Last night Beijing announced that there'd been a preliminary decision affirming dumping and subsidies from American steel exports.
While the tonnage involved in this trade suit -- 75,000t, or less than a tenth of a percentage point of the Chinese market -- is truly trivial, this decision is anything but.
In our view, this trade case reflects an effort by Beijing to stem a surging tide of Western complaints about China's high cost and subsidized steel industry's exports, which have been sizable at times over the last half-dozen years in virtually every region of the globe.
The West has taken a three-pronged approach in dealing with this problem, and the effort is fairly unified. First, the U.S. and Europe have filed official complaints with the WTO regarding WTO-illegal subsidies to steelmakers via controls on the export of steelmaking raw materials. Second, eight global steel trade associations combined to issue an "advisory" last spring regarding the need for Chinese steel restructuring/rationalization and suggested a path to effect that. Finally, most Western countries have placed some type of limits on Chinese steel imports, via their own individual WTO-compliant remedies.
This seemingly trivial man-bites-dog decision is a reflection of the pressure that Beijing is feeling from the unified West. While China is clearly fighting Western pressure on exports, at the same time we see Beijing for the tenth time in as many years come out with yet another attempt at cutting production at the so-called "backwards and polluting" steel players in the provinces.
The social issues Beijing faces are acute; while many view China as a dictatorship, we see the "democracy by civil unrest" aspect to the culture loud and clear in the mob-led reactions to Beijing's attempts at rationalizing their high-cost steel industry.
Beijing needs to take a lesson from the West: Focus resources on the lower-cost efficient players, like Baosteel, and provide retraining and subsidies to the workers who get displaced in rationalizing the higher-cost players.
In the U.S., a similar rationalization was protracted and took over a decade by allowing free market forces combined with union and politics to drive these changes. China should take heed and learn from our mistake - inevitably, economics win. The U.S. today is a globally competitive low-cost producer as contrasted with the dinosaur that existed 30 years ago. China can make the same change, but only if it wants to!
Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.