Economy

Blocked pipes

Details in latest trade case lose sight of the bigger picture

Getting carried away: will seamless steel pipes prompt trade war?

Seamless steel pipe doesn’t stand out as the most riveting of topics. Not that it doesn’t serve a useful purpose, as a means of carrying high-pressure fluids like oil and natural gas. But as a conversation-starter at least, it’s one more for the plumbers than the policymakers.

Perhaps it’s time for a change; seamless pipe might be about to go much higher profile. That follows a ruling at the end of December from the US International Trade Commission (ITC) in favour of new duties of between 10% and 16% on Chinese imports. As a trade case, it’s the ITC’s largest ever by dollar value (Chinese firms sold $2.8 billion of pipe to American customers in 2008). It also follows another new US tariff last autumn, that time on Chinese tyres (see WiC31).

Beijing has already responded to the news (“strong dissatisfaction” and “resolute opposition” were mentioned). But proposers of the new duty seem determined on further action. They’ve been energised by news that Chinese exports look to be recovering. For the hawks convinced that a wider trade war is on the horizon, it’s another step towards the inevitable confrontation.

Free trade lobbyists, on the other hand, fret that Obama’s campaign promise to get tough on Chinese trade practices means that he is now in payback mode to the labour unions. In signing-off the tyre duties, Obama became the first president to act under a “China Specific Safeguard” law that allows for temporary trade barriers in cases in which an import is said to be creating ‘market disruption’. George W Bush turned down similar advice from the ITC on four separate occasions.

In fact, even the leading US tyre producers were against last year’s duty. Their main complaint was that the Chinese imports were low quality ones, sold largely to the most price-sensitive consumers. Most of the tyres manufactured in US factories are sold to a more discerning market, so the new tariffs were deemed unlikely to protect many American jobs. Chinese imports are going to be replaced by low-cost substitutes from places like Indonesia, Poland and Mexico – and not from factories in the US.

There are similarities in the steel pipe case, according to Adam Minter of Shanghai Scrap. He doubts that many US steel firms are making the type of pipe that the Chinese have been importing as they’re “bottom-feeder” products, well below international standards.

In China that may not be much of an issue as low wages mean the costs of replacing faulty pipes are lower too. But that’s not the case in developed markets, where energy firms are generally keener to avoid poorer quality imports, even at lower prices.

In which case, why the booming sales of Chinese pipe into the US after 2004? Minter says it was down to the oil price boom. Small, wildcatter drillers didn’t care too much about quality when oil was running up over $100 a barrel. Instead they were in expansion mode and ready to take bigger risks in prospecting for new strikes. Hence the sales of Chinese imports surged.

But this is getting into the details. And specifics are not something that pro-trade campaigners have been able to communicate especially well to American audiences receptive to anti-Chinese rhetoric.

Instead blue-collar groups are rallied by warnings that the US manufacturing base is on the verge of an irreversible decline. Unless something is done to counter Chinese imports…

Not so, according to a report authored last year by Daniel Ikenson and Scott Lincicome for the Cato Institute. Yes, since 2008 American manufacturers have struggled. But that is a result of a cyclical downturn. It does not signal approaching doom for the US manufacturing economy in general.

In fact, American manufacturers actually set new records in 2006 for output, revenues, profits and investment returns. There were new highs again the following year, although profits and return on investment tailed off because of rising costs in commodities and transportation. In both years the backdrop was record imports into the US economy. Ergo: this is not a zero-sum game.

And what the doomsayers tend to overlook, say the authors of the report, is that American factories continue to account for far more ‘value-added’ production than their Chinese counterparts. For every dollar of output coming from Chinese factories, US firms are producing almost $2.50 in higher value products. So even if US firms are ceding ground in some “bottom-feeder” markets, they also have the potential to march ahead in other areas, like biotech, aircraft technology, advanced medical devices and sophisticated machinery.

In this context, squaring up to the Chinese over low quality tyres and fractured piping looks like something of a side issue.

Of course, that’s an argument that won’t convince the increasingly small number of US workers still making similar products. But the US president is supposed to be a great communicator. And he should be picking his battles elsewhere.


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