Has the trade war begun?

The way China has countered US and EU complaints over commodity price distortions on environmental grounds shows that it is quite adept at using the WTO for its own ends.

Stratfor.com

The United States and the European Union have filed complaints against China at the World Trade Organisation (WTO) on June 23 accusing Beijing of placing export restrictions on raw materials and partially processed raw materials critical to many industries. The nine materials cited by the United States are bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The complaint accuses China of restricting exports, thus creating an unfair advantage by contributing to disparities in prices of these precursor materials inside and outside China. The European Union also complained that the restrictions could undercut some 4 per cent of European industrial production if the resources are no longer easily accessible from Chinese suppliers.

Beijing has countered that its export restrictions are perfectly legitimate under WTO regulations, with a Ministry of Commerce official telling China’s official Xinhua news agency the restrictions were part of environmental protection and energy conservation measures approved under the 11th five-year economic plan (2006-2011). Zhao Jinping, senior researcher and deputy chief of the Research Department of Foreign Economic Relations of Development Research Center – the main consulting institution for China’s State Council – added that the West’s demands on China were "conflicted". He accused the West of saying Beijing should work to protect the environment and reduce excessive energy consumption while simultaneously criticising Beijing for taking measures to reduce energy-intensive polluting industries like those being restricted.

At its core, the focus of the US and EU complaint is the manipulation of prices for several critical primary commodities. Bauxite is used for aluminium production, which in turn is used in anything from soda cans to electronics. Coke is a primary ingredient in producing steel, while magnesium and manganese have numerous uses. (Both magnesium and manganese are also used in the steel manufacturing process, as well as in creating alloys with steel and aluminium.) Silicon carbide is used as an abrasive and in high-end brake discs, while silicon metal is used for, among other things, the production of silicon wafers for semiconductors and photovoltaic cells. Yellow phosphorus is used in flame retardant materials, and zinc is used in galvanisation of steel, in battery production, and as a major component of brass.

China is a major producer of several of these commodities (for example, China was the world’s largest producer of zinc in 2006, nearly double the output of its next-nearest competitor, Australia), making its export restrictions significant in the overall global supply-and-demand balance. The accusation is that by restricting exports, China reduces supply internationally, driving up international prices. It also maintains that China has a glut of these resources, comprising both domestically produced and imported commodities, so Chinese domestic prices are artificially low due to oversupply. China thus not only has the advantage of lower precursor prices, it also can supply lower-priced secondary products like steel and raw aluminium to international consumers. This gives it additional market share and potentially drives out higher-priced overseas competitors.

China certainly can make a case for the environmental side of its export restrictions. (Beijing has been working to try to consolidate numerous industry sectors to reduce waste, cut energy consumption and address pollution problems.) But the restrictions and their 'unintended' consequences regarding resource availability fit with Beijing’s longer-term program of seeking ways to insulate China from the vagaries of international commodity pricing. China has been buying up resources, and buying or investing in resource producers and mines around the world. This is part of its efforts to maintain control of the entire chain from extraction to Chinese manufacturing as a way to mitigate price and availability changes. China also has been stockpiling natural resources as a further buffer. Restricting exports of key industrial commodities gives Beijing the ability to better regulate resource prices at home; if it gains additional influence in shaping international prices, all the better from China’s point of view.

As the case enters the WTO process, it is unclear whether China can make a strong enough case on environmental grounds to counter the charges effectively, or whether some compromise will have to be made. China has become adept at using the WTO mechanisms to avoid significant punitive trade actions by the United States and others, exploiting the time it takes to process a WTO complaint to gain ground before compromising. Perhaps not coincidentally, on the same day the United States filed its complaint, Beijing sent a letter to the WTO complaining about US restrictions on the import of Chinese poultry – demonstrating China’s willingness to use the WTO for its own ends as well.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.

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