Chinese steel should enter US freely, former ITC chairman says

Imports of China-origin steel products into the USA should be allowed to enter freely rather than be hindered by trade cases, Dan Pearson, former chairman of the US International Trade Commission (ITC), has told Steel First.

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“That would ensure access to competitively priced steel for the large US manufacturing sector, helping to keep those important businesses globally competitive,” Pearson said in an email exchange.

Pearson is now senior fellow at the Herbert A Stiefel Center for Trade Policy Studies at the Cato Institute, a public-policy think-tank based in Washington, DC.

At the end of last month, US steelmakers celebrated the signing into law of landmark trade legislation that includes measures expected to make it easier to file trade cases.

The Trade Promotion Authority (TPA) is fast-track legislation that allows the president to negotiate trade deals without amendments from the US Congress. Trade Adjustment Assistance (TAA), passed along with TPA, provides a more precise definition of injury in trade cases, and could see petitions being filed in months instead of years.

However, Pearson warns that it is not obvious that the law will do the steel industry any good.

“The new language pertaining to the ITC’s injury determination seems to me unlikely to lead to any substantive change in how the Commission evaluates the factors relating to injury,” he said.

“What that language will do is to encourage the ITC to write even longer opinions, addressing each of the specific criteria that have been added to the law. It also will raise numerous possibilities for appeal [against] Commission decisions,” he added.

So it may be trade lawyers rather than steelmakers who will benefit from the new language in the ITC. Law firms will welcome the additional litigation risk – and the opportunities to earn large fees – that the new language creates, he added.

“Steelmakers will pay many of those legal costs (respondents also will have to pay their attorneys), so I’m not certain whether they will come to see it as a blessing or a curse,” Pearson said.

Steel-intensive industries suffer
As trade cases are likely to result in higher steel prices in the USA compared with the rest of the world, it is the steel-intensive manufacturers which will bear the brunt.

The price gap between the USA and other markets does not have to be very wide before it becomes more economical for US end-users to import finished goods rather than manufacture them domestically.

“Far more value is created (and far more workers are employed) by the fabrication of finished items containing steel than is created by the initial manufacture of steel itself,” Pearson said. “It does not serve the best interests of the US economy to provide protection to the steel industry that simultaneously imposes such large costs on steel consumers.”

The former ITC chairman believes that the US government should provide protection neither to steelmakers nor to steel consumers. Instead, it should adopt policies that would allow market forces to guide the production and use of steel, he said.

Since the trend in US steel production has been away from commodity steel and toward highly specialised products, Pearson believes that much of the US steel industry would continue to operate effectively even if all import restrictions were ended.

“Producers and consumers of speciality steel tend to develop close business relationships,” he said.

“Both parties have a real stake in the success of the consuming company – if it can’t keep its customers satisfied, neither the steel consumer nor the steel producer will prosper. Such relationships make it more challenging for a foreign producer to gain a foothold,” he explained.

“It is possible that taking a laissez-faire approach to steel markets would lead to changes in the steel industry that might justify adjustment assistance from the government,” he added.

Chinese overcapacity
Pearson acknowledges that China’s massive steel capacity expansion was not driven by market forces alone, but by state intervention on central, provincial and municipal levels. He therefore also advocates that China should end all subsidies and expose its steel industry fully to real market forces.

“China should allow market forces to downsize its steel industry significantly,” Pearson said. “Going a step further, enforcing world-class environmental standards on Chinese steel production could be expected both to accelerate the downsizing and to lead to a noticeable improvement in air quality.”

Just as the expansion of China’s steel capacity has not been “fair”, he acknowledges, allowing Chinese steel to flow freely into the USA would not be “fair” either.

Nevertheless, he says that allowing open access for steel imports would be the best economic policy.

“The reality is that some changes in the global economy can’t be avoided,” Pearson said. “Those changes may not be fair – they simply must be dealt with.”

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