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RUEHGZ/AMCONSUL GUANGZHOU 2218
RUEHGH/AMCONSUL SHANGHAI 6835
RUEHSH/AMCONSUL SHENYANG 7459
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RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 06 BEIJING 000552 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
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. 
 
-------------------- 
INTRODUCTORY REMARKS 
-------------------- 
 
¶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 
 
BEIJING 00000552  002 OF 006 
 
 
learning from the United States steel industry's restructuring 
experiences. 
 
--------------------------------------------- ----- 
TWO SIDES OUTLINE BILATERAL AND MULTILATERAL STEEL DIALOGUES 
--------------------------------------------- ----- 
 
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. 
 
--------------------------------------------- ------- 
INDUSTRY DELEGATIONS EXCHANGE VIEWS ON CHINESE STEEL SECTOR 
--------------------------------------------- ------- 
 
¶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 
 
BEIJING 00000552  003 OF 006 
 
 
Commerce of Metals, Minerals, and Chemicals Importers and Exporters 
stated that it is willing to consider exchanging steel market data 
as recommended by AISI. 
 
--------------------------------------------- ------ 
UNITED STATES DELEGATION OUTLINES HISTORY, PROBLEMS WITH STEEL 
SUBSIDIES 
--------------------------------------------- ------ 
 
¶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. 
 
--------------------------------------------- ------ 
CHINA DEFENDS EXPORT TAX REBATE POLICY, COKE EXPORT QUOTAS 
--------------------------------------------- ------ 
 
¶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. 
 
 
BEIJING 00000552  004 OF 006 
 
 
---------------------------------- 
NDRC EXPLAINS CHINA'S STEEL POLICY 
---------------------------------- 
 
¶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. 
 
--------------------------------------------- ----- 
INDUSTRY, NDRC RESPOND TO UNITED STATES DELEGATION QUESTIONS ON 
STEEL POLICY 
--------------------------------------------- ----- 
 
¶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 
 
BEIJING 00000552  005 OF 006 
 
 
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. 
 
--------------------------------------------- ------- 
DELEGATIONS OFFER FINAL THOUGHTS, OUTLINE NEXT STEPS 
--------------------------------------------- ------- 
 
¶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 
 
BEIJING 00000552  006 OF 006 
 
 
share any list it develops on specific closures of Chinese steel 
mills with the United States Government. 
 
----------------------- 
ATTENDEES AND CLEARANCE 
----------------------- 
 
¶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.