Not The Onion.
Well, this is interesting.
The U.S.-China Strategic & Economic Dialogue is happening in Beijing right now, and industrial overcapacity is at the top of the agenda. China is producing far more steel, aluminum and other commodities than the world needs, and is flooding the U.S. and global markets with goods priced far below market value.
That’s causing a host of problems — including nearly 15,000 layoffs in the U.S. steel sector alone.
Ahead of the talks, Treasury Secretary Jack Lew publicly called out China for its overcapacity problem and urged officials to take action:
“Excess capacity has a distorting and damaging effect on global markets. Implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminum, is critical to the function and stability of international markets.”
Not surprisingly, China wasn’t having any of it. Chinese Finance Minister Lou Jiwei told reporters that Beijing is already confronting the issue, which we’ve heard before. But he also said something that caught our eye:
“Some countries in the world want China to set up a quantitative target to ease overcapacity. I want to say that China is no longer a centrally planned economy, actually 52 percent of the steel sector are private companies. They are not going to take any instructions from the government.”
So… China says it is a market economy and therefore can’t do anything about the overcapacity problem.
Let’s get this out of the way — China is NOT a market economy, and its steel industry does not operate in a fair and open market.
As the Wall Street Journal explained, most Chinese steelmakers are government-owned or closely linked to local governments. China’s state-backed steel mills provide jobs and tax revenue, and the government is unlikely to close or cut production because it fears a backlash.
China’s steelmakers also benefit from a number of other unfair government interventions, such as having their loans regularly rolled over or refinanced, the WSJ noted.
On top of all this, China often manipulates its currency, providing its steelmakers with yet another unfair advantage. And China’s communist party and government still play a major role in critical aspects of the economy, including the financial system, resource and energy sectors.
But there’s a reason why China is pushing this market economy message.
When China joined the WTO back in 2001, it did so under the condition that it would be labeled a “non-market economy” for 15 years. This gave the United States and other nations additional remedies to deal with China’s trade cheating.
During the 15-year period, China was to take meaningful steps to move toward an open market. It did not.
But China still thinks it is entitled to be automatically named a market economy, and really, really wants that status, since it will make it easier to dump its goods into our market (and without any meaningful consequences).
China isn’t likely to do much about its industrial overcapacity; it has broken numerous promises to do so. But Lou’s remarks on Monday suggest that we can expect the debate over China’s market status to only intensify in the months ahead.