China’s US$8.5 billion in steel encourages Latin America to adopt tariffs

(Bloomberg) — One after another, Latin American countries are following in the footsteps of the U.S. and Europe by imposing prohibitive tariffs on Chinese imports — a strain on what has been an otherwise welcoming relationship.

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Mexico, Chile and Brazil have increased – and in some cases more than doubled – tariffs on steel products from China in recent weeks. Colombia may be about to follow suit.

The fees may seem unfashionable given the way the Asian superpower has consolidated itself in Latin America in recent years. China has become the region’s largest buyer of raw materials and a major investor. At the same time, Latin America has given China another market to sell its products as it faces tough tariffs from the US and Europe. It is shipping nearly 10 million tons of steel a year, valued at $8.5 billion, to Latin America – a huge jump from a mere 80,500 tons in 2000, according to regional steel association Alacero.

Now, that relationship is being tested by a global turn toward protectionism and a flood of Chinese imports that threaten to drive Latin American steel producers out of business and put 1.4 million jobs at risk.

“This is an important test of China’s interests and intentions,” said Margaret Myers, director of the Asia and Latin America Program at the Inter-American Dialogue. It is also a “test of Latin America’s determination to challenge what is a critical economic partner”.

Brazil will soon introduce a tariff quota system to prevent predatory pricing of imported alloys. Although the official announcement did not mention China, the 62% increase in Chinese shipments last year to 2.9 million tonnes was behind the move, people familiar with the matter said.

“It’s a sign to the world that Brazil has rules – it’s not a no man’s land,” said Marco Polo de Mello Lopes, president of the industrial association Aço Brasil, who held talks with the government for nine months before it announced the new rules. .

However, reacting against China can be fraught with risk – especially for smaller, export-oriented economies that depend on Chinese demand for their sales of raw materials, from cherries to copper.

There are many examples of Beijing suspending purchases and investments in reaction to what it considers unfair and unilateral measures. There was a brief period during which China banned soy products from Argentina in response to broad anti-dumping measures. Following the arrest of a Huawei executive in Vancouver in 2018, China blocked canola shipments from two Canadian companies.

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China’s Ministry of Commerce did not respond to a request for comment on recent tariffs imposed by Latin American countries.

For the self-proclaimed leader of the Global South, there is also a broader symbolic risk that comes from a potential united front against its exports.

“In some ways, these developing countries are the best indicators of global trade sentiment toward China,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics. “They suggest that protectionist walls against Chinese products are being erected in many different places, not just in rich countries.”

Existential crisis

Latin America’s trade relationship with China has also, in many ways, had a positive impact on the region.

Chile’s economy, for example, has benefited greatly from sending raw materials to China and buying back processed or manufactured products. The country’s free trade strategy – including bilateral agreements with China and the US – has opened huge markets for its grapes, wines, salmon, wood pulp and minerals, helping it become one of the region’s most prosperous nations. .

But like other raw materials export-oriented economies, Chile has struggled to compete in downstream markets – such as turning raw lithium into battery components or iron ore into steel products.

For Brazil, having the best iron ore deposits in the world is not enough to make its steel mills competitive with China, even though it has developed some production capacity.

Take as an example the mining company Vale SA, which extracts rich iron ore from the red earth of the Brazilian Amazon. Much of it is transported 16,000 kilometers to the Chinese port of Qingdao and fed into any of the country’s hundreds of large steel plants. There it is sandblasted and shaped into basic alloy products.

The problem is that when some of this steel makes the return trip, it reaches Brazilian manufacturers at a huge discount compared to the prices charged by local steel mills owned by Gerdau, CSN and ArcelorMittal.

In Colombia, where Chinese shipments arrive at a 50% discount, steelmaker Paz del Río asked the government to increase import tariffs and help it return to profitability, CEO Fabio Galán said in an interview last month. The influx of Chinese alloys is not only putting jobs at risk, but has also completely displaced imports from Brazil and Mexico, according to the company. In the year to April, 92% of steel wire imports came from China and Russia.

“The biggest risk is that steel becomes another example for the argument that China is exporting its excess capacity,” Beddor said. “It’s especially a problem because steel could lead developing countries to buy into that narrative in a way they wouldn’t for, for example, electric vehicles.”

At the same time, Chinese investors have also been a key partner for Latin American countries looking to take their raw materials-oriented economies further downstream. The country has become a big spender in Latin America and the Caribbean, investing US$187.5 billion between 2003 and 2022 in industries such as energy, transport and mining, according to a report by the Inter-American Dialogue.

Although Chinese spending in the region has slowed of late, investment has continued in key industries. The Industrial and Commercial Bank of China grew in Argentina. In Brazil, electric car giant BYD Co. is building its first factory outside Asia and plans to announce another in Mexico by the end of the year. In Chile, BYD and Tsingshan are developing lithium cathode factories. Since 2005, the China Development Bank and the Export-Import Bank of China have provided $136 billion in loan commitments to the region.

With the recently imposed tariffs, Latin American countries may be betting that China is now so entrenched in the region that Beijing will not engage in reprisals. President Xi Jinping is expected to make his first trip to South America in five years for the APEC and G-20 leaders’ summits, putting a renewed focus on relations in the region.

Furthermore, although the amount of Chinese steel entering Latin America is significant for the region and detrimental to local factories, it represents about 1% of the billion metric tons that Chinese factories produce every year. This could minimize the risk of angering Beijing.

“These countries potentially have more influence than in the past because they are more critical as a destination for many of these goods,” Myers said. “That said, they are still hugely dependent on China. So everyone is going to walk this fine line.”

‘Bandage’

For Latin American steel-producing countries, tariffs are still not a perfect solution.

For example, strict new tariffs in Chile will increase costs in the all-important mining industry that uses steel balls to grind ore.

“It is necessary to show a response to the dilemmas caused by economic globalization,” said Francisco Urdinez, director of Nucleo Milenio Iclac, a Chile-based think tank that studies Sino-Latin American relations. “But it is not a fundamental solution. It’s just a band-aid that ends up generating redistribution from consumers to producers.”

Then, of course, there is the issue of steel dumping, the practice of selling the product for much less than local competitors. Raising tariffs won’t be enough to stop Brazil, said Humberto Barbato, who heads the country’s electronics industry association, Abinee, a major steel consumer. Instead, the government should prioritize purchasing products with local content, he said. “The Chinese have a lot of flexibility to change the price.”

Although top Brazilian steelmaker Gerdau applauded the country’s new tariff quota, CEO Gustavo Werneck warned that it would not solve the local industry’s long-term competitiveness problem, such as the high cost of energy.

“China will make exports an important source of financing” for the country’s transition from industrialization to a more consumption-oriented economy, Werneck told journalists at a press conference.

In total, Latin America’s steel protections are much more limited than the tariffs that former President Donald Trump implemented during his administration. This only makes it more likely that China will simply try to plead its cases at the World Trade Organization, according to University of Queensland associate professor Scott Waldron.

“Any countermeasures will be limited,” Beddor said.

According to him, authorities have already “started restricting steel production, and that will likely be the main focus in the future, rather than how to retaliate against upset trading partners.”

—With assistance from Joe Deaux, Fabiola Zerpa, Simone Iglesias, Fran Wang, James Mayger and Jenni Marsh.

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