Chinese Steel Imports Cause Industry Rift in Mexico

10 July 2015

The Mexican government’s recent decision to impose anti-dumping duties on some key steel imports from China has sparked a rift between the country’s steel and automotive industries, reigniting a debate over whether Mexico should adopt a more protectionist stance over trade policy.

On Thursday, the government announced several additional measures to support domestic steelmakers, including strengthening customs controls to block the entrance of illegal steel. But authorities stopped short of meeting local industry demands for a 15% blanket tariff on all steel imports from China. Mexico doesn’t apply import tariffs on steel.

As a result of the global steel glut caused by falling demand and excess output by China, Mexican steel producers have announced thousands of layoffs and have been lobbying in recent weeks for the imposition of tariffs.

The automotive industry cried foul, however, warning that setting up more protective measures could end up hurting the competitiveness of one of Mexico’s best-performing manufacturing sectors. The Mexican auto industry imports around 90% of the steel it uses.

The dispute shows how even champions of free-trade such as Mexico can face policy dilemmas. The government of President Enrique Peña Nieto is seeking a delicate balance between supporting a labor-intensive industry that pays higher-than-average wages, and remaining one of the most open economies in Latin America.

“We want a smart integration of Mexico in the global economy. Yes, we want to continue being a country that welcomes free trade, but active enough to battle unfair competition,” said Economy Minister Ildefonso Guajardo.

India and the European Union have also recently slapped anti-dumping duties on Chinese steel, as China’s massive state-owned steel industry floods the world with exports.

Mr. Guajardo said imposing tariffs wouldn’t be the best solution. “Tariffs go against all market participants, and that could generate distortions along the value chain,” he said.

Francisco Orduña, the head of institutional relations at Mexico’s biggest steel producer Altos Hornos de Mexico, or Ahmsa, said the latest measures are “a positive step” that could limit planned layoffs at the company. A spokesman for the automotive industry association had no comment on Thursday’s measures.

Disagreements between suppliers and users of steel began in June, when Mexico imposed anti-dumping duties of up to 103% for cold-rolled flat steel from China, after it was determined that Chinese exporters were selling their products at dumping prices due to heavy government subsidies. Similar duties were applied to hot-rolled steel coil. Both products are essential for the automotive industry.

The move came after Ahmsa said it was cutting 4,500 employees and reducing production by 20%. Mexico’s unit of steel giant ArcelorMittal is also planning to cut 2,800 jobs and DeAcero another 2,500.

Steel imports in Mexico rose 11% in the January-May period compared with the previous year, while production fell 5%, according to the steel industry chamber. Steel imports from China jumped 113%. China’s authorities have publicly opposed any measures against its steel exports, saying its products are highly competitive.

“We’re becoming a country of assembly plants, while Mexico is losing a national industrial base. No country can expect to become an economic power without its own industry,” said Mr. Orduña of Ahmsa.

Mexico’s auto industry association, which represents foreign auto makers such as General Motors and Nissan, disagrees on applying tariffs to steel imports.

“Mexico can’t change the rules of the game. We can’t introduce new elements that will impact on our competitiveness and growth,” said Eduardo Solís, president of the association, earlier this week.

Auto makers are investing billions of dollars in new assembly plants and expansions, promising to bolster Mexico’s position as the world’s seventh-largest auto producer and fourth-biggest exporter.

Mexico burnished its free-trade credentials in 1993, signing the North American Free Trade Agreement with the U.S. and Canada. It now has trade agreements with 46 other countries, including the European Union, Japan, and a host of Latin American nations.

The opening has spurred business investments and benefited consumers, who can now find all kinds of products on supermarket market shelves and in stores, analysts say. Mexico’s total trade has increased to around $800 billion in 2014 from $115 billion in 1993.

“Free trade has been a success story for Mexico. To change course and impose tariffs on steel would only mean rises in prices for consumers and for the thriving manufacturing industry,” said Luis de la Calle, an economist and former Mexican trade official.

But critics of the open-trade policies say Mexico lacks effective tools to support local producers, having more lenient rules regarding unfair competition than some developed nations. While Mexico has established so far 15 anti-dumping duties against Chinese steel, the U.S. has set 158 and the European Union 85.

“Mexico has to stimulate added-value national industries via tougher actions, as most countries do,” said Mauricio de María, a former head of the U.N. Industrial Development Organization. “What assembly plants export, in many cases, are imports manufactured by a cheap labor force.”

The Economy Ministry said it will try to raise the efficiency of its anti-dumping inquiries, which often take years to complete, and match legislation with those of Mexico’s main trade partners.

But in private, some in the steel industry remain skeptical. “Too often, the Chinese seem to be smarter than the government,” said a senior official of a steel company who asked not to be named.