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China, world economies face higher tension over steel surplus

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Low prices on Chinese steel exports are at the heart of growing global trade tension.   © Reuters

BEIJING -- Refusal by the U.S., European Union and others to recognize China as a market economy is the latest sign of intensifying trade friction between the Asian economic giant and other world powers, exacerbated by a supply glut in such industries as steel.

U.S. Secretary of Commerce Penny Pritzker said Wednesday that the time was "not ripe" to grant China market-economy status under World Trade Organization rules. A spokesperson for China's foreign ministry shot back at a press conference the following day, claiming that "the world recognizes China's success in developing a market economy."

Dec. 11 will mark the 15th anniversary of China's accession to the WTO -- a milestone Beijing says automatically brings full market-economy status. The country has until now been labeled a non-market economy under the treaty. While Japan has not explicitly supported either side of the issue for fear of straining diplomatic ties, it is seen continuing to handle China as a non-market economy in practical terms.

This status allows Chinese products such as steel to be saddled with steep tariffs if it is determined, based on international prices, that the country is dumping those goods. Recognition as a market economy, meanwhile, would force trading partners to use domestic Chinese prices as a baseline for judgments about export prices, limiting their ability to impose trade restrictions.

Prices in China are far lower than international prices for many goods. Steel products, the leading point of contention, go for 10-20% cheaper here than in Japan due to production overcapacity. China made 800 million tons of crude steel in 2015. But the domestic industry was capable of pumping out more than 1.1 billion tons, putting excess capacity at nearly three times Japan's actual output for the year.

China has sought to close this gap by boosting exports. The country sent 24 million tons of steel overseas in 2009. By 2015, that amount had more than quadrupled to 112 million tons. The influx of cheap steel eroded earnings at Japanese, European and American steelmakers, forcing widespread layoffs.

Cross-Pacific tension

Of the 85 trade investigations into China from January to August for violations such as dumping, 18 were initiated by the U.S. It is therefore only natural that Washington would put off recognizing China as a market economy. But Beijing is seen weighing ways to retaliate, including possible complaints through the WTO against countries withholding market-economy status.

Dumping is not the only factor in mounting trade tension. Washington has also repeatedly blocked Chinese efforts to acquire American companies, including a 2005 bid by China's CNOOC for U.S. oil producer Unocal. Similarly, semiconductor maker Tsinghua Unigroup in February called off plans to invest in U.S. hard-drive maker Western Digital after American authorities threatened an investigation into the transaction.

A U.S. congressional panel on Nov. 16 urged lawmakers to bar Chinese state-owned companies from buying American businesses, saying technology acquired in such deals could benefit Chinese state interests "to the detriment of U.S. national security." Beijing, meanwhile, has worked to effectively oust U.S. companies such as Google and Twitter from the Chinese market.

Advances in globalization have made China and other world economies much more interdependent in recent years. The country is the leading global market for automakers such as General Motors of the U.S. and Germany's Volkswagen. Consequently, a boycott of such brands encouraged by Chinese state media could do a good deal of damage.

A Donald Trump presidency could put further strain on Sino-U.S. trade relations if the president-elect's "America first" rhetoric translates into actual policy. Trump pledged during the campaign to label China a currency manipulator and slap a 45% tariff on imports from the country. Though he has been silent on these matters since his electoral win, many in China remain on high alert. The WTO bars the U.S. from unilaterally raising tariffs on specific countries. But "merely looking into the possibility of hiking tariffs would have a weighty impact on China's economy," according to Ni Yueju of the Chinese Academy of Social Sciences.

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