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Chinese dumping of steel is an issue

Commentary: President Trump announced his plans to impose a 25% tariff on steel and a 10% tariff on aluminum. Initially, no distinction was made among trading partners, but later it was revealed that Mexico and Canada were to be exempt, and that other countries can apply to also be exempt. Australia has been identified a perhaps a third country that could qualify for exemption and other allies may also qualify.

The tariffs are designed to protect U.S. steel and aluminum producers from dumping by China, although the tariff is very broad based, covering many more countries than just China. In fact, the version of the tariff in effect as of this writing (although the policy is still in flux) covers something like $41 billion worth of imports, of which only 7% is from China.

Trump’s decision to broadly impose tariffs has been criticized by many as wrong headed in that the problem is China and the tariffs do not target China. China is responsible for 50% of the worlds steel exports and it has achieved this market share though government subsidies, that is, by dumping.

So, what exactly is dumping? It involves government support of exports that allows the underpricing of international competitors. It is not allowed under the rules of the World Trade Organization. Accusations of dumping underlie many of the globes trade disputes.

One might think, what’s so bad about dumping. In essence, a foreign government is using taxes imposed on their own citizens to subsidize the purchases by U.S. citizens. How dumb of them; how luck for us.

China is, in fact, subsidizing steel consumption by American industry. The motivation for this behavior is unclear. This may be a strategic attempt to grab market share by pricing competitors out of the market--that is the claim of U.S. steel manufacturers. But more likely, the current situation arises not from cunning but from happenstance.

Despite the common wisdom, China is not some economic juggernaut faultlessly guided by preternatural former communist ubermensch. Rather, China remains a creaky economy, with many investment decisions made by oh-so-fallible nameless, faceless government bureaucrats.

Many of these decisions are driven more in an effort to make the bureaucrat look good by achieving arbitrary goals set by higher ups rather than by economic efficiency. The system is ultimately self-destructive, but in the short run give the impression of rapid growth and of a dynamic economy.

China’s irrational over investment is famously manifested in the so-called Ghost Cities, in which large construction projects, literally whole cities, remain vacant of occupants. Chinese overproduction of steel is another similar manifestation. The globe is awash in Chinese steel not because China is such an efficient producer of steel, but because of Chinese inefficient overinvest in steel production capacity.

Regardless of the cause of Chinese overproduction—cunning strategy to grab market share or incompetent over-investment—the impact on U.S. steel producers is the same, which is to underprice our manufacturers, making them unprofitable, forcing them out of business. The destruction of the U.S. steel industry will be difficult to reverse. It is this irreversibility that justifies  Trump’s steel tariffs.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He doesn’t object to Trump’s policies as such, but rather he objects to Trump’s awful lack of character. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.