PacNet #24 – Why it’s so hard to quit Chinese steel

Steel is all around us, from sophisticated defense weapons to railways and buildings, and the COVID-19 pandemic has underscored its critical use in medical equipment. It is the commodity great powers, notably China, may attempt to control and use to coerce other states on international platforms. China’s excessive production of steel is the prime factor in global overcapacity, hurting domestic steel producers in other countries. It also creates unwanted dependencies on Chinese steel, not to mention national security concerns.

Many countries realize this, but fixing the problem is harder than noting it.

China’s hold over steel, particularly stainless steel, has increased radically in recent decades. In 2020, steel production in China exceeded 1 billion tons, at a time when global steel output was 1.864 billion tons (fig 1) total.

But that is not the complete picture. Chinese companies also produce steel in Southeast Asian countries like Indonesia. Production has shifted to ASEAN countries with the onset of the US-China trade war to reduce dependency on China, but if Southeast Asia’s production of steel, an essential component in manufacturing, were controlled by Beijing, then regional value chains remain vulnerable.

Tariff rows over steel

As succinctly analyzed by Elisabeth Braw for Foreign Policy, China has manipulated the global steel market for years. The Chinese government had long subsidized its steel producers, leading to overproduction. China has likely kept prices of exported steel artificially low, a violation of World Trade Organization (WTO) rules known as “dumping.” The European Union in 2015 imposed anti-dumping duties on China, only to later realize that exports of steel from Chinese companies, produced in Indonesia, were still flooding the market. Once the EU anti-dumping duties were imposed on both China and Indonesia in 2019, Beijing retaliated by increasing tariffs on EU steel imports from 18.1% to over 103%.

Indonesia has the world’s largest nickel reserves but has banned nickel exports as a  strategy to boost domestic manufacturing. However, the ban seems to have come (conveniently) after the Chinese company Tsingshan began producing stainless steel in Indonesia. Given Indonesia’s ban on nickel exports, EU steel producers were left in the lurch, whereas the Tsingshan plant in Indonesia continued to produce stainless steel. Tsingshan’s cheap stainless steel exports have rattled markets everywhere. Indonesia was the source of 60% of China’s stainless steel imports in 2018—it had been zero as recently as 2015. The massive export increase is also reflected in a year-on-year difference of 420,000 tons in 2017 to 1.1 million tons in 2018, after which China decided to impose 20% anti-dumping duties on Indonesia.

What are the implications for steel producers like India, Japan, and the United States?

The Trump administration imposed tariffs on all steel imports in 2018, citing a threat to US national security. A 2018 US Department of Commerce report classifies steel as a vital element of national security given its use in “critical infrastructure and national defense,” recommending “immediate action by adjusting the level of imports.” The Biden administration has taken a similar stance, even as Washington and Brussels work toward a settlement.

It became clear, however, that global overcapacity in steel threatens both the American and European steel industries. Japan has also been in talks with the US government since November 2021 to lift curbs on its steel exports under the Japan-US Commercial and Industrial Partnership, and under a newly concluded deal the United States agreed to remove a 25% levy on 1.25 million tons of Japanese steel imports, effective April 1. In its budget for 2022, India removed the countervailing duty, imposed in 2017 on imports of steel from abroad, to bring down steel prices. Given the emphasis on infrastructure in its 2022 budget, and New Delhi’s plans to boost domestic manufacturing under its Make-in-India initiative, steel may be required in abundance.

Modeled on the 2009 Mineral and Coal Mining Law, Indonesia’s ban on mineral exports seeks to channel investment into smelters and processing plants. China has been at the forefront with approximately $30 billion of investment in Indonesia’s nickel value chains. According to the Southeast Asian Iron and Steel Institute, about 59.4 million tons, or 74% of the steel output of ASEAN countries in the next 10 years will come from Chinese projects in these countries. Indonesia will be a leader among them, with an output of 19.5 million tons.

China has several Belt-and-Road-Initiative (BRI) projects in the region, and it is easier to source the essential components of steel for these mega-infrastructure projects from Chinese companies producing locally. However, skepticism over Chinese debt may stall BRI projects in the region. As local consumption slows, ASEAN steel exports will predictably flood international markets even more. For instance, post-China’s anti-dumping duties, Indonesian stainless steel exports to the rest of the world accelerated anxiety among major producers, like POSCO in South Korea, Jindal in India, and local mills in the European Union. In absence of regulatory frameworks, global overcapacity may force steel producers to shut down in many countries and regions like the United States, Japan, and the European Union, in addition to creating dependencies on Beijing.

Possible measures

Despite international pressure, China has had limited success in curbing steel production even after curtailing subsidies. If China, or Chinese companies producing steel in Southeast Asia, continue to dump steel into the international market in this manner, domestic steel industries in many countries will be gravely affected. Given the importance of steel for national security, several countries that view themselves as regional powers in the Indo-Pacific—like India or Japan—and ASEAN nations, which see Chinese maritime expansionism as a threat, may find their autonomy compromised. Even if national security is invoked in such cases to curb imports (like the United States did in 2018), local steel producers will have already suffered substantial damage.

Major steel producing countries may instead coalesce to push the WTO to implement reforms that sufficiently cover the gaps and address ambiguity in dumping regulations, without excluding China from the dialogue in reaching inclusive terms. Large economies like the “Quad” countries (United States, Japan, Australia, and India) might also want to invest in Southeast Asia’s steel sector to ensure diversification and prevent China’s domination of this essential commodity. Since the region is critical for global value chains, preserving its autonomy by diversifying is necessary.

Akash Sahu (akash00015@gmail.com) is a researcher in Indo-Pacific geopolitics and Southeast Asian studies. He works as Research Analyst at New Delhi-based Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA). He looks at traditional and non-traditional security in the Indo-Pacific, balance of power, and inter-state defence relationships in the region.

PacNet commentaries and responses represent the views of the respective authors. Alternative viewpoints are always welcomed and encouraged. 

PacNet #24 – The destruction of North Korean agriculture: We need to rethink UN sanctions

In 2016 and 2017, in response to North Korea’s continued nuclear testing, the United Nations Security Council (UNSC) expanded sanctions that had previously been targeted at commodities, individuals, and institutions linked to the nuclear and missile sector to sanctions measures that no longer differentiated between the civilian and the military sectors. The 2017 UNSC sanctions included a ban on the import of natural gas and condensates; a cap on crude oil imports to 4 million barrels a year and refined oil product imports, which includes diesel and kerosene, to half a million barrels a year. Military sector oil imports, including rocket fuel, were already prohibited by the Wassenaar Arrangement, prior UN sanctions and bilateral Chinese export controls, so the impact of the UN oil sanctions fell disproportionately on the civilian economy.

North Korea has no indigenous sources of oil and natural gas and therefore depends on imported energy inputs to produce fertilizer and pesticides, to fuel irrigation equipment and agricultural machinery and to transport agricultural inputs including seeds, crops, equipment, spare parts, and labor. Given the UN prohibitions on essential energy imports, it should be no surprise that in 2018 North Korea’s agricultural production collapsed to levels similar to those of the famine years of the 1990s.

Under international law, the North Korean government has primary responsibility for the welfare of its population but that does not mean that outside actors like the UN do not also hold responsibilities. No government or international organization may use the excuse of the wrongdoing of governments to inflict further harm on innocents living in that government’s territory. In war time, the destruction of agriculture in an enemy territory is a war crime.

The Geneva Conventions state that it “is prohibited to attack, destroy, remove, or render useless objects indispensable to the survival of the civilian population, such as foodstuffs, agricultural areas for the production of foodstuffs, crops, livestock, drinking water installations and supplies, and irrigation works… whatever the motive.”

North Korea needs around 5 and a half million tons of cereal a year to feed its people, at subsistence levels. In the 1990s, between a third and two-thirds of a million people lost their lives in the midst of economic collapse and the devastation of North Korea’s agricultural sector. Crop production recovered to the extent that between 2012 and 2016, domestic food production, averaged around 5 million tons a year. The food gap was filled from a more or less even split between commercial imports and food aid. In total, recorded imports hovered at around half a million tonnes a year, increasing, after a reduced harvest in 2017, to an import requirement of just over three-quarters of a million tons for 2018, as sanctions tightened.

Improved agricultural production combined with a manageable food import requirement had been accompanied by significant improvements in child nutrition. By 2017, according to UNICEF, North Korean children, whether in terms of stunting (a sign of long term poor nutrition) or wasting (a sign of starvation conditions) on average were significantly and measurably better off than if they had lived in other poor Asian counties like Nepal or even some wealthier countries in Asia, like Pakistan, India, and the Philippines.

In 2018, after the implementation of energy sanctions, agricultural production fell to just over 4 million tonnes, leaving an enormous food deficit of 1 and a half million tonnes in 2019. Put another way, if the only food available in 2019 had been from domestic food production, only about two-thirds of the 25 million population could have received even a basic subsistence level ration. There was no humanitarian crisis in 2019 because China and Russia stepped up with massive food aid as well as fertilizer and pesticide support and, very likely, ignored sanctions limits on oil exports to the DPRK.

Even prior to UN energy sanctions, the North Korean economy was getting by with globally low levels of oil inputs; the 25 million population was second only to the Democratic People’s Republic of Congo as the lowest per capita consumers of oil in the world. The UNSC December 2017 limit on refined oil imports to 500,000 barrels a year is less than Australia, an oil producer itself and with a similar size population to the DPRK, imports in one day. Agriculture in North Korea is founded on hard physical labour, mainly by women, because of the nationwide lack of technology and farm equipment. Nevertheless, there is a limit to how much human labour can substitute for the diesel that is necessary to transport crops and labour from one place to another or the natural gas and oil products necessary to produce the fertilizer and pesticides to ensure adequate yields from insufficient land and inhospitable terrain.

Neither the United Nations nor the member states have a road map that sets out how the goal of DPRK denuclearization will be achieved by sanctions that target the civilian economy. Perhaps the UNSC assumption is that the people will rise up and overturn the government if conditions get tougher. Yet North Korea is, by almost any criteria, including GNI in total or per capita, one of the poorest countries in the world. In destroying agricultural production, the 2017 sanctions have made day-to-day life a literal struggle for the physical survival of families and communities, which does not leave time, opportunity, capacity, or motivation for individuals to also risk their lives by expressing political criticism of a security-focused authoritarian government.

In 2003 the UN had abandoned non-targeted sanctions because of the many well-attested reports from internationally respected health professionals that showed how non-targeted sanctions did not discriminate between innocents and wrong-doers and had caused the deaths of millions of children in Iraq and Haiti. The United Nations Security Council cannot excuse itself through a bureaucratic insertion of “humanitarian exemptions” in its resolutions. The loss of agricultural production destroys farmers’ capacity to grow food in future years. The scope and scale of North Korea’s food production losses could only be compensated by what would have to be the largest and most expensive food aid operation in the world. No member state is seriously proposing this as an option. Ethically, it is also a rather grotesque idea that the same organization that destroyed the population’s ability to feed itself should offer “humanitarian” aid as recompense.

In 2020 China and Russia face coronavirus. If the disease damages their own agricultural production cycle or if they decide they need to keep their oil and cereal stocks at home to protect against the economic uncertainties brought by the global pandemic then, while energy sanctions continue, the North Korean population will again face the threat of starvation. The UN’s own agencies that have been resident and working in North Korea for 25 years and more, especially the FAO and the WFP, have already documented how these new sanctions have brought back a level of food insecurity unknown since the famine years.

This is the start of the agricultural season in North Korea. At least until the UNSC has brought forward a detailed impact study of sanctions on food security, oil, and energy sanctions should be suspended.

Hazel Smith (hs50@soas.ac.uk) PhD FRSA is Professorial Research Associate at the School of Oriental and African Studies (SOAS), University of London; Professor Emerita of International Security, Cranfield University, UK; Member Global Futures Council on Korea World Economic Forum and Fellow, Wilson Center, Washington DC.

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