CANADA GETS TOUGH ON CHINESE STEEL / GEOPOLITICAL FUTURES

Canada Gets Tough on Chinese Steel

Ottawa wants to avoid becoming dependent on Chinese suppliers.
 

As U.S. tariffs on steel hit markets around the world, Canada is considering ways to protect its own steel producers. The Canadian government is preparing to impose a combination of quotas and tariffs on steel imports from certain countries including China, according to a Bloomberg report last week that cited “people familiar with the plans.” This in addition to the Canadian tariffs on U.S. goods (including a number of steel products) worth 16.6 billion Canadian dollars ($12.6 billion) that went into effect on July 1. According to the Bloomberg report, which remains unconfirmed, the new measures would be meant to prevent Chinese steel, in particular, from flooding the Canadian market to avoid duties imposed by the United States. That is only partly true. The broader issue is China’s steel dumping practices in general. With the U.S. attracting so much attention, Canada is now quietly considering imposing protectionist measures of its own that are not too different from those levied by its southern neighbor. China’s dumping of steel on the global market has reduced steel prices and, in so doing, hurt the bottom line for Canadian steel companies, as well as companies from many other countries. It has also led to an increase in Canadian imports of Chinese steel. Though the U.S. is still by far the largest supplier to Canada – 55 percent of Canadian steel imports came from the U.S. last year, compared to just 7 percent from China in 2018 – China’s share is increasing while the United States’ is decreasing. And the sheer volume of Chinese production is an advantage for Beijing.

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Right now, Canada isn’t overly reliant on China – it has access to cheap steel from elsewhere. But its reliance is increasing, and that could leave Canada in a vulnerable position in the future. Canadian imports of Chinese steel increased 26 percent in the first five months of 2018 compared with the same period in 2017. The only way for Canada not to become dependent on Chinese steel is to impose tariffs, quotas or other protectionist measures. After all, China has already shown it will not reduce production. (Whether that’s because of a lack of will or ability on China’s part is a key question, but we’ll leave that aside for now.) If Canada were to block Chinese steel imports, it would likely increase U.S. imports, but this wouldn’t make Canada dependent on U.S. steel. It would merely replace Chinese imports for U.S. imports – a better position for Canada even with the tough stance U.S. President Donald Trump has taken on trade. It’s also likely that once NAFTA talks are completed, the U.S. will grant Canada an exemption to steel tariffs – which the Trump administration has often used as leverage in the negotiations. Another country on which Canada could consider imposing tariffs is Turkey. Turkish steel imports to Canada have increased a whopping 615 percent from roughly this time last year. Still, Turkey is far more dependent on Canada as a market than Canada is on Turkey as a supplier. Even if Canada blocked Chinese steel from entering the Canadian market, the trade relationship between Canada and Turkey would remain roughly the same, with Turkey more dependent on Canada because Canada would still have many other potential suppliers to fall back on. Even though Canada is not in danger of developing a dependency, the large increase in Canadian imports of Turkish steel looks bad politically, and for the purpose of boosting domestic production, Canada may decide to take aim at Turkish suppliers. Prime Minister Justin Trudeau is, after all, facing elections in 2019 and may be looking for a boost among certain constituencies in which he is currently unpopular. Moreover, a few tariffs, paltry when compared to those imposed by its southern neighbor, would likely go relatively unnoticed on the world stage. For Canada, it comes down to a simple question: Is it preferable to have cheap steel and a potential trade dependency on China, or more expensive steel without any significant dependency on a single country? Ultimately, the latter is the better option. And if Canada no longer trusts the U.S. as a trade partner and wants to be self-sufficient when it comes to steel, it could achieve that as well: Canada can produce enough steel to meet its domestic demand, though this would require investing in the production of stainless steel, for which Canada currently relies on imports. But self-sufficiency is likely a bridge too far – especially for the present government, which has vehemently supported free trade. Tariffs on Chinese steel can be far more easily justified to Trudeau’s base than broader tariffs that would target a variety of countries. Most important, Canada is better served strategically by staying close to the United States. Given the choice then – and on steel imports, it looks like Canada is, for once, in the driver’s seat – we expect Canada to try to restrict Chinese steel imports while encouraging imports either from the U.S. or other countries with which it has closer ties.