The right approach to addressing overcapacity problem from a Chinese perspective

This article was written for the Sting by HE Ambassador Yang Yanyi of the Chinese Mission to EU The recent weeks have seen further worrying moves in Brussels. The European Commission opened new anti-dumping investigations on steel products originating from China, and the European steel industry organized a demonstration against so-called Chinese dumping on the EU market and the granting of Market Economy Status for China. The message carried – the protectionist sentiment is worrying and the confrontational approach is regrettable and misleading. No body should be under any illusion: overcapacity, including excessive capacity of the global steel sector is one of the many challenges we are all faced with. Not only European steel industry sector has been hard hit, iron and steel industries in China and many other emerging economies are bearing the brunt, suffering badly from excessive production and flagging demand. According to some estimates, a reduction of overcapacity cut back by 30% in those industries with most excess capacity—iron and steel, coal, cement, ship building, aluminum and flat glass is expected to affect employment of three million workers. Not to mention that China is also confronted with many other daunting tasks: lifting out of poverty the remaining 70 million people, advancing industrialization to transform China into a post-industrial society, rebalancing the economy from investment and net exports to consumption and innovation. The situation is serious and requires a response. But what kind of response? Grumble, curse, cut the ground from under other’s feet, retreat into protectionism and to be at each other’s throats? If history serves as a guide, these are unwelcome if not irresponsible responses. They may help to give vent to one’s anger and frustration and obtain short-term gains, but fail to serve one’s long-term self-interest and common interest of all. Obviously how to respond to challenges belongs to the competence of each and every country. I only wish to share what we believe to be the best possible approach and option and what China has been doing and will continue to do with regard to the issue on hand. First, digest the problem and not dump it onto other’s doorsteps. Development of the steel industry in China is mainly to meet its domestic demand, rather than to export to other countries. To effectively deal with the overcapacity problems, China has taken tough measures to control new capacity. Painful as it is, China has cut its steel industry capacity by more than 90 million tons over the past few years and investment in iron and steel assets by 13% last year and the growth of Chinese steel production has basically come to a halt. To continue to address overcapacity in a serious and resolute manner, China has made elimination of overcapacity the top priority for this year and will cut the steel industry capacity by another 100-150 million tons. Second, take the tackling of overcapacity an opportunity to accelerate economic restructuring. The Chinese word for “crises” is made up of two characters, crisis and opportunity. Guided by our conventional wisdom that opportunities are embedded in crises and that we must be good at getting to grips with them, China is pushing through essential reforms and restructuring against all odds. Being fully aware that much of China’s industrial overcapacity is heavily concentrated at the lower end of the value curve, we have taken restructuring of the iron and steel sector an important part of our endeavor to complete the difficult transition of moving China away from an investment-led economy to a consumer-oriented one. China is actively restructuring the steel sector by eliminating outmoded capacity, creating exit strategies for “zombie companies” based on market rules and encouraging promotion of innovation, technology, quality and management to meet production safety, energy consumption and environmental protection standards, ensure effective supply of high quality products. In addition, we have put in place stricter supervision over local authorities to guard against excess production and tendency to protect enterprises with favorable policies. Third, support training and relocating workers for new jobs and businesses to minimize the negative impact of transformation. Like elsewhere in the world, pressure of globalization and reform and restructuring has its impacts in the Chinese society. Restructuring of the iron and steel sector gives rise to concerns and worries. Yet, there is a common understanding that there is a price and pain to be taken for change for the better. This time around, the Chinese Government has taken up measures to help redundant labor change career path. Among others, the central government is setting up a special fund to retrain workers and support local government efforts to reduce overcapacity. And with rebalancing underway in the Chinese economy and with numerous new industries emerging, now it is far easier to get new and better-paid jobs than in the reform of the country’s inefficient state-owned industries in the late 1990s. This should also mean China can rely more on domestic consumption, instead of pouring yet more concrete in a country that has already built too many steel mills and cement plants. Fourth, stay the course of transformation against headwind. Our attitude to life is shaped and moulded by the great intellectual legacy over the past thousands of years and values associated with Laotze, Confucius and Motze, including the wisdom that as heaven maintains vigor through movement, a gentleman should constantly strive for self perfection. And the many vicissitudes we have gone through have taught us that maintain the status quo and protect underperforming sectors is only a temporary adaptation to circumstances rather than a long-term solution. To be competitive we have to live with the world as it is and when the world changes we must remain nimble to seize opportunities that come with challenging circumstances and swiftly adjust ourselves in a pragmatic and clinical manner. Undoubted, the unfolding new normal and structural transformation could be more painful and even prolonged than in the late 1990s since restructuring of upstream industries are more arduous and difficult. Yet to achieve high-quality, efficient and sustainable growth is not an impossible dream as we are determined to enduring hardships and putting our strength, determination and willingness to see to its conclusion our set objective. Fifth, China remains committed to opening-up to achieve international competitiveness and promote win-win. In our globalized world, we are interdependent. This is not an option but a reality. Our progress and achievement proves that the relationship we’ve built with our global partners especially those strategic partners determines our common prosperity. Given this, we are working closely with our neighbors and neighbors of neighbors the One Belt One Road initiative to forge closer economic ties, deepen co-operation and expand development in the Eurasian region, and build a community of common interest, destiny, and responsibility. We are expanding opportunities for both China and the EU by increasing market access and leveling the competitive playing field, including through the negotiation and early conclusion of the China-EU Investment Agreement. We are advancing, as I mentioned before, economic reforms and restructuring, including financial sector opening, that would create a more rapidly growing Chinese market for European goods and services by moving China toward more home-grown, consumption-led growth. And we are strengthening cooperation on a range of international economic and financial issues, so that we are better able to work together on common global challenges. Last but not least, global excess steel capacity calls for global action. All concerned countries should step up dialogue and exchange to seek to resolve their concerns through closer cooperation rather than resorting to trade defense measures, which are not sound remedies. China stands ready to engage in dialogue and consultation with the EU through platforms including the China-EU Steel Dialogue to resolve their differences and properly manage trade friction. In this connection, I wish to mention a conversation I had some weeks ago with a European business leader who works with the steel industry. Contrary to my expectation, he didn’t pick a fight with me. Rather, he was very friendly, frank and open-minded. Of the many interesting points he shared with me, three are especially impressive. One, China represents more of an opportunity than a challenge. For many years Western policymakers and scholars, as well as media pundits and commentators, including those in Europe, have engaged in heated debates on whether the rise of China represents a threat or an opportunity for the current international order. In recent times, the “threat-talk” has regained momentum. For Europe, China is both a challenge and an opportunity. In the final analysis, China represents more of an opportunity than a challenge. Putting in perspective, China’s moving from major exporter of low-value added manufactured goods towards higher-end production and domestic consumption augurs well for Europe. And it is very important for Europe to keep in mind there is only one China in the world and Europe should not miss the opportunity that a transforming China will bring to the rest of the world. Two, Europe and China can and should work with each other and not against each other. Europe and China are neither strategic competitors nor rivals. With long-standing civilization behind them, both Europe and China set great store by economic development as well as social equity and justice. In areas where the two sides diverge both have the wisdom and capability to accommodate and work things out in a mutually beneficial manner. The successful settlement of the solar panel dispute was just a case in point. Three, it is imperative that Europe hold on to its values of openness and inclusiveness. While the concerns and worries of the steel sector could be well appreciated, it is highly necessary to remind ourselves that to keep Europe’s social model and give concrete hope to European citizens and the younger generation, Europe must reform and change. The same goes true for the steel industry. Even if China is not out there in the steel industry market, there are other competitors with competitive edge. Though voice like this is not very much in the headlines of the local media, they are worth listening to and heeded to. Before I conclude, I wish to reiterate one more point. Whether or not recognizing China’s market economy status, the EU and all other members of the WTO are under the obligation to apply the rules of the WTO, namely Section 15 of the Protocol on the Accession of China to the WTO which requires Members to stop using “analogue country method” in anti-dumping investigations against China as of December 11, 2016. It should be clarified and not confused, this is not a bilateral negotiation between China and the EU. This is not about whether or not China is up to the market economy criteria of the EU. This is simply irrelevant. The real issue is about the EU’s standing by its values of and commitment to fair trade, multilateralism, and rules-based international order. We look forward to the EU’s clear-cut compliance with its WTO obligations and apply equal terms to China in its calculations of anti-dumping duties.