Steel subsidies deepen the industrial crisis and affect job creation in the Western Hemisphere.
Unfair Chinese practices in the commercial exchange of steel products affect Latin American businesses and exacerbate the region’s deindustrialization. During 2018, China’s indirect steel trade exports to Latin America –– products manufactured with steel components such as automobiles, home appliances, and machinery –– registered a 17 percent increase to almost $47.47 billion, according to a May 19, 2019 report from the Latin American Steel Association (Alacero, in Spanish), an organization that brings together steel companies from 20 Latin American countries.
The increase is worrisome to Francisco Leal, Alacero general director. Chinese steel companies are frequently accused of using unfair trade practices such as dumping, which consists of selling a product for less than its regular market price or even less than its production cost to eliminate the competition, take ownership of the market, and vastly recover the investment.
“What we know is that Chinese steel is a problem caused by all the subsidies the industry receives,” said Leal to Diálogo. “The world seeks to defend itself from Chinese enterprises’ global overcapacity; many European countries impose measures to mitigate the effects of unfair trade. Latin America is behind in that process.”
The impact on the Latin American industry is clear, when analyzing the weight Latin America currently bears as an indirect market for Chinese steel, Leal says. In 2016, according to data from Alacero, the region received 7 percent of China’s global indirect steel trade, while in 2018 that number rose to 11 percent, a four percentage point increase.
“Current anti-dumping cases show there’s a reaction from Latin America to China’s unfair trade, even though the method doesn’t seem efficient or sufficient, since China triangulates its steel to Latin America and finds any means possible to position its steel in the region,” Leal said.
There are currently 42 Latin American complaints against Chinese companies related to steel dumping, according to data from Alacero.
Employment takes a hit
Alacero’s director says the situation directly impacts job creation in Latin America because Chinese companies’ unfair practices end up affecting regional industries and businesses are forced to cut their operations and avoid hiring staff.
“China exports high productive-chain and job-management products, while Latin America exports products with less added value that compromise its job creation potential,” said Leal. “As such, there’s a direct relationship between import substitution due to increased industrialization as a regulatory tool for the trade balance and apparent domestic consumption.”
Mexico and Brazil are the most affected countries, as they’re the main consumers of indirect steel from China in Latin America. Together they consume 56 percent of total imports in the region.
The Latin America-China relationship around steel production also involves organized crime, especially Mexican drug cartels.
For example, in March 2014, the Mexican Armed Forces intercepted Chinese cargo ship Jian Hua, which transported 68,000 tons of undocumented steel, the BBC news agency reported. The mineral was extracted illegally and was part of illicit activities of the Knight Templar drug cartel. The criminal group has the most links with Chinese mafias and businesses related to steel, because it controls steel mines in Michoacán, the Mexican state with the most steel reserves. According to authorities, more than 200,000 tons of illegally mined steel had been seized in previous months, and most of it was destined to China, the BBC said.
Integration is urgent
According to Leal, the way to combat China’s impact is to advocate for regional countries to conduct stronger integration processes that allow for measures to halt the impact of unfair competition, and increase and support the added value of the Latin American production.
“The battle’s success depends on the political and economic integration of Latin American countries to create efficient barriers against the excessive and illegal entry of Chinese steel products. The world seeks to defend itself from China’s overcapacity, and countries defend themselves by creating standards to mitigate the effects of this unfair trade,” said Leal.
“We should also be concerned by our inability to maintain a productive chain that generates added value to our industry. The focus now shouldn’t be to only protect the steel industry by imposing tariffs to level the competitive playing field among local and Chinese producers, but to protect products that have a significant added value and that struggle in unfair conditions,” he concluded.