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The recent increase of the EU’s steel imports from China is not a harbinger of China flooding European markets with its industrial overcapacities. The steel industry is suffering from global overcapacities, not just China’s. Fears of a disruptive surge of Chinese imports in other industries currently seem overblown.

The debate over granting China Market Economy Status (MES) has become a major headache for the country's global trading partners, including the EU.

The European steel industry in particular is up in arms against plans to lower its trade defenses at a time when Chinese steel imports are flooding the European market. The European Commission is reportedly seeking concessions from China on limiting exports of its excess steel production.

Based on promises made when it joined the World Trade Organisation in 2001, China expects a decision by the end of the year. But granting MES to China would make it harder for the EU to impose anti-dumping duties on cheap imports from China.

The steel debate has raised concerns that other industries may be equally vulnerable to unfair Chinese competition. But such fears are overblown when the steel industry's particular set of problems and the EU's trade structure with China are considered more closely.

Confronting overcapacities in China is becoming unavoidable

Fuelled by a seemingly unstoppable demand combined with cheap credit in previous years, China invested heavily in expanding its industrial production capacity, particularly in heavy industries. But slowing economic growth and a persistent deceleration in domestic demand is now exposing industrial overcapacities. This means that the potential output in affected industries is greater than what the Chinese market needs. As a result, industrial profits have been tumbling along with output prices. The Producer Price Index (PPI), a measure for changes in output prices, has been in negative territory for 47 consecutive months.

Despite recent cutbacks, there is still a dramatic mismatch between supply and demand in affected industries. It is becoming ever clearer that unprofitable companies need to be closed. Painful measures will be necessary in China, affecting millions of workers. Based on MERICS calculations, the average utilisation rate in five monitored industries fell by 5.2 percentage points to 72.2 percent in 2015 compared to 2014. Producers of ferrous metals (incl. steel), non-ferrous metals (incl. aluminium), refined products (including petroleum), non-mineral products (incl. cement and glass) as well as paper products have all seen utilisation rates drop in recent months.

By 2015, all monitored industries saw their utilisation rate fall below a range between 79 and 82 percent, According to the Asian Development Bank, a utilisation range below that threshold points to overcapacities. Ferrous metals (-9.7 points) and refined products (-7.3 points) experienced particularly sharp declines over the past twelve months. Given China’s share of global production in these industries competitors overseas fear that China will export its way out of its crisis by flooding world markets with cheap goods. 

The burden of overinvestment – utilisation rates in China crumble 

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Surge of EU’s steel imports from China are the exception

Yet, with the exception of steel and to a lesser degree aluminium, China’s industrial overcapacities have not become a problem for Europe. Since 2000, Chinese imports into the EU have been dominated by consumer goods. Over the past 15 years the biggest shifts have been related to the ascent of mobile phones and computers in the area of household electronics. Since these industries have mostly vanished in the EU, Chinese-made products in these sectors mostly do not compete with products made in the EU.

In no other industry with overcapacities in China is the immediate impact as pressing as in ferrous metals, which consists of steel and iron products. The steady decline in utilisation rates in Chinese ferrous metal manufacturing is indeed accompanied by increasing volumes being exported to the EU. Falling import prices are compounding the effect. Between January and November 2015 the import volume of steel and iron to the EU ballooned by over 50 percent compared to the same period in 2014. By comparison imports of aluminium products only increased by 13 percent.

In other analysed industries including refined products, non-minerals (glass and cement) and paper, there is no substantial evidence for a surge in imports into the EU. This however does not preclude that certain industrial sub-categories may be affected. It is also worth to note that some European industries might suffer not because of a direct increase of imports from China, but because shrinking demand within China is causing downward pressure on global prices for a whole range of goods.

The EU steel sector feels the pressure

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Steel dumping should not determine the MES debate

The current influx of steel imports from China to the EU is the exception and not a symbol for a general Chinese trend to dump excessive output onto foreign markets. Plagued by global overcapacities and low utilisation rates, including in the EU itself, the steel sector is a special case. China accounts for nearly 50 percent of worldwide crude steel production and demand, so it should be no surprise that the current slowdown in China has repercussions in the industry across the world.

However, the specific circumstances in the steel sector do not lend themselves for drawing parallels with other industries. The data suggest that the recent surge of Chinese exports to Europe is currently contained to steel. The decision over granting MES to China will be a difficult one for many reasons. But it should not be driven by an unrealistic fear of Chinese overcapacities flooding the European market.