China and International Trade Research

Describe China’s Entry Into the WTO. Why Was China Granted Admission?

China's entry into WTO occurred in late-2001 after a lengthy negotiation process that lasted for about 15 years. The process was initiated by President Jiang Zemin and Premier Zhu Rongji after the realization that guiding the appropriate concessions through the country's complex bureaucracy would prove difficult and result in potentially strong opposition and delay (Saich, 2002). Consequently, the duo alienated the entire process from China's political system and the information was restricted to a small leading group in the country. It was after the long negotiations that country was finally incorporated as incorporated into the WTO which had numerous benefits such as the opening up of new sectors like telecommunications and the reduction of tariffs that were previously among the highest in the world in the early 1990s (Saich, 2002).

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China was granted admission to the WTO due to a number of reasons. One of these reasons is the extraordinary economic integration into the world economy that took place since the start of reforms in 1978. There was the worldview that necessitated the opening up of China's economy while increasing its engagement levels in the global economy (Martin, Bhattasali & Li, 2003). Also, Chinese leaders of the time demonstrated a high commitment to being admitted as an active member of the world economic community (Saich, 2002). Another reason for China's admission was related to the legal rights and responsibilities whereby it was necessary to ensure that the country's rights are upheld through WTO mechanisms such as the Dispute Settlement Mechanism (Martin, Bhattasali & Li, 2003). Further, in WTO's view, the incorporation of China into the global organization would serve as a key component of the wider set of reforms that the Chinese government had undertaken since 1978 and would significantly contribute to development and poverty reduction (Martin, Bhattasali & Li, 2003).

Describe How China's Steel Producers Operate and Their Pricing Strategy.

China's steel producers operate in a highly decentralized industry that consists of a fairly small number of large, advanced steelmakers and numerous small-and medium-sized firms producing lower-value steel products (Price, 2011). A majority of China's steel producers are owned by the state while a substantial percentage of the smaller producers are private companies (Holloway, Roberts & Rush, 2010; Tang, 2010). The operations of the Chinese steel producers are mainly located in the coastal provinces with a high concentration of their operations in the north-east of the country, particularly in Inner Mongolla and Hebel. However, environmental concerns have been raised in relation to the steel producers' operations due to the continued use of outdated and high-polluting facilities by some of the smaller Chinese steel producers (Price, 2011). One of the major operations of China's steel producers is the production of crude steel which is either achieved directly from iron ore and coking coal by use of the blast furnace or from scrap steel using the electric arc furnace method (Holloway, Roberts & Rush, 2010).

The pricing strategy of China's steel producers continues to include price increase with the growing cost of steel production (Li & Sun, 2010). According to the pricing strategy that began in 1981, it is after negotiations between suppliers and manufacturers that a price can be confirmed and after the determination of the price, the two sides are expected to execute it on annual basis (Li & Sun, 2010). The supplies and manufacturers are expected to agree on the prices as the "New Year's price" which is considered the starting price (Li & Sun, 2010). However, in 2010, a new pricing system on a quarterly basis was introduced by miners. The pricing strategy uses quarterly contracts as opposed to the annual deals while the determination of the price is based on an average of the spot market level rather than through bilateral and prolonged negotiations with key steelmakers (Tang, 2010).

Describe the Recently Announced US Tariffs on Foreign Steel. Why Were The Tariffs Proposed? How Does A Tariff Work?

Recently, the US president announced new tariffs on foreign steel. According to the announcement, 25% tariff would be imposed on imported steel while imported aluminum would attract a 10% tariff (Campbell, 2018; Irwin, 2018; McBride, 2018). However, the president directed his administration to exempt Mexico and Canada from the tariffs but that will be for a while (Irwin, 2018).

One of the reasons as to why the tariffs were proposed is that the American national security is being endangered by the trade practices of other countries by undermining the domestic production of US (Campbell, 2018; McBride, 2018). Therefore, the newly proposed tariffs were in government's efforts to protect its domestic industries while also raising revenue for the US. It is said that the American aluminum and steel producers have long protested their overseas competitors' unfair practices, especially China, which have strongly encouraged production. Consequently, the global marketplace would be flooded with metals resulting in depressed prices that would make American production uneconomical (Campbell, 2018).

The working of a tariff is basically having a tax imposed on particular imported goods or products (Campbell, 2018). As a result of the placed tax, the price of that specific commodity goes up as its importation from other countries is discouraged. For instance, with the tariffs imposed on imported steel and aluminum in the US would raise the costs of these goods which will significantly be felt by various business groups in the US such as architecture and construction firms, car dealers as well as boat, machinery and auto manufacturers. However, in general, tariffs serve three key functions. They serve as a source of revenue for the government, protects domestic industries and serves as a trade distortion remedying strategy (Isakova, Koczan & Plekhanov, 2016; Alavi, 2007).

Present the Pros and Cons Regarding the Above US Tariffs

The recently announced US tariffs have both advantages and disadvantages. Starting with the benefits, the tariffs are expected to increase the prices of steel and aluminum hence more profits for US-based steel manufacturers. Such domestic companies will be able to hire more of the locals while improving the workers' lives (Beck, 2018). Also, the tariffs will protect the country's industries believed to be essential to national security (Beck, 2018). According to the American trade law, the president has the power to place tariffs on imported goods that put US security at risk (Associated Press, 2018). In this regard, in the president's view, strong aluminum and steel industries are crucial to the country's defense.

Further, the introduced tariffs will give infant industries an opportunity to grow and develop before engaging in direct competition with mature companies from abroad (Beck, 2018; Melitz, 2005). The excess supply of steel in the market has pushed down the prices to levels at which infant industries or those with less efficiency cannot survive and as a result, are forced out of the steel business. About ten US-based steel plants have been shut down within a period of 20 years which has led to the loss of thousands of jobs (Bivens, 2018). Therefore, the introduction of steel-tariffs serves as a major step toward protecting such American firms.

On the other hand, the recent tariffs have been linked to several disadvantages. Firstly, the effects of the tariffs may be severe when other countries in the global business also impose a levy on imports as a retaliatory strategy to the US decision. When other countries affected by the US tariffs begin retaliating, there may also be a net loss in jobs (Francois & Baughman, 2003). For instance, there may be layoffs in steel companies that mainly relied on exports to the US. With the reduced sale of produced goods that is likely to arise from the tariffs, the producing companies may be forced to reduce their scale of production and cut jobs (Associated Press, 2018). The announced tariffs may result in a trade war (Beck, 2018; Vijayasri 2013) where a tit-for-tat trade war is likely to arise as countries and regions such as Europe respond to America's tariffs by warning to impose their own tariffs on American products such as Levi's jeans and Harley-Davidson motorcycles. In response to these warnings, the US president threatens to further place tariffs on Europe's auto imports (Associated Press, 2018).

Secondly, the tariffs will raise the prices of imported steel and aluminum products hence making the American consumer to suffer financially. With the high prices for imported goods, US-based producers who depend on the imported commodities in their end products will lose their competitiveness at the international market despite the fact that their products will become more costly domestically (Beck, 2018; Francois & Baughman, 2003). Though the president's decision came as a measure to protect America's steel and aluminum industries, this will raise the production costs for steel based companies such as automakers and in the end, the cost is passed on to the American consumer. Thirdly, the US tariffs are barriers to international trade (Beck, 2018). With a decreased trade, there is the likelihood of reduced economic growth both in the US and globally. This is because reduced trade between countries causes a drop in the respective countries' income. For instance, the economy of countries like Canada which is America's largest steel exporter would be hit hard if such a move is taken on its steel exports to the US (Associated Press, 2018).

What Is the Likely Outcome In the US To The Steel Tariffs?

In the US, one of the most notable outcomes to the steel tariffs is that US-based steel and aluminum producers including AK Steel Holding and Nucor would significantly gain from the imposed tax on imported steel and aluminum as it would result in higher prices for their commodity. However, the increase in steel and aluminum implies higher costs for companies that rely on these products in their production (Pettinger, 2018). Therefore, raining the cost of steel and aluminum would negatively affect manufacturers in America and ultimately the US consumers (Wiseman, Boak & Krisher, 2018). For instance, when the prices for steel go up, the American automakers would be forced to increase the price for new vehicles which implies that the American consumer who buys the final product will be put under financial pressure. Although some manufacturers may choose to absorb the higher costs, most of the manufacturers would not (Wiseman, Boak & Krisher, 2018). Furthermore, when the prices for steel products such as cars go up, it is likely that the products' sales in the country would slow down. Subsequently, when the sales of a given steel-based manufacturer decrease, then the company becomes less competitive compared to its foreign rivals which may even result in a loss of their market share to the abroad companies (Wiseman, Boak & Krisher, 2018).

Additionally, the steel tariffs may also result in the restriction of US exports to other countries in retaliation efforts (The Straits Times, 2018). For instance, the Chinese government is carrying out investigations on US sorghum imports and reviewing whether restrictions to the US soya beans shipments should be imposed (The Straits Times, 2018). Similarly, the European Union also promised to take firm action against the US products if the steel tariffs unjustifiably affect their members (Pettinger, 2018). Such moves by other countries would pose problems for America's broader eco...