G7 Leaders Say “Boo!” to China. China Yawns.

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Leaders at last week’s G7 summit in Japan issued a communique expressing the need for a solution to the excess capacity problem in the global steel industry, hinting at possible litigation at the World Trade Organization. Attendees included President Obama and the leaders of Canada, France, Germany, Italy, Japan and the United Kingdom.

[Crista Huff| May 31, 2016 |Good Fellow]

The biggest problem in the steel industry is that China is currently producing more than half of all global steel, at below-market prices, thus pushing competitors toward bankruptcy. Its industry is heavily-subsidized by government-sponsored entities, thereby allowing China to undercut its competitors on pricing.

One specific result is that U.S. steel production fell 27% in 2015. Obviously, an industry cannot sustain such large-scale revenue impact without widespread job layoffs, and personal & corporate bankruptcies.

The G7 leaders’ communique — which ironically does not mention China — carries no weight toward resolving steel overcapacity.

Three of the G7 countries in attendance — the U.S., Canada, and Japan — are partners in the not-yet-ratified Trans-Pacific Partnership (TPP) trade agreement. Clearly, these countries’ leaders realize that they need to appear willing to resolve international trade problems, in order to shore up waning U.S. support for the TPP. Thus, the milquetoast communique.

Additional diplomatic meetings that are scheduled to take place in China, in June and September, are also unlikely to produce satisfactory resolutions. China is exceedingly aware of the overcapacity problem, which they knowingly caused. As long as there are no harsh consequences for China’s behavior within the global manufacturing arena, China has zero motivation to change its game plan.


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