Misuse of Free Trade Agreement by China

Hot Rolled Bar

With the US and EU’s constant trade deal sanctions imposed on Beijing, China risks of being in market isolation.

The non-classification of China as a market economy disables them to join Free Trade-Agreements (FTA) despite their ongoing demands to do so. Therefore, China has been building trade agreements with countries willing to sign deals with the eastern powerhouse.

However, there have been calls from countries that do not have trade deals with China for the misuse of the Free Trade Deal. A glaring example of China’s exploitation of the free trade agreement is through the stainless-steel market.

India’s domestic stainless-steel industry has been decimated by the surge of imports by its neighbour. Strong buying countries such as Japan and Korea have lessened their stainless-steel demand due to their strong reserves, China shifts its focus to India.

India does not have a free trade deal agreed with China, therefore, imposing an 18.9% countervailing duty on Chinese steel imports. This has seen a decrease in imports, however, China has found a method of importing stainless steel without paying the countervailing duty.

Chinese stainless steel has been making its way to India duty-free by re-routing its path using countries that China has free trade deals with. Indonesia has an existing free trade deal with China making steel imports go through their outstations in Indonesia.

With Indonesia’s limited stainless-steel market, the Chinese move the unwanted steel on to India. China takes advantage of Indonesia’s free trade deals with countries that have free trade deals themselves with India.

The present year has witnessed many ups and downs in terms of the steel imports from different countries. An exact and verifiable account of the percentage rise and drops in consumption of Chinese steel can be derived from a look at the plotted graph.

steel graph

Image Source: https://images.financialexpress.com/2018/08/steel.jpg

A 67% upsurge in steel importation has been noted during the April-June quarter of 2018, accounting for almost 3,62,000 tonnes (of steel to the mere 2,17,000 tonnes estimate of the previous year.Thus, the purchase made in accordance to the pricing of steel in China would have required an investment of 433.5 US Dollars per metric ton; which is an astounding number.

Also, this data is verifiable by the detailed data provided in the Financial Express. The quantity of steel being imported and used for building materials and commercial use can be concretely impressed upon the minds of people.

steel-reu

Image Source: https://images.financialexpress.com/2018/08/steel-reu.jpg

With strong Chinese investors using Indonesia as a trade puppet state, it paves the way for steel to enter India cheaply. Countries like Vietnam, Thailand, South Korea, and Japan have also been used as a route to transport steel into India duty-free. India also suspects that raw materials likeHR coils are imported from Indonesia to its neighbouring countries Thailand and Vietnam who then converts it to CR and exported directly to India.

The smart marketing strategy on behalf of the Chinese export market allows a provision of Hot Rolled (HR) coils to India at a lesser price of $672 per tonne as opposed to the standard $675 per tonne noticed elsewhere. The cost-effective price encompasses within its grasp a 12.5% customs duty and freight. It encourages further trade between the countries as buyers in India see this as a cost-saving venture.

Additionally, China has made a better bargain here in terms of getting longer contracts from private companies in India and more exports mean more profits and income. A whole sale trade and marketing strategy has equipped China to gain the most benefit from this venture, as opposed to the global nations.

Indian authorities have taken swift measures to counteract the problem by imposing anti-dumping duties, strict quality controls, and anti-bypassing audits.

The steel ministry has issued a warning against India’s signing the agreement with Regional-Comprehensive Economic-Partnership (RCEP), which involves China as well. A sealed agreement would mean that China will have free access to Indian market, which can heighten the trade deficit which is pre-existent due to trade relations with China. A higher trade deficit may mean economic inconsistency in India, which must be avoided by all means.

However, Indian steelmakers have suggested that despite the government’s attempt to monitor the situation, it is still a recurring problem. The fear of turning a net importer of steel as opposed to its designation as a net exporter spells economic crisis for the country at present. The domestic steel infrastructure has taken a huge hit with reported job losses and local steel business profits on the decline. Calls for the government to establish a commercial intelligence division to control the manufacturing of different goods in different countries have been made.

Quiet recently, almost 2 months back, India authenticated a policy which levies an Anti-dumping cost of USD 185.51/tonne of steel for the next five years on select varieties of steel from China to discourage Indian buyers from investing in importing seemingly affordable raw material.

The decision has been made in consultation with the Directorate-General of Trade-Remedies (DGTR), as notified by the government. An investigation into the state of market affairs revealed that the Chinese export of Steel had caused market injury to India by the purchase of export duties at a lower price estimate than is allowed.

China has heavily benefited from the misuse of the free trade agreement. Stagnant Chinese stainless steel situated in Indonesia have been encouraged to be moved to different countries with the buying power to continue its turnover. Chinese steel has been claimed as the cheaper alternative making it attractive to buy for local markets. Although it is far the less superior product with sub-standard manufacturing rules, companies are choosing it to reduce costs. Ongoing trade wars worldwide have raised the level of uncertainty in the market. Not only is China finding loopholes and misusing the free trade agreement, but there are also questions of their ethical trading policies. With potential trading partners in the US and the EU opting to steer away signing agreements with Beijing, it appears that China has had their hand forced into exploiting regulations.

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