China’s massive subsidization of its steel industry is having consequences that are truly global. By expanding its steel industry by Government fiat, rather than in response to the demands of the market, China has skewed the entire world market in steel and in the inputs used to make steel. In doing so, it has directly injured both foreign steel producers and steel consuming industries in other countries.
China’s explosive growth between 2000 and the present required massive amounts of steel, and indeed, during much of this period China was the world’s leading steel importer. By building up its steel industry to artificial levels, though, China deprived steel producers in other countries of valuable sales. This is significant, because steel is a highly cyclical industry.
Not surprisingly, the rapid expansion of steel making capacity in China led first to the replacement of imports, and then to a boom in exports. In product line after product line, Chinese exports have flooded world markets, driving down prices.
The world in many ways constitutes an integrated market for steel. Through a dramatic expansion in capacity fueled largely by subsidies and Government-directed lending, the Chinese steel industry is destabilizing that market. Foreign steel producers are not the only ones harmed by the subsidized expansion of the Chinese steel industry. Foreign steel consumers have also been injured. The expansion of the steel industry is only part of the Chinese Government’s plan for the development of the Chinese economy. The Chinese Government is also encouraging the development of manufacturing industries that use steel.
Manufacturers of products that are steel-intensive, such as automotive parts and appliances, are seeing increasing competition from Chinese producers who have access to subsidized domestic steel. Subsidized steel is going to manufacture components in China that ultimately end up in the United States and replace American steel. Indeed, American consumers report that they can import finished parts cheaper from China than they can buy the steel here. At the same time that U.S. steel producers are seeing increased imports caused, directly and indirectly, by increased Chinese production, we are also seeing many of our domestic customers move production to China, or go out of business altogether.
1) Which of the options most closely describes ‘by Government fiat’?
a) In response to Government order b) Before the Chinese Government ordered
c) With the help of Chinese owned fiat company d) In keeping with Government intuition
2) How have US steel consumers gotten affected as a result of Chinese steel?
a) Import from China has become very easy and hence there is no need to manufacture the finished product in the US
b) Subsidized Chinese steel which is not of very high quality is affecting quality of finished product
c) Demand for steel is less than supply from China, leading smaller US steel consumers to shut down business
d) Raw material in America costs more than the finished product in China and hence production is unfeasible
3) What does “dramatic expansion” indicate?
a) Artificial expansion b) Noticeable expansion c) Unstable expansion
d) Unreal expansion
4) What is the main motive behind expansion of steel industry in China?
a) Increased returns as a result of higher market share globally
b) Replacing imports and growth of Chinese economy
c) Driving out foreign producers and consumers from the world market of steel
d) Make a global impact in all industries, beginning with steel industry