Girding for a Fight

When Minerals Technologies shops for magnesium oxide, it buys much of it from China. But because China restricts its exports of magnesium oxide, the company pays much more than Chinese manufacturers pay at home.

“If they got rid of those restraints, you’d have more open markets,” said Rick Honey, a spokesman for the New York-based manufacturer of refractory materials for steel mills.

That’s exactly what the U.S. and the European Union hope to do, and as soon as possible. U.S. Trade Representative Ron Kirk and his EU counterpart in late June requested World Trade Organization dispute-settlement consultations with China regarding its export restraints on numerous raw materials, including bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc.

All are key ingredients for global steel, aluminum and chemicals manufacturers — and China is one of the world’s largest producers of them all. By restraining their exports, China is able to sell more to its domestic manufacturers, who then can sell their finished products more cheaply on the global market. It’s especially damaging because it raises the prices of raw materials that go into manufacturing just as governments worldwide are trying to jump-start factory production and trade.

“We are deeply troubled at what appears to be a conscious policy to create unfair advantages for Chinese industries that use these raw materials,” Kirk said in announcing the WTO request.

The restraints could explain why U.S. imports of finished steel products from China surged 48.7 percent in May and 23.5 percent in the first five months of the year, while imports from most other major suppliers have fallen in 2009.

“This is something significant,” said Frank Vargo, vice president of international economic affairs at the National Association of Manufacturers. “So many users say that Chinese products are coming in at about the same price as U.S. products,” because Chinese producers pay less for these mineral inputs.

Nancy Gravatt, vice president of communications at the American Iron and Steel Institute, applauded the EU’s decision to act with the U.S. and said other countries may lodge their own complaints.

“China has a basic competitive advantage,” she said.

Although U.S. manufacturers often argue a further devaluation of the yuan is essential to shrinking a U.S. trade deficit with China that reached a record $268 billion last year, ending the restraints would help a great deal by leveling the trading field.

“This is the first major trade action of the Obama administration,” Gravatt said.

In the best-case scenario, China would admit it needs to dismantle the export restraints as it promised when joining the WTO in 2001. It appeared more likely China would stand firm, forcing the creation of a WTO panel. A day after the U.S. and EU filed their requests, China said its policies were designed to “protect the environment and natural resources,” and are “in keeping with WTO rules.”

Vargo is not discouraged. “China is still new to the global trade rules,” he said. “The only people in Beijing who understand China’s obligations to the WTO are in the ministry of commerce.”

Until now, other Chinese bureaucrats may have been able to ignore the issue. Now that it has attracted the attention of Communist Party leaders, they will likely be pressured to resolve it, Vargo said.

A promising precedent is China’s willingness to settle a high-profile 2004 WTO case against the country’s discriminatory taxes on imported semiconductors, a violation of WTO rules.

How much a resolution helps U.S. manufacturers will depend on how quickly China settles the issue, Vargo said, “The timing is important; if China does it soon, it will have the maximum benefit.”

But if China appeals, the WTO must create a dispute panel, which could take 18 months to make a decision. China would then have another 15 months to comply — if it’s ordered to end the restraints at all. And, if China ultimately fails to abide by a WTO order to lift the restrictions, the U.S. and EU then could impose economic sanctions.

In all, it could take three years for U.S. manufacturers to benefit.
And some U.S. manufacturers of mineral products that compete with China might even suffer if the country is forced to dismantle the restraints, said Lyle Vander Schaaf, a Washington-based international trade lawyer at Bryan Cave. U.S. producers of the minerals may prefer the restraints because they keep prices higher for the commodities they sell, he said.

Contact Alan Field at afield@joc.com.