World Economy

Why China is likely to stay quiet on Trump's steel probe


President Donald Trump is chipping away at a campaign promise to tackle unfair trade with China. His latest — a U.S. probe into whether exporters of cheap steel, including China, are a threat to national security.

Steel is no stranger to global trade spats, especially when it comes to China. The country produces about half the world's steel — more than the U.S., Japan and Russia combined, according to the World Steel Association. And the country has long been accused of selling unwanted steel on world markets for less than what it costs to produce and export, hurting firms.

A worker cuts steel billets at an iron and steel enterprise in Ganyu County.
ChinaFotoPress | Getty Images News | Getty Images

Last year, tensions rose considerably — Europe slapped anti-dumping tariffs on Chinese steel imports, and the U.S. International Trade Commission launched an investigation, announcing last month that U.S. producers were harmed by the dumping and subsidization of imports of certain steel products from China.

In the past, China would often issue choice words in retaliation. But this time around, given tough talk coming from the U.S., it's likely Beijing will take a softer stance. After all, Chinese President Xi Jinping met recently with Trump, and the U.S. indicated that China appeared willing to tackle trade gaps. And on Friday, state media remained largely mum on the issue.

"The Chinese are not going to be happy about it, but I do think there are more concerns about Trump's trade policy than there were previously under Obama," said Julian Evans-Pritchard, China economist at Capital Economics. "They're less willing to push as hard against these kinds of probes, because they don't want to escalate tensions."

But even if the U.S. were to slap high tariffs on Chinese steel, and other countries followed suit, experts said it's unlikely to impact China's economy by much. That's because most of the steel China produces is used domestically, and not actually exported.

In general, China has a complicated relationship with steel. For years, China pumped its economy by rapidly building new infrastructure and factories, fueling massive demand for coal and steel.

But as growth has waned in the world's second-largest economy, the slowdown triggered a global rout in commodities and forced those industries to cut back on spending and jobs around the globe. It eventually hit China as well, forcing massive layoffs in coal and steel.

China's commodities sectors are also suffering from overcapacity, partly due to government support of the giant state-owned enterprises in industry, which have long been notorious for inefficiency and wasteful spending.

It's one of the issues the central government has pledged to tackle — these "zombie" state firms — but doing so likely means more layoffs and the big question of resettling workers.

"The issue for the Chinese leadership is how to deal with those layoffs in a way that maintains political stability and in a way that the workers are relocated and continue to contribute to the economy," Evans-Pritchard said.