by Jack Bruns
Tariffs! Tariffs! Tariffs! Lately, it seems they are all the rage. Nations large and small, rich and poor, developing and developed are entering an era defined by protectionist economic policies, attempting to counter the devastating effects of excessive globalization. Nations are increasingly growing tired of competing with others whose social, economic, and political frameworks allow them to engage in “anti-competitive” pricing and sales tactics. China is at the forefront of this dialogue. Flooding markets with its excess steel, China has racked up accusations of engaging in anti-competitive pricing. Nations around the world are responding with tariffs; however, the consequences of protectionist policies as such are far more complex than made out to be. Their imposition depends on the nation’s relative bargaining power and the associated political, economic, and social conditions. Hence, protectionist policies – while designed to “protect” – do not always protect. This is most evident in Latin America.
Before touching on Latin America, however, one must understand the contextual linkage between Latin America and China’s rapid economic growth throughout the late 1990s and into the 2000s. In 1997, China’s GDP was $957 billion. In 2023, it stood at $17.7 trillion. The low cost of labor as well as its abundance made manufacturing in China cheap. As the nation developed into the manufacturing hub of the world, unprecedented levels of foreign investment led to the expansion of the middle class, large-scale development, and urbanization. This gave way to a nationwide industrial and construction boom. The result? A booming real estate industry and an ever-expanding, homegrown, steel industry. Cities like Shenzhen, Shanghai, Chengdu, Beijing, and Guangzhou, saw hundreds of new residential towers, transport links, and commercial centers constructed in a span of twenty years. Expecting this growth to continue, the nation further expanded its steel production capacity becoming the world’s largest producer. In 2023, steel production reached 967,718 thousand tonnes per annum (ttpa). For context, the United States, European Union, India, and the rest of the world produced 109,120 ttpa, 118,580 ttpa, 121,905 ttpa, and 677,098 ttpa respectively.
On the surface, China’s steel industry seemed as though it was thriving. However, the implementation of new rules limiting the amount real estate developers could borrow in 2020 and the COVID-19 pandemic devastated the nation’s steel consumption. Evergrande, the nation’s largest real estate developer with over 1300 active projects in 230 cities across China, delved into a crisis. With over 300 billion in debt obligations, the company had to rapidly raise capital to be compliant with the new CCP borrowing rules. The company began selling properties at steep discounts and absorbing massive losses. Ultimately, the sale of properties well below their market value and the loss of ninety-nine percent of Evergrande’s stock value sent the real estate market into a crash. The effects of Evergrande’s high levels of borrowing rippled throughout the economy and construction significantly slowed not just in real estate but across the board. The economy could no longer support the high levels of construction and China’s steel production capacity far exceeded its domestic use capabilities. Although this gap can be traced as far back as 2014, the Evergrande Crisis, coupled with COVID-19 and the subsequent slow economic recovery, greatly exacerbated it. All of this has made Latin American countries perfect recipients of Chinese steel dumping today.
Following the slowdown in demand for steel, rather than cutting production, China ramped up exports simultaneously dropping prices. In 2023, Chinese steel exports rose 36.2% while average export prices fell by 32.7%. By flooding markets with its excess steel at prices far below what other producers can offer, China is single-handedly fueling a crisis of excess capacity. They are not just making it hard for others to compete but impossible. To put the extraordinarily low prices in perspective, one ton of Chinese steel sells for as much as 40% less than the same one ton viably produced on home soil. That is, Chinese steel in Latin America is selling for 40% less than the break-even price offered by Latin American firms. They simply cannot compete.
While Latin America is not the only place China is dumping its excess steel, accounting for only a little over one percent of Chinese steel exports, it has devastated home-grown producers, eliminated thousands of jobs, and exposed the leverage China has over commodity-based economies. Unlike the EU and the United States, the commodity-driven nature of many Latin American economies means they are heavily dependent on exporting raw materials. When China also happens to be their largest customer, imposing tariffs and angering China becomes much more complicated.
According to Alacero, the Latin America Steel Association, in 2023, ten million tons of Chinese steel were imported. This was a forty-four percent increase compared to the year before. In 2004, only 85,000 tonnes were imported. Additionally, with over 1.4 million jobs dependent on the steel industry in Latin America, cheap steel flooding the market is slowly chipping away at these jobs. Companies across the continent are begging their governments to impose tariffs. Huachipato, a Chilean steel company, faced over $1 billion in losses due to Chinese steel. The company asked the Chilean Price Distortion Commission to recommend the government levy a twenty-five percent import tariff on Chinese steel. While the commission ruled there was sufficient evidence of Chinese steel dumping and recommended a fifteen percent tariff be imposed, the Chilean government’s hands were tied. In 2006, Chile signed a trade agreement with China, and imposing tariffs on Chinese steel would end the export of copper, refined copper ore, and Lithium to China. These by far are some of Chile’s largest exports and China is their biggest customer. So, on September 16, 2024, facing no other option, Huachipato, Chile’s largest steel maker shut down operations after seventy-four years. The closure directly eliminated over 2,700 jobs and indirectly affected an additional 20,000 jobs. However, imposing a tariff on Chinese steel would be like biting the hands of those who feed you. Thus, Chile, who is dependent on China and does not have other industries to fill this potential loss of income, complied.
Chile could not risk it but Brazil decided it could. In 2023, Chinese steel exports to Brazil alone surged by eighty percent. After months of complaints from local steel producers, the Brazilian government announced it would levy up to a twenty-five percent import tariff on steel beginning in 2025. While this announcement comes with risks as China has a well-documented history of retaliation for tariffs (banning soybean imports from Argentina after the nation imposed a wide range of anti-dumping measures), Brazil feels it can handle it. Marco Polo de Mello Lopes, the head of industry association ACO Brazil told the Economic Times, regarding the announcement “It’s a sign to the world Brazil has rules—it’s not a no man’s land”. Unlike Chile, Brazil has some of the largest deposits of iron ore – a crucial mineral for steel production; however, despite this, the inflow of Chinese steel has meant their relative production capacity is extraordinarily low. Thus, Brazil hopes the tariff will make locally produced steel competitive again and expand the industry.
Unfortunately for Brazil and Chile, as well as the other Latin American countries including Colombia, Peru, and Mexico, their vulnerability lies far deeper than tariffs can protect. Latin America’s economic entanglement with China is a double-edged sword. On the one hand, China – through steel dumping and other supply flooding measures – systematically dismantled local industries that provided thousands of jobs and self-reliance. This poses an opportunity for Latin American countries to rebuild capacity and resilience. On the other, China purchases massive volumes of raw materials from Latin American nations, provides technology, and contributes hundreds of billions of dollars in Foreign Direct Investment (FDI) inflows across the continent. This dependence severely limits any actions taken by Latin American nations to protect their own interests and is entirely a result of fundamental shortcomings that continue to characterize Latin American economies such as extreme monetary mismanagement, low productivity, and poor education.
Tariffs are like band-aids: they do not address the fundamental issues leading to Latin American vulnerability. The case of Brazil shows band-aids can come loose with China still able to find a way around their tariff. Humberto Barbato who heads Brazil’s electronics industry association says, “The Chinese have a lot of flexibility to change the price.” Regardless of the tariff imposed, China can and will lower prices to the point where the tariff has no effect.
Furthermore, in much the same way a damaged heart cannot be fixed by slapping on a simple band-aid, imposing tariffs will not revive or bolster Latin American steel industries. On top of that, China has only just begun. Gustavo Werneck, CEO of Brazilian Steelmaker Gerdau, told journalists “China is going to make exports a major source of finance” for the country’s transition from industrialization to a more consumption-driven economy. The result of this: ever-increasing exports to commodity-driven economies, of which Latin America is home to many. Further, these exports will become increasingly diverse, affecting not just steel but all industries.
So, will Latin America ever emerge from China’s iron fist? China’s leverage lies in the limited nature of many Latin American economies. Most are driven by the export of a few commodities. For Chile, it is copper and lithium. For Brazil, it is iron ore. The solution is not in the export of these raw materials but in the refinement and transformation to final goods and services which can then be exported. In doing so, they will diversify their economies, reducing the relative impact of Chinese steel dumping.
In a diversified economy, like the United States, steel dumping causes a cut in the skin. Cuts can be healed with band-aids. The steel industry in the U.S. accounts for only a small percentage of the economy; shocks do not ripple as quickly or as far. This allows for greater time to assess and respond before the situation becomes dire. In a commodity-driven economy, steel dumping cuts open the heart and infects it, an injury that cannot be healed with a band-aid. Tariffs are wonderful tools when a country’s underlying fundamentals are strong, but do not sustain their long-term intended effects when their fundamentals are weak. It is by no means a simple task to diversify an entire economy. This is a result of sustained and proper fiscal, political, and economic management over a relatively long period which, unfortunately, few Latin American countries are able to achieve (with the possible exception of Brazil). In the short term, tariffs will curb some Chinese steel dumping in Latin America but, without major changes, the protections will wear off, China will find a way around them, and their leverage will further increase.