy, stem primarily from US President Donald Trump’s decision to initiate a National Security investigation under Section 232 of the Trade Expansion Act of 1962, to restrict imports of steel. With export revenue worth billions of dollars under threat, the US government’s move to restrict steel imports sent several exporters, especially from Europe, into a tizzy. Not only would the possibility of US closing its doors to imported steel affect revenue generation for the exports but would also increase the threat of over capacity within the exporting nations.

Major exporters facing the heat Opinions around the world remain split over the issue. The global steel industry has been ailing since the past several years as China pushed up its production and virtually flooded the world with cheap steel, thus driving down prices. China which has been the largest producer as well as exporter of steel has strategically taken advantage of economy of scale and pushed exports world over. The sheer pace at which China has pushed production in the past 15 years incites more suspicion than astonishment. In 2000 the US held a larger share in world production as compared to China which produced around 15 per cent of the world’s total steel then. Within 15 years China increased its share in global steel production to almost 50 per cent, going from 128 mnt in year 2000 to above 800 mnt in 2015.

According to the World Steel Association USA despite being the fourth largest producer of steel remains a net importer of the vital metal. USA has an import to export deficit of 21.7 mnt. Think tanks based in the United States have argued that the country’s dependence on imported steel can prove to be an impediment for the defence establishment and thus it was imperative that the US protects its domestic steel industry. However, IMF along with other global trade bodies has spoken against these policies and has urged major economies to embrace globalization to tap the present uptrend in the market.

Although myopic to some extent these policies had become a necessity for many countries thus compelling them to enforce anti dumping and other protective measures. However, no developing country can afford to insulate itself from global trade. Most nations have been trying to present themselves as strong proponents of globalization and thus have reduced aggressive protectionism such as strong anti dumping duties. However, internally non tariff barriers have been strengthened giving domestic steel industry subsidies and preference in procurement.

The Indian context

The Indian steel industry has perhaps been hit the worse by cheap imports, pushing domestic steel manufacturers to the brink of bankruptcy. The Indian government has been making continuous efforts since 2013 to protect its domestic industry. The steel sector forms the back bone of industrialization and if under threat can severely jeopardize the health of the National economy itself. Job creation is also another factor which is significant enough for any Country to come out in defence of a sector that contributes to employment generation as much as Steel.

“Pakistan was not far behind in imposing tariff barriers on Chinese steel despite having strong diplomatic and trade ties. Even as the much talked about China Pakistan Economic Corridor (CPEC) was taking shape, Pakistan imposed 24 per cent duty on Chinese billets.”

 

 

The strain on balance of payment caused by import of capital goods and industrial raw material had since decades hampered development works in India. Growth of the domestic steel industry has aided India in more ways than one and to remain a mute spectator, while cheap imports were obliterating steel producers, would have been a grave mistake on the part of the Indian government. Leaving no stone unturned towards securing its own steel industry India also kept pushing up exports significantly and finally became a net exporter of steel in 2017. In accordance with the action plan under India’s National Steel policy 2017, production is to be raised to 300 mnt by 2030.

It is becoming immensely difficult for developing economies to maintain a healthy balance between protectionism and maintaining global trade ties.

China cuts production

China which to a great extent had been the curator of the steel crisis had resolved to cut capacity to help ease pressure on international steel prices.

The Chinese government has been cracking down on obsolete Induction Furnaces since January-February 2017. The Chinese government has even claimed that it plans to reduce as much as 50 million tonnes in capacity and by 2020 the country plans to reduce production by 150 Mnt. China presently produces above 800 Mnt of steel annually which is about 50 per cent of the world’s total steel production. It is due to this reason that Chinese steel has faced the ire of countries world over. Although China recorded its highest production in the month of May the production seems to be slowing down from the last month. The production in June saw a significant reduction as compared to May but was still higher on y-o-y comparison.

Anti dumping around the world

It was in May that India imposed anti dumping duty on 47 steel products in addition to the products for which tariff barriers had already been in force. This move resulted in a steep decline in imports by almost 37 per cent while exports after this decision soared to 102 per cent. Pakistan was not far behind in imposing tariff barriers on Chinese steel despite having strong diplomatic and trade ties. Even as the much talked about China Pakistan Economic Corridor (CPEC) was taking shape, Pakistan imposed 24 per cent duty on Chinese billets. On the other hand the European Union has proposed Anti Dumping duties on Russia, Iran, Brazil and even Ukraine.

Brazil has imposed anti dumping duties on several products while Brazilian steel itself has come under scrutiny in several nations including India, US, EU etc.

Threat continues Even though China has pledged to reduce capacity the move is highly unlikely to alter the global steel output which continues to rise at a steady rate. On the contrary, other developing nations such as India, Iran, Brazil etc have planned large scale expansion to take advantage of decline in production from China. Iranian steel for example has been taken to task by quite a few countries due its predatory pricing. Iranian semi finished steel is being priced atleast USD 10 cheaper than Indian or Chinese steel thus establishing a wide market across the Middle east and South East Asia.

Source: Steel 360 Magazine Aug’17 Issue