Testimony of Mr. Thomas J Usher
Chairman and Chief Executive Officer
USX Corp
Before the U.S.-China Commission
August 2, 2001
Washington, D.C.
Mr. Chairman and members of the Commission, I am Thomas J. Usher, Chairman and
Chief Executive Officer of USX Corporation and United States Steel LLC. United
States Steel is the largest integrated steelmaker in the United States and the
largest producer of flat-rolled steel in the U.S. I appreciate this opportunity
to appear before you today to address the growing challenge posed to our industry
by China.
In 1996 China became the world's largest producer of crude steel. While much of
its industry consists of inefficient mills producing steel of relatively low quality,
the Chinese government is devoting massive resources to upgrading the industry.
The Chinese government has a stated objective of making China completely self-sufficient
in steel by 2010. There is little doubt that China is quite capable of achieving
this goal. World Steel Dynamics, which recently completed a major study on the
Chinese industry, reports that "a huge expansion" is under way in the
steel sector, with an addition of 20 million metric tons of hot-rolling capacity
seen by the year 2006.(1)
Some Chinese mills, like Baoshan in Shanghai, now produce high quality cold-rolled
and corrosion-resistant flat products.
The U.S. Department of Commerce reported last year that the Chinese government
will spend $6 billion during the next several years to "upgrade and transform"
the steel industry.
Commerce predicted that the central government will direct local governments to
give the steel industry priority with respect to land use, raw materials, transport,
raw material, equipment, and water and power supplies.(2)
World Steel Dynamics predicts that "the Chinese steel industry by 2010 is
sure to become the dominant steelmaking group in the world."
The expansion of the Chinese steel industry must be viewed against the crisis
which confronts the global steel industry today. China is undertaking massive
capacity expansion at a time when the world steel industry already suffers from
an enormous overhang of surplus capacity. The capacity surplus has already led
to depressed prices, chronic dumping and trade friction around the world. While
the numbers may vary by source depending on the definition of ìovercapacity,î
the dimensions of the problem are monumental:
The OECD estimates that 275 million tons of surplus crude steelmaking capacity
exists worldwide, or about two times the annual consumption of the United States
and more than the entire world consumed annually during the decade of the 1950s.
In the year 2000, over 75 million tons of the world's effective capacity for hot-rolled
flat products was not utilized at all, more than double the amount needed to supply
the U.S. market for a year.(3)
The consequences of the global capacity glut for our own steel industry have been
disastrous. We have experienced massive, recurrent surges of low-priced imports
in this market since 1998 which have depressed prices and destroyed profitability.
Since 1998 producers representing over 20 percent of the U.S. steel industryís
crude steel capacity have entered bankruptcy proceedings.
Chinese steel - the experience to date. What role has China played in this process?
To date, the biggest impact of China's steel policies on our industry has been
indirect, reflecting the progressive closure of the Chinese market through a series
of government measures which have been implemented since 1994.
In 1993, according to statistics published by the International Iron and Steel
Institute, China imported over 36.7 million metric tons of semi-finished and finished
steel products, more than twice the volume imported by the U.S. in that year (17.9
million).
By 1998, the situation had more than reversed itself - the United States absorbed
37.9 million tons, over 2 1/2 times the 13.1 million tons imported by China in
that year.(4) Chinese import restrictions largely foreclosed a traditional major
export outlet for countries like Russia and Japan. Steel from these and other
sources that would have gone to China ten years ago has come to the United States
instead. In addition, Chinese import restrictions have meant the loss of an export
market for us - U.S. exports of finished steel to China fell from an average of
109.8 thousand net tons in 1992-95 to 18.5 thousand net tons in 1997-99.(5)>
Thus far, given its sheer size, the Chinese steel industry has played a comparatively
modest role in export markets. In both 1998 and 1999, for example, it exported
a smaller total volume of steel than Taiwan.(6) However, we have already learned
that when China directs its large and growing steelmaking capacity to the export
market, the results can be dramatic:>
In 1993 China did not ship any cut-to-length plate (CTL) to the U.S. market.
Only three years later, China had become the largest single foreign supplier of
this product to the U.S., accounting for over 18 percent of all CTL imports. Dumping
margins were found by the Commerce Department ranging from 17.33 percent to 128.59
percent.
As Chinese capacity continues to expand, the prospects for a repetition of the
plate episode increase. Given the size of China's industry, if domestic demand
falters due to recession or other factors, the result could be an export surge
comparable in scale and disruptive power to that which we saw from Russia in 1998.
Significantly, the Chinese government has demonstrated that it will employ special
tax rebates and other export incentives in order to stimulate exports.
Trade Policy Implications of China's Steel Policies
While Chinese industrial policies in steel have already had substantial effects
on our industry and market, they have more serious implications for the future.
Confronting China, our industry faces a competitive challenge from enterprises
organized under an economic system which is fundamentally unlike our own. The
recent study by World Steel Dynamics cites some of these systemic differences
in support of its predication that the Chinese steel industry is "sure"
to become the dominant producer in the world within ten years. It notes, for example
- -
Subsidies. The Chinese industry has access to ìlow-cost, abundant capitalî
from the government. WSD asks "why be fearful [of high levels of debt] when
the central government may never permit any of the companies to go out of business
and is willing to exchange debt for equity when necessary?"(7)
State ownership. The government owns the principal steel enterprises and is "committed
to creating an environment in which profits, and, therefore, income tax receipts,
are good." "All of the [main Chinese steel] companies belong to the
government. There are no exceptions. If the government approves, the companies
get the help that they need." Top executives of Chinese steel companies are
members of the Communist Party.(8)
Market controls. Government-administered import restrictions and production controls
have enabled Chinese mills to achieve domestic prices which are among the highest
in the world for both flat and long products ñ for example, $314 per metric
ton for hot-rolled bands in the first quarter of 2001(9) (versus about $270 per
ton in the U.S. during the same period).>
Comparable promotional measures in many other countries have played a major role
in the erosion of the U.S. steel industry. Their presence on a huge scale in what
is now the worldís largest steel industry must constitute a major cause
for concern.
Since the end of World War II, the United States has sought to promote an open,
liberal world trading order through the establishment of multilateral rules and
institutions, such as, most notably, the General Agreement on Tariffs and Trade
(GATT) and, more recently, the World Trade Organization (WTO). Through this process,
multilateral rules have been established which prohibit or circumscribe precisely
the kinds of trade and industrial policy measures China is using to promote its
steel industry. The critical question which we face today is the extent to which
these rules will apply to China in a manner in which compliance can be monitored
and, where necessary, enforced.
The U.S. government has negotiated a bilateral agreement with China with respect
to WTO accession which goes a long way toward satisfying some of our principal
concerns about the potential effect of Chinese policies on our industry. The extent
to which China will comply with its obligations is an open question. The effectiveness
of subsequent monitoring and enforcement will depend on the degree of effort and
level of resources committed to the task by this and subsequent administrations.
With all of these variables, it is premature to assess the impact of Chinaís
WTO entry on the U.S. steel industry. Nevertheless, it is useful to review the
most important issues.
Antidumping - non-market economy rules. U.S. antidumping law provides that in
cases involving exports to the U.S. from "non-market economies" (NMEs)
the Department of Commerce is to determine ìnormal market valueî
of the product under investigation by calculating the costs of production for
NME producers. Because prices in NMEs are distorted by pervasive government controls,
Commerce calculates costs by reference to a surrogate market economy which is
a significant producer of comparable products and which is at a level of development
comparable to that of the NME under investigation.
The U.S.-China Agreement provides that Commerce may continue using NME methodology
in antidumping investigations involving China for 15 years following Chinaís
WTO accession. China has indicated it will seek to eliminate use of the NME provisions
of U.S. antidumping law given its progress towards becoming a market economy.
However, State ownership and pervasive control of strategic industries like steel
are expected to continue for the foreseeable future, and are cited by industry
analysts as a major source of competitive advantage:
The Chinese government makes and guides prices in the crude oil and natural gas
sectors, power supply, coal, transportation, and in the steel industry itself.(10)
In the state steel sector, wage rates are not determined by free bargaining or
other market-based methods - overemployment is endemic and a de facto form of
social welfare, with the costs ultimately absorbed by the state. One Chinese mill,
Shougang, employs more workers than the entire U.S. steel industry.(11)
Accordingly, in the final Protocol of Accession and in implementing U.S. legislation,
the right of the U.S. to continue to apply the NME provisions of its Antidumping
Law to China for the full 15 years must be preserved.
Safeguards. The U.S.-China Agreement provides that the U.S. can apply product-specific
safeguard measures solely against China in situations in which imports occur in
such an increased quantity and are imported under such conditions that they constitute
a "significant cause of material injury, or threat of material injury"
to a competing U.S. industry. This provision, which will remain in effect for
12 years following China's accession to the WTO, contains lower causation and
injury standards than ordinarily would apply between WTO members in safeguard
cases. These special safeguard rules are appropriate given China's status as an
economy in transition, the sheer size of some of its manufacturing sectors, including
steel, and the potential for domestic market disruption in the wake of trade liberalization.
Congress must enact legislation fully implementing this provision, and it will
be important for the Executive to exercise this right vigorously in appropriate
cases.
Market Access. In October 1992, China signed a Memorandum of Understanding (MOU)
with United States committing (1) to eliminate all quotas and import licensing
on steel imports, and (2) not to pursue import substitution policies, e.g. measures
designed to displace imports with domestic production. Notwithstanding these commitments,
China has pursued an explicit policy of import substitution in steel using a system
of de facto import licensing to quantitatively restrict steel imports:
The State Administration of the Metallurgical (SAMI) has repeatedly stated its
objective of "replacing [steel] imports with domestic products. In 1998 the
government implemented the Steel Import Substitution Program (SISP), which provided
VAT rebates to steel consumers who used domestic steel and would otherwise use
imported steel.(12)
A Chinese official publication, Liaowang, stated in 2000 that despite the commitments
in the 1992 MOU, China still maintained quotas on steel imports and subjected
imports to registration requirements.(13) The U.S. Department of Commerce concluded
in 2000 that "ample anecdotal evidence and various reports indicate the existence
of a steel import quota."(14)
In addition to quotas, China maintains an array of other import restrictions,
including restrictions on import trading rights, the prohibition of distribution
of steel by foreign firms within China, the requirement that foreign firms importing
steel post security deposits, and tariffs which range from 10 to 40 percent.
If China fully adheres to its WTO commitments upon accession, most of the principal
restrictions which limit access to the Chinese market will be eliminated -- most
importantly, the quota/licensing system. The result will be an increase in imports
from nearby Asian countries as well as producers in the former Soviet Union. This
will relieve pressure on the U.S. market and will subject inefficient Chinese
producers to intensified competition. The U.S. and its trading partners have a
shared interest in ensuring that China complies with its commitments on market
access.
Subsidies. At present the Chinese steel industry is one of the most heavily-subsidized
steel industries in the world.
The government has provided massive assistance, in the form of debt forgiveness
to China's steel industry, estimated at $10.8 billion in 1999-2000. Some of Chinaís
leading producers, including Baoshan and Capital Iron and Steel, were beneficiaries
of this aid.(15)
In April 2001 China's State Economic and Trade Commission (SETC) approved loans
at subsidized interest rates worth US $4.6 billion to over 80 steel projects designed
to expand capacity for hot-rolled flat products and plate by 13.7 million tons,
cold rolled flat products by 6.8 million tons, and galvanized sheet by 2.5 million
tons.(16)
Additional large scale subsidies are provided to Chinese steelmakers by regional
and local governments.
The Chinese government gives "export tax rebates" on a preferential
basis to domestic steel producers, which have been credited with substantially
improving China's export position.(17)
At present, under current Department of Commerce rules, given China's non-market
economy status, U.S. countervailing duty law (CVD) does not apply to Chinese exports.
If and when all or parts of the Chinese economy graduate to market economy status,
U.S. CVD rules should be applicable immediately to imports from China.
The U.S. should retain flexibility to use alternative benchmarks to measure countervailable
benefits arising out of subsidies, so that, for example, even if a particular
sector is graduated to ìmarketî status, other sectors providing subsidized
inputs reflecting state controls would not be so considered.
The U.S. should seek to ensure -- if necessary through legislation -- that if
massive Chinese subsidies to the steel industry continue, those subsidies will
be subject to U.S. CVD rules even if individual steel enterprises are privatized,
unless and until the subsidies are fully repaid.
Given China's historical and current reliance on export subsidies, it is important
that the current WTO ban on export subsidies be made fully applicable to China
after accession. In addition, U.S. CVD law should be fully applicable to Chinese
export subsidies, whether or not a remedy is available under WTO Dispute Resolution
procedures.
Enforcing U.S. rights. The Commission has expressed interest in the extent to
which China will be able to live up to the bilateral trade obligations which it
is assuming with regard to the U.S. as it joins the WTO. To date, the record is
mixed. China has met many of its commitments under the 1992 MOU with the U.S.,
and we have a right to expect that it will make a good faith effort to comply
with its new WTO obligations. However, with respect to steel, it should be recalled
that in the 1992 MOU China committed not to implement an import substitution policy
and to phase out its quantitative import restrictions on steel by the end of 1993.
These commitments were in conflict with China's industrial development objectives,
and industrial policy prevailed. Based on this experience, it is important that
the U.S. government closely monitor China's adherence to its WTO commitments,
particularly in sectors like steel which are the subjects of intensive government
promotional efforts.
If China breaches its WTO commitments, the United States has recourse to WTO Dispute
Resolution Procedures, and should utilize procedures in appropriate cases. At
the same time, we must bear in mind that to date these procedures have not proven
fully effective in enforcing U.S. rights under the GATT, and the WTO has not yet
demonstrated that it can handle cases in which complex factual issues are in dispute,
as is likely with respect to China. For example, China has denied that it maintains
quantitative restraints on steel imports, despite extensive evidence to the contrary,
and a future U.S.-China dispute over this or similar issues would involve issues
of fact which WTO dispute resolution procedures and the WTO Secretariat are ill-equipped
to handle. Accordingly, the U.S. must remain ready to act unilaterally, where
necessary, in defense of its rights, consistent with its obligations under the
WTO. As a practical matter this will entail the application of antidumping and
countervailing duty measures, as well as remedies available under other statutes.
The nexus with U.S. security interests.
Steel has been a "strategicî"industry for centuries, meaning an
industry essential to national defense and the ability to wage war. The advent
of nuclear weapons, the development of "smart" weapons systems, and
the increasing use of specialized nonferrous and exotic metals in aircraft and
submarines have perhaps made steel somewhat less central to defense capability
than it was earlier in this century, but the fact remains that many of the platforms
from which modern weapons systems operate are still predominantly made of steel.
The Navyís ships and the armored vehicles, artillery pieces, trucks, and
munitions used by the Army and Marine Corps are made of steel, as are countless
other major and minor items of equipment used by all of the armed services.
The existence of a strong domestic steel industry has proven vitally important
in all of the wars of this past century, and the same will be true in the unfortunate
event that we became involved in another major war. While such a conflict today
seems unthinkable, it should be recalled that our entry into a number of wars
which are within living memory came as a surprise to most Americans, including
World War II, the Korean conflict, and the Gulf War. Moreover, while we have allies
who would undoubtedly be willing to supply us with steel during wartime, the need
to transport a vital raw material across thousands of miles of ocean during a
war is a major strategic disadvantage. The British discovered this in World War
I, when they had to import large tonnages of steel vital to their war effort along
sea lanes that were under attack by enemy submarines.
Whether or not we regard China as a "strategic competitor" with the
United States, an important element in China's emergence as a major power is the
rapid development of strategic industry like steel. China clearly regards the
existence of a strong indigenous steel industry as essential to its broader national
htmirations, including its military capacity. By the same reasoning we should
implement trade and other policy measures necessary to prevent the further erosion
of our own steel industry, which has played a major role in defending the nation
during the past century and may be called upon to do so again.
Maintaining a coherent U.S. Policy - The case of Ex-Im Bank
President Bush recently launched an initiative to respond to the crisis confronting
the U.S. steel industry. The president has asked the U.S. International Trade
Commission to undertake an investigation pursuant to section 201 of the Trade
Act of 1974 which can provide the basis for comprehensive import relief for the
U.S. industry. The President is also preparing to engage our trading partners
in negotiations to reduce surplus steelmaking capacity worldwide. These initial
steps are very positive. While discussions are still under way about what additional
policy measures may be needed to enable the U.S. industry to recover fully, one
thing should be clear already - no arm of the U.S. government should take action
which undermines the objective of the President's program. I am referring specifically
to proposals by the U.S. Ex-Im Bank to provide loans to finance expansion of steelmaking
capacity abroad at the same time that the President is trying to reduce capacity.
USX has always supported the efforts of Ex-Im Bank to promote U.S. exports, and
our subsidiary, USX Engineers and Consultants, recently participated in an Ex-Im
Bank program to assist a mill located in Romania to become more environmentally
efficient. However, it is irrational for Ex-Im Bank to finance the construction
of additional steelmaking capacity abroad for products which are already in global
oversupply. Last year Ex-Im Bank approved a loan to the Benxi Iron and Steel Company
in China which would help finance the expansion of Benxiís capacity for
hot-rolled flat products by 1.5 million tons.
This loan was approved at a time when worldwide there was already over 75 million
tons of effective hot-rolled capacity that was not being utilized at all - or
more than double the amount needed to supply the entire U.S. market for a year.(18)
In China in 2000 there was already nearly 10 million tons of unutilized hot-rolled
capacity, and the capacity surplus is forecast to swell to 14 million tons by
2004.(19)
Benxi's own hot-rolled capacity utilization rate was a disastrous 44% in 2004,
and even without the planned expansion this utilization rate is not forecast to
increase significantly in the foreseeable future.(20)
China's capacity glut in hot-rolled flat products is so severe that the Chinese
government has established a controversial output-restraint cartel in this sector.
The U.S. government is currently conducting an antidumping investigation with
respect to hot-rolled flat products from China. The Department of Commerce has
made a preliminary finding of dumping with respect to China at margins as high
as 67.44 percent and the U.S. International Trade Commission has made a preliminary
finding that dumped Chinese hot-rolled flat steel products have materially injured
U.S. steel producers.
This episode underscores the need for some additional guiding principles for Ex-Im
Bank financing. First, Ex-Im Bank should not finance investments that would increase
capacity for a commodity product which is already in massive global oversupply.
Investments in such sectors should be limited to environmental safety, and capacity
reduction. Second, no loans should be extended to countries where companies have
been found to be dumping in the U.S. market, or while an antidumping investigation
is pending. Finally, as part of its effort to reduce global excess capacity in
steel, the U.S. government should engage other governments in a dialogue to ensure
that no country extends export financing for capacity expansion in steel which
would aggravate the existing surplus.
Conclusion
The expansion of the Chinese steel industry is occurring in the face of an already
existing global steelmaking glut. The United States must closely monitor Chinaís
compliance with the bilateral agreement between China and the United States and
with Chinaís WTO commitments particularly in regard to the steel industry.
The steel industry continues to be a strategic industry in terms of national security.
China clearly views the development of a strong steel industry as integral to
its emergence as a major industrial and military power. We cannot allow the desire
to promote a bilateral trade relationship with China to be placed above our national
security interests and the maintenance of a domestic manufacturing base. Finally,
the Ex-Im Bank must take steps to assure that its actions are consistent with
and in support of other programs of the United States to reduce global steel overcapacity.
____________
(1) WDS, Chinese steel: Unique, Unbridled, Unstoppable, Case Report vvv (June
2001), p. vvv-1-7.
(2) U.S. Department of Commerce, Report to the president: Global Steel Trade
(July 2000), p. 146.
(3) Metal Bulletin Research, April 2001.
(4) IISI, Steel Statistical Yearbook 2000.
(5) American Iron and Steel Institute
(6) IISI steel Statistical Yearbook 2000, Table 30
(7) WSD, Chinese Steel (op. Cit.) p. vvv-2-3.
(8) WSD, Chinese Steel (op. Cit.) p. vvv-2-3, vvv-4-1, vvv-2-1.
(9) WSD, Chinese steel, op. Cit., p. vvv-3-4.
(10) "China Controls Public Utilities Prices," Beijing Xinhua Domestic
Service (April 26, 1998); "Energy Situation, Utilization Strategy,"
Neijing Zhongguo Nengyuan (Februaary 1, 1999); "State Sets Minimum Price
for Steel Products," South China Morning Post (September 1, 1998).
(11) U.S. Department of Commerce, Reports to the President: Global Steel Trade
(July 2000).
(12) "The State Bureau of Metallurgical Industry Seeks to Continue to do
a Good Job of Controlling Total Production Output," Xinhua (Chinese Language
Version) (July 22, 1999); U.S. Department of commerce, Global Steel Trade op.
Cit. P. 154; "PRC Sets Metallurgical restructuring Objectives for 2000,"
Xinhua (English Language Version) ( February 25, 2000).
(13) "WTO entry Pros, Cars as PRC Industries," Liaowang (February
28, 2000)
(14) U.S. Department of Commerce, Global Steel Trade (July 2000) p. 153.
(15) "PRC Government to Continue to Implement Debt-to-Equity Swaps for
Steel Firms," China Daily (Business Weekly Supplement, Hong Kong Edition)
(March 26, 2000); "SOE's Sign Huge Debt-Equity Swap Agreements," Xinhua
(November 10, 1999); "AMCís Sign 3.6 Million Yuan Agreement With
Steel Giant," Xinhua (January 5, 2000).
(16) World Steel Dynamics, Chinese Steel Unique, Unbridled, Unstoppable,î
Core Report VVV (June 2001).
(17) "Government to Raise Tax Rebate Rates for Export Goods," Xinhua
(July 19, 1999); WJO Deal Poses Competitive Threats to Chinese Mills,î
Metal Bulletin (November 16, 1999).
(18) Metal Bulletin Research, April 2001.
(19) Metal Bulletin Research, April 2001.
(20) Metal Bulletin Research, April 2001. Benxi hot-rolled utilization rate
forecast for 2004 is 48%. Ibid.