Real Money, The Street
There is sure to be collateral damage caused by the decision by the United States to start its own action against China’s aluminum industry without being asked to do so by U.S. companies. The question is, how much?
U.S. Commerce Secretary Wilbur Ross announced the investigation by his department into “unfair trade practices” involved in imports of common alloy aluminum sheet from China. It proudly trumpeted these “historic investigations, the first in over a quarter century.”
President Trump’s team is nothing if not unpredictable, and this action fits that bill. It’s the first such “self-initiated” action on alleged dumping since the Reagan administration, when the United States in 1985 took Japanese semiconductor manufacturers to task.
This latest decision is “very surprising indeed,” according to William Marshall, a partner in customs and global trade at Deloitte in Hong Kong.
Retaliation, formally announced or informally implemented, seems the logical next course from Beijing. “I do expect China to take various measures to protect its industries and national interests,” Marshall said.
The Office of the U.S. Trade Representative previously concluded that it should conduct an investigation into alleged Chinese intellectual-property theft and decided in August that the country has a case to answer.
But this self-initiated action by the U.S. Commerce Department is “very aggressive and very unusual,” Marshall notes, though consistent with Trump’s tough talk on trade and reflective of the hawkish members among his trade-policy advisers.
The United States technically has launched two investigations: one into alleged “dumping,” which involves the anti-competitive sale of goods at below-market price; and one into the subsidies that China grants aluminum companies, which could amount to unfair state-supported help to keep prices artificially low.
It’s the first investigation into allegedly illegal subsidies since 1991, when the United States brought a case on its own initiative over imports of Canadian lumber. You need to go back even further for the previous self-initiated dumping inquiry.
Chinese officials have been very patient with Trump and his team. They’ve generally let his bluster go without much comment.
The Commerce Ministry has not yet responded to this latest move. But it did state back in August when the United States started its intellectual-property investigation that it “will resort to all proper measures” to firmly defend its lawful rights if the United States violates multilateral trade pacts and hurts trade ties with China.
It clearly indicated that companies could be in the line of fire — by implication, through tit-for-tat tariffs — that “any protectionist move will certainly damage bilateral economic relations and hurt the business interests of companies in both countries.”
I would bet that any attempt to raise tariffs on Chinese goods will result in a swift and targeted response.
The Chinese companies most at risk from a broad-based trade war with the United States are the computer maker Lenovo Group (LNVGY) , electronics supplier China Greatwall Technology SH:000066, handset manufacturer FIH Mobile (FXCNY) , semiconductor foundry SMIC (SMI) and freight shipper Orient International Enterprise SH:600278, all with at least 2.5 billion yuan ($379 million) in U.S. sales, in each case accounting for at least 18% of worldwide sales.
The most obvious target of the aluminum action is Chalco, full name the Aluminum Corp. of China (ACH) , China’s largest aluminum producer. I mentioned yesterday that it is one of nine stocks that investors could favor as part of deleveraging efforts by China Inc. Those nine stocks currently have high debt burdens, but are doing a good job of reducing them.
Besides tariffs, China could take the case to the World Trade Organization (WTO). That’s a process Canada just initiated, which is challenging new U.S. tariffs on imports of Canadian softwood lumber — something Ottawa officials say they will take to the WTO.
But the wheels of the WTO grind slowly. China would need to present its case to the organization, and even after hearing its argument the WTO would likely deliberate for nine months before handing down any final determination on whether the action violates its free-trade rules.
The United States imported $603.6 million in common alloy sheeting from China last year. The Commerce Department says it has “evidence” that those imports “may be materially injuring, or threatening material injury to,” the domestic U.S. aluminum industry.
It’s normally the industry itself that initiates this kind of investigation. But Commerce Secretary Ross has taken the unusual step of shoving his department right to the front of the complaint. If it proves to itself “dumping” or “unfair subsidization,” it will impose duties equal to those amounts.
The United States in 1985 self-initiated an action against perceived dumping of Japanese semiconductor chips in the United States. That came at the peak of hostilities in an acrimonious trade war between booming Japan and a United States that felt hard done by.
In a 1986 U.S.-Japan semiconductor trade agreement, the Japanese government agreed to end the practice of “dumping” Japanese chips on world markets. It also promised to help foreign companies secure a 20% share of the Japanese chip market within five years.
That didn’t get very far. Frustrated by any signs of progress on U.S. companies gaining access to the Japanese semiconductor market, U.S. action continued with the 1987 imposition of retaliatory 100% tariffs on Japanese computers, televisions and power tools.
The same year, the United States accused Japanese companies of dumping roller bearings on U.S. markets, claiming the price didn’t reflect the decline in the value of the yen. The U.S. Customs Service was ordered to collect duties equal to the margins of the so-called dumping.
Taiwan might take the hardest direct hit from a trade war between the United States and China. Of the top 25 exporting companies out of China, only four are actually Chinese — two Alibaba (BABA) subsidiaries, ZTE (ZTCOY) , and a subsidiary of unlisted SeALL.
More than half (14) are from Taiwan, led by Quanta Computer (QUCCF) , Hon Hai Precision (HNHPF) or Foxconn, Pegatron TW:4938 and Compal Electronics (CMPCY) .
Dell (DELL) via its Chengdu plant is actually one of the 10 largest “Chinese” exporters. Other U.S. companies that are among the top 25 companies exporting out of China are the Flex (FLEX) group thanks to Flextronics in Zhuhai, next to Macau; Micron Technology (MU)with its Xian plant; and Jabil Circuit Electronics (JBL) via its operation in Guangzhou.
Will 2017 see a Japan-style battle between China and the United States?
We already are seeing the early skirmishes. The Commerce Department also on Tuesday slapped punitive duties of up to 96% on imports of tool chests and cabinets from China.
Watch that aluminum sheeting, and watch this space.