CHINA/STEEL: WRAP-UP OF SECOND SINO-UNITED STATES STEEL

UNCLAS SECTION 01 OF 06 BEIJING 000552

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STATE FOR EAP/CM PSECOR/JYAMAMOTO
STATE PASS USTR FOR STRATFORD/KEMP/READE
USDOC FOR 4220/ITA/MAC
USDOC FOR 6300/ITA/MAS
USDOC FOR 5120/ITA/IA
USDOC FOR 1003/ITA/OUS
TREASURY FOR ISA DOHNER/CUSHMAN

E.O. 12958: N/A
TAGS: ECON ETRD EIND EINV WTRO CH
SUBJECT: CHINA/STEEL: WRAP-UP OF SECOND SINO-UNITED STATES STEEL
DIALOGUE


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SUMMARY
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1. (SBU) Summary. Chinese and United States Government delegations
supported by steel industry representatives from both countries
conducted the Second Sino-United States Steel Dialogue in Beijing
October 19-20, 2006. The dialogue included a broad range of
presentations relating to the steel industry-including overviews of
bilateral and multilateral dialogues, experiences of the United
States steel industry's reorganization efforts, and China's Steel
Policy-from both delegations and included discussion periods
relating to the presentations. The United States delegation, led by
Assistant United States Trade Representative (AUSTR) Tim Stratford
and Deputy Assistant Secretary (DAS) of Commerce Jamie Estrada,
emphasized that the United States Government and steel industry is
concerned about China's growing excess steel production capacity. If
this production capacity continues to grow unabated, it will have a
deleterious impact upon the world steel market. The United States
delegation emphasized that if market forces were fully at play in
China, such overcapacity would not exist, suggesting that the
Chinese Government is subsidizing the country's steel sector.


2. (SBU) For its part, the Chinese delegation led by Ministry of
Commerce (MOFCOM) Director General (DG) Wang Shouwen stated that
China's steel sector is not subsidized. The United States must stop
applying its own market experiences to China's economy. China is
developing in a different fashion than the United States and this
largely accounts for the differences in the two markets. DG Wang
encouraged the United States to have patience with China as its
steel sector reorganized. AUSTR Stratford, DAS Estrada, and DG Wang
concluded the dialogue by agreeing to hold another round of talks in
early 2007, possibly in the United States. DG Wang agreed to
provide the United States information on the product breakdown of
China's steel exports covered by the recent reductions in
value-added tax (VAT) rebates and an explanation of why the rebates
for some steel products were reduced but not others, a list of
obsolete plants that have actually closed under the Chinese
Government's steel plan and clarification by the Chinese Government
of what is correct and what is incorrect in the North American
industry's China Syndrome subsidies report and United States
industry's submission to USTR regarding China's World Trade
Organization (WTO) compliance. Both sides agreed to exchange
electronic copies of the presentations made during the talks. End
Summary.

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INTRODUCTORY REMARKS
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3. (SBU) In separate introductory remarks, AUSTR Stratford and DAS
Estrada began the Second Sino-United States Steel Dialogue by
outlining United States Government and steel industry concerns that
China's rapidly increasing steel production capacity is threatening
the health of the world steel market. Chinese steel exports have
been growing during the past several years and in 2005, China became
a net steel exporter. AUSTR Stratford and DAS Estrada emphasized
the importance of market mechanisms being allowed to work in the
Chinese steel industry. The United States industry delegation is
eager to share its experiences in restructuring to meet changing
market conditions. The United States Government for its part wants
to outline the very limited role it played in this restructuring.
AUSTR Stratford said that this information should be useful to the
Chinese delegation as it wrestles with how to manage growing
overcapacity in the Chinese steel sector.


4. (SBU) MOFCOM DG Wang Shouwen stated that his goal for the
dialogue is simply to resolve misunderstandings held by the United
States Government and steel industry regarding the Chinese steel
industry. In particular, the Chinese delegation wants to address
assertions that the Chinese Government subsidizes the steel
industry. DG Wang agreed with AUSTR Stratford and DAS Estrada that
the Chinese Government and steel industry would benefit from

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learning from the United States steel industry's restructuring
experiences.

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TWO SIDES OUTLINE BILATERAL AND MULTILATERAL STEEL DIALOGUES
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5.(SBU) Joe Spetrini, Deputy Assistant Secretary of Commerce for
Policy and Negotiations, provided participants an overview of the
North American Steel Trade Committee (NASTC). The NASTC-made up of
the Canada, Mexico, and the United States-is successful because
industry plays a large part in planning the agenda and working
collaboratively to make each meeting a success. DG Wang inquired if
any of the three parties had initiated new dumping cases against one
another since the NASTC's creation. DAS Spetrini responded that the
NASTC did not preclude the filing of antidumping cases. There have
not been any new petitions filed since the NASTC's inception, but
antidumping orders on steel products from the three countries remain
in place and are subject to administrative reviews. United States
industry representatives underscored the importance of the three
countries' steel companies using the NASTC to discuss matters of
mutual interest to which a resolution may be found rather than
arguing about issues that cannot be resolved.


6. (SBU) A representative from MOFCOM's Department of Foreign Trade
followed this presentation with an overview of China's bilateral
steel dialogues with Japan and South Korea. The Chinese Government,
accompanied by Chinese steel industry representatives, has held ten
meetings with Japan and eight meetings with South Korea since 2001.
The Chinese Government uses these dialogues to promote stability and
healthy development of steel markets in all three countries and to
avoid problems in steel trade. MOFCOM explained that in both
bilateral dialogues they discuss trade in raw materials and finished
steel products, along with other factors of importance to steel
trade. AUSTR Stratford noted recent press reports indicating the
Japanese Government is willing to assist China in closing
inefficient excess steel capacity and asked the Chinese side whether
such assistance had been accepted. DG Wang stated that he was
unaware of such an offer. Japan has offered environmental and
energy experts to assist Chinese steel companies in becoming more
environmentally friendly and less-energy intensive.

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INDUSTRY DELEGATIONS EXCHANGE VIEWS ON CHINESE STEEL SECTOR
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7. (SBU) In separate presentations the Steel Manufacturers
Association (SMA) and the American Iron and Steel Institute (AISI)
underscored the importance of the United States and Chinese steel
industries learning more about one another. The United States steel
industry is concerned that much of the Chinese steel industry is
using out-dated, environmentally harmful and energy-intensive
technology, and that Chinese steel production capacity is increasing
at a very high rate. AISI stated its willingness to sign a
cooperation agreement with the China Iron and Steel Association
(CISA) to establish a regular exchange of publicly available steel
industry market statistics and to encourage more contact between the
two associations. AISI raised this idea with CISA several years
ago, but to date, an agreement has not been concluded.


8. (SBU) CISA stated that the association is interested in learning
more from United States counterparts. In particular, China's steel
industry hopes to learn more about advanced United States steel
industry technologies through bilateral exchanges and cooperation.
CISA representatives try to visit United States steel companies once
a year in pursuit of this goal. The United States has a strong
demand for steel and in CISA's opinion, United States steel
companies are unable to produce enough to meet that demand. This
creates an opportunity for Chinese steel exports to supplement
United States steel production rather than undercut it. CISA
concluded that there should be more face-to-face discussions between
the Chinese and United States steel industries and that further
interaction will help protect the market order. The China Chamber of

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Commerce of Metals, Minerals, and Chemicals Importers and Exporters
stated that it is willing to consider exchanging steel market data
as recommended by AISI.

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UNITED STATES DELEGATION OUTLINES HISTORY, PROBLEMS WITH STEEL
SUBSIDIES
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9. (SBU) DAS Spetrini provided a historical overview of government
steel subsidies during the past several decades. Numerous countries
have considered a strong steel industry to be strategically
important and as a result, make policy choices that lead to global
excess steel production capacity. The sale of steel products
involves aggressive price competition since steel is a commodity and
for certain products undifferentiated. DAS Spetrini stated that the
United States and other Western Governments are concerned at present
that some countries in Asia are using their banks as a policy tool
to support local steel companies. The banks are issuing steel
companies loans at less than market rates of interest to prop them
up in the face of international market competition. This form of
subsidy in the past damaged the world steel market.


10. (SBU) AUSTR Stratford followed this presentation with a
discussion of the importance of trust in a market economy. To
achieve market benefits a country or company must work together with
other parties, but these relationships only work if they are based
in mutual trust. In order to build trust, there must be
transparency. AUSTR Stratford stated that when China does not
answer its transitional review mechanism (TRM) questions or
otherwise fully observe its WTO commitments, other countries begin
to question China's motives. Increased transparency on these
matters will assist China's transition to a market economy and make
the country more prosperous.

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CHINA DEFENDS EXPORT TAX REBATE POLICY, COKE EXPORT QUOTAS
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11. (SBU) DG Wang and other Chinese Government representatives
stated that recent changes in China's VAT export rebate policy for
certain steel products are intended to decrease environmentally
harmful and energy intensive steel production. Many countries use
tax rebates as an economic tool to promote or discourage exports.
These rebates are not prohibited by the WTO as long as they are not
more than the original tax levied, and none of the Chinese rebates
exceed the amount of tax levied. A National Development and Reform
Commission (NDRC) representative explained that China has three
tools available to manage its economy: economic tools, legal tools,
and administrative tools. Collecting or rebating taxes is a
legitimate economic tool to promote or discourage exports. In this
case, the Chinese Government's goal is to discourage production of
certain steel product categories by limiting their export.


12. (SBU) Chinese representatives went on to note that coking coal
quota levels will be announced soon and that they will be the same
or similar as last year. The coking coal quota policy, similar to
the VAT export rebate policy, is intended to discourage
environmentally harmful, energy-intensive production. The NDRC said
that the United States and European governments frequently complain
about this policy. Despite these complaints, it is not China's
responsibility to take on the world's burden of
environmentally-harmful, energy-intensive natural resource
production. The coking coal export quota is designed to send a
message to the Chinese domestic market rather than to harm world
trade. AUSTR Stratford responded that export quotas are forbidden by
the WTO because they affect world market supply and prices. As a
result, quotas are inappropriate domestic policy tools. The United
States Government policy is that enforcement of strict environmental
laws and application of stringent energy standards are the
appropriate means of regulating environmentally harmful, energy
intensive production.


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NDRC EXPLAINS CHINA'S STEEL POLICY
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13. (SBU) The NDRC began its explanation of its July 2005 Steel
Policy by stating that while the Chinese Government may have
intervened to increase capacity in the steel industry or determine
where factories were built in the past, such intervention no longer
takes place. The Chinese Government has determined that investments
should be market-led by enterprises, banks should determine who
receives credit and what the interest rate would be, and the Central
Government will only intervene if macro-economic controls become
necessary. The NDRC stated that as a result of these reforms,
Chinese companies purchase raw materials from any country at a price
they determine acceptable, set their own products' sales prices, and
determine whether to export products in accordance with market
considerations.


14. (SBU) The NDRC said that it has several aims for the Steel
Policy: the steel industry should meet with growth demands of other
industries; the industry should consolidate through mergers and
acquisitions and companies using obsolete technology should be
closed; the industrial layout of the steel industry should be
altered between now and 2020; steel producers should use more
environmentally-friendly technology and use less energy in
production. The Chinese Government has required domestic steel
producers with an annual capacity of more than 5 million metric tons
to submit a plan to the Central Government outlining how these goals
will be achieved. The NDRC said that the companies can implement
their respective plans once approved by the Chinese Government.


15. (SBU) The NDRC went on to say that the Chinese Government wants
to use economic tools to create several large, word-class steel
companies, but will not build nw factories in order to achieve this
goal. Beijing also wants to encourage steel producers that are not
well placed for transportation or energy needs to relocate to other,
more sustainable locations. The Chinese Government wants to
encourage steel companies to invest in advanced steel-making
technology, especially technology that is environmentally friendly
and conserves energy. The NDRC noted that Beijing will continue to
monitor the pace of exports. Beijing will use tools, such as
decreasing the export VAT rebate, to ensure the domestic market has
adequate supply and that Chinese exports do not harm global market
prices.

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INDUSTRY, NDRC RESPOND TO UNITED STATES DELEGATION QUESTIONS ON
STEEL POLICY
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16. (SBU) In response to questions from United States industry
delegates, several Chinese industry representatives stated their
companies operate according to market principles and are not
subsidized by the Chinese Government. Notably, a representative of
Wuhan Iron and Steel said that his company receives bank loans with
the same lending terms as other state-owned enterprises and private
companies, and that it pays dividends to all owners, including the
Chinese Government. The NDRC further explained that the People's
Bank of China sets national interest and lending rates and with the
exception of two policy banks that don't do much business with the
steel industry, Chinese banks lend according to market principles.


17. (SBU) The NDRC ended its presentation by responding to a broad
range of U.S. industry questions regarding environmental
regulations, water and electricity tariff rates, and steel
enterprise closures. The NDRC noted that it is publishing the names
of companies that are not following environmental standards;
however, it is a challenge to effectively monitor steel enterprises'
compliance to these standards given China's size. The NDRC stated
that Chinese steel companies pay the same electricity and water
prices as other industries. The Chinese Government plans to
increase electricity and water prices for companies using outdated,
energy-intensive technology as an economic tool to encourage them to

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adopt better production practices.


18. (SBU) In response to questions relating to the closure of
excess steel production capacity, the NDRC acknowledged that China's
steel industry has received too much investment, possesses too much
obsolete capacity, and manufactures too many low-quality products.
The Chinese Government wants to close steel producers employing
obsolete, environmentally harmful technology, but with domestic
demand for steel products so high, it is difficult to close these
mills down. Furthermore, the NDRC noted that using administrative
measures to close plants would cause significant labor unrest given
that Beijing does not have the resources to replace the unemployed
workers' wages.

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DELEGATIONS OFFER FINAL THOUGHTS, OUTLINE NEXT STEPS
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19. (SBU) AUSTR Stratford stated in closing that although the
Chinese Government may no longer directly intervene in the market,
his impression is that market forces have still not taken full root
in the Chinese steel sector. China's steel industry is driven by
high domestic demand for steel products and as a result, it is
difficult for the Central Government to completely remove itself
from the sector. AUSTR Stratford noted that China's incomplete
transition to the rule of law is resulting in the country's laws and
regulations, such as those intended to protect the environment, not
being effectively enforced. The United States Government and
industry still have a difficult time understanding China's large
steel production capacity increases and how factories using
inefficient, environmentally unfriendly technology can exist if
market forces regulate the sector as claimed by China. Given this,
it is inevitable that the United States Government and steel
industry remain concerned that China's steel industry is
subsidized.


20. (SBU) DG Wang said in response that the Chinese Government does
not have the money to subsidize the steel industry. China is a
market economy, albeit a market economy that operates differently
than the United States model. DG Wang reiterated that the United
States should not make assumptions about the Chinese economy using
its own experience. The United States and other countries should
not assume economic actions taken by China are designed to harm the
United States or other countries. Finally, DG Wang encouraged the
United States to have patience with China as it reforms its steel
sector. China so far does not possess the same well-established
labor and social security mechanisms that have allowed the United
States to effectively reform its steel sector in the past.


21. (SBU) AUSTR Stratford and DAS Estrada stated that the next round
of the Sino-United States Steel Dialogue should take place
concomitant with the next Joint Commission on Commerce and Trade
(JCCT) meeting in 2007. The talks should be held in Washington,
D.C. given that the first two rounds have been held in Beijing.
AUSTR Stratford stated that the presentations made by the United
States delegation will be shared electronically in their entirety
with the Chinese Government. (Note: The United States delegation
provided the presentations to MOFCOM on October 23, 2006. End Note.)



22. (SBU) DG Wang concurred with the timing of the next round of
talks, and indicated that he would check with other Chinese
Government and industry participants on holding the next round in
the United States. MOFCOM will provide the United States Government
with a document clearly outlining the various VAT export rebates
applicable to Chinese steel products. Additionally, MOFCOM will
send the United States Government collected Chinese Government and
industry comments regarding the North American industry association
papers detailing China's subsidies and other government intervention
to its steel industry and another industry paper submitted to USTR
regarding China's WTO compliance. DG Wang will ask the NDRC to
share a copy of its presentation on China's Steel Policy with the
United States delegation. DG Wang also will encourage the NDRC to

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share any list it develops on specific closures of Chinese steel
mills with the United States Government.

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ATTENDEES AND CLEARANCE
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23. (U) List of United States Attendees:

--Tim Stratford, Assistant USTR for China
--Jamie Estrada, Deputy Assistant Secretary for Manufacturing,
Commerce Department
--Joe Spetrini, Deputy Assistant Secretary for Policy and
Negotiations, Commerce Department
--Jean Kemp, Director, Steel Trade Policy, USTR
--Charlie Bell, International Trade Specialist, Commerce Department
--Brian Jones, Economic Officer, Embassy Beijing
--Sarah Ellerman, Commercial Officer, Embassy Beijing
--Representatives from the Steel Manufacturers Association, the
American Iron and Steel Institute, IPSCO, Nucor and U.S. Steel.


24. (U) List of Chinese Attendees:

--Director General Wang Shouwen, Bureau of Fair Trade, Ministry of
Commerce (MOFCOM)
-- Liu Danyang, Director, Bureau of Fair Trade, MOFCOM
--Wei Wei, Bureau of Fair Trade, MOFCOM
--Rong Min, Deputy Division Chief, Department of Treaty and Law,
MOFCOM
--Duan Dingjian, Deputy Division Chief, Department of Planning &
Finance, MOFCOM
--Wang Youli, Deputy Division Chief, Department of American &
Oceania Affairs, MOFCOM
--Fu Jingjie, Department of WTO Affairs, MOFCOM
--Sun Zhihong, Director, Department of Foreign Trade, MOFCOM
--Wang Deyang, Deputy Division Chief, Department of Mechanic,
Electronic & High Tech. Industry, MOFCOM
--Che Hui, Division Chief, Bureau of Industry Injury Investigation,
MOFCOM
--Lu Jiang, Deputy Division Chief, Office of Representative for
Int'l Trade Negotiation, MOFCOM
--Luo Tiejun, Director, Department of Industry, NDRC
--Zhang Xie, Department of Economics and Trade, NDRC
--Liu Zhimei, Deputy Secretary-General, China Chamber of Commerce of
Metal, Minerals & Chemicals Importers & Exporters
--Dong Zhihong, Director, China Iron and Steel Association
--Representatives from Bao Steel, An Steel, Capital Steel, Wuhan
Steel, Sha Steel, SinoSteel, China Minmetals and SinoChem


25. (U) This cable has been cleared by the United States Government
delegation.