This afternoon, we welcome Aptium Global's Stuart Burns and Lisa Reisman to shed additional perspective on the new Chinese export tariffs.
The recent announcement from China's Ministry of Finance of the rate changes to some 83 steel items this week highlights some interesting economic/political strategies. Interestingly, the changes are 5-10% on steel semis like plates, sheets and wire, but a higher 10-15% on more basic raw materials like ingots, billets and pig iron.
So what's really going on here? Is China trying to even out the balance of trade? No, we think it's more like trying to keep China competitive on value-add products. At least that's our take. But in our view, the effect will be disproportionate -- with minimal changes to volumes of the higher value add products like plates, sheets and wire because both Chinese producers and overseas consumers will be able to absorb the tariff increases. However, a more dramatic effect will be felt on the volume of raw material products where the value-add is much lower and neither producer nor consumer has the same ability to absorb cost increases. Supply and demand will likely kick in favoring other sources of supply that were marginal before. Like many developing countries before them, China is using the export tariff system to discourage investment in some sectors of the economy and encourage development in others.
Same news story different angle -- this move, designed to appease politicians who claim China's currency is over-valued and America's ballooning trade deficit takes a little fire out of the debate. China's Ministry of Finance probably figured out that they could kill two birds with one stone. One, China will likely be able to avoid de-valuing its currency because US politicians will perceive it as being a conciliatory step on the part of the Chinese (and will have some effect in terms of American firms sourcing less raw material from China) but second, it will also play into the hands of American's squeakiest-wheel-gets-the-grease industry (US steel producers) and will keep this group quiet for the time being.
Stay tuned ...
Lisa Reisman and Stuart Burns are co-founders of Aptium Global Inc., a direct material advisory group that works with middle market manufacturers. Both are former metals traders. They can be reached at lreisman[@]aptiumglobal[dot]com or sburns[@]aptiumglobal[dot]com.