China's recent trade moves create outsize problems for everyone else

Russia's war in Ukraine has taken a shocking toll on the region. It has also contributed to a global food crisis, as Russia is blocking vital fertilizer exports needed by farmers elsewhere, and Ukraine's role as the breadbasket for Africa and the Middle East has been destroyed.

But there is another, unappreciated risk to global food security. China has also ordered its firms to stop selling fertilizer to other countries, in order to preserve supplies at home. Its little-noticed steps, which began last summer, were forcing farmers worldwide to leave fields fallow long before Russia invaded Ukraine.

Beijing's moves on fertilizer are just one example of the bigger challenge facing today's world trading system. China has become a massive producer, consumer, and trader of thousands of products, and it benefits enormously from integration into the global economy. But the way it tackled fertilizer, as well as many of its other problems, illustrates how the rest of the world suffers from its choices. China's reflexive self-interest is too often to select the policy that sharply disrupts its trade flows, exacerbating price pressures in other countries, along with the headaches they produce.

Steel is another recent case. Until 2021, China was such an enormous supplier of metals that it was widely accused of generating overcapacity, with its low-priced exports forcing steelmakers out of business in the United States, Europe, and elsewhere. Then Beijing suddenly imposed export restrictions on steel. Now, instead of contributing to a global glut, China is a steel glutton, triggering higher prices worldwide and adding more unwelcome pressures to inflation.

In still another striking reversal, Beijing increased its tariffs on pork in January, after consuming nearly 40 percent of global pork imports in 2021. Its new restrictions marked an abrupt about-face in dealing with an oversupply of pork domestically. In this case, China was worried not about inflation but about plummeting pork prices that threatened the livelihoods of its farmers.

If there were a functioning World Trade Organization (WTO), some of Beijing's actions—especially its export restrictions—might have been found to have violated China's legal commitments. But some likely did not, and that too is a problem. A main purpose of trade rules is to nudge large countries like China toward minimizing the international implications of their policies.

The trouble with China is that it continues to act like a small country. Its policies often have the desired effect at home—say, reducing input costs to industry or one set of Chinese farmers or by increasing returns to another. But they can also be beggar-thy-neighbor, with China selecting the policy that solves a domestic problem by passing along its cost to people elsewhere.

China's Fertilizer Export Restrictions

In 2021, Chinese and global fertilizer prices started rising, as a result of strong demand and the higher cost of energy, a key input (figure 1). China's National Development and Reform Commission (NDRC) vowed to crack down at home. In June, it launched an investigation into the market for urea, a nitrogen fertilizer. In July, it ordered major Chinese fertilizer companies to stop exporting "to ensure the supply of the domestic chemical fertilizer market." In October, as prices continued to rise, Chinese customs mandated dubious additional inspections. This combination of nontariff barriers led Chinese fertilizer exports to decline sharply. With more production kept at home, Chinese fertilizer prices leveled off and have since even started to fall.

Yet, the world price of fertilizer has continued to increase. Even before Russia's invasion of Ukraine, world prices had risen to more than twice their levels of a year earlier.[1] (Before the export restrictions, China's shares of world fertilizer exports were 24 percent for phosphates, 13 percent for nitrogen, and 2 percent for potash [see the appendix table]).

China's decision to take fertilizer supplies off world markets to ensure its own food security only pushes the problem onto others.[2] Less fertilizer reduces the ability of farmers elsewhere to grow food. Russia's war on Ukraine—which is a separate threat to world food supplies, as the two countries are major exporters of wheat, barley, corn, sunflowers, and other crops—means that China's ongoing export restrictions could hardly come at a worse time. At such a critical moment, China needs to do more—not less—to help overcome the potential humanitarian challenge likely to arise in many poor, fertilizer- and food-importing countries.

China's Steel Export Restrictions (And Tariffs)

Both Chinese and world prices of steel began to increase in the second half of 2020, alongside the global economic recovery from the COVID-19 pandemic (figure 2). (During periods of open trade, the two series tend to track closely—unsurprisingly, as China makes up more than half of world steel production.) Toward the end of 2020, Beijing announced that it would engineer a decline in domestic steel production in order to help meet needed decarbonization goals. Prices accelerated further.

To help tackle surging prices at home, China again turned to trade policy. In January 2021, it lifted a ban on imports of steel scrap. In May, it restricted exports to keep more of its production local. China increased export taxes on five steel products and limited exports further by cancelling rebates of value added taxes (VAT) of 13 percent on exports of 146 more. (China also cut tariffs on 20 steel products from 1 or 2 percent to zero.) When this turned out to be insufficient, China imposed another round of restrictions in August, with new export taxes and more terminations of VAT rebates.

This combination of Chinese trade policies may have helped tame domestic steel prices. By March 2022, Chinese steel prices were 5 percent lower than they had been before the first round of export restrictions, in April 2021. But as in the case of fertilizer, these decreases came at the expense of the rest of the world, where prices outside of China remain higher.[3] The concern is the widening of the wedge between the world and Chinese prices of steel that has emerged since January 2021.

China's Pork Tariffs

China's actions are not always driven by concerns over inflation. For the opposite reason, it also recently increased its tariffs on pork, one of its most important foods.

The story begins with events in 2018, when China made up nearly half the world's production and consumption of pork and 17 percent of world imports. A devastating outbreak of African Swine Fever (ASF) ultimately forced China to cull 40 percent of its pig herd, reducing domestic production (figure 3). By December 2019, China's pork prices had more than doubled relative to a year earlier, even as imports started to fill the gap. World prices increased by 25 percent, in part because of China's new import demand, which pulled supplies off global markets.

To help ease the pressure on Chinese consumers of rising pork prices, Beijing lowered its applied most favored nation (MFN) tariff in January 2020 from 12 percent to 8 percent. Opening to imports helped: China's pork prices leveled off before falling considerably. China's share of global pork imports more than doubled, to nearly 40 percent in 2021. But then, as the ASF problem was resolved and domestic production increased, China's imports tailed off. China shut the door on imports by increasing its MFN tariff to 12 percent in January 2022.

China reduced the price pressure at home beginning in 2019 by tapping into imports before more recently shutting them down. These policies affected the rest of the world. China's tariff cut in 2020 helped Chinese consumers and foreign pork producers (including EU as well as US farmers during the period of the Phase One agreement). But consumers elsewhere likely suffered from higher prices as a result. In contrast, China's tariff increase in 2022 has resulted in fewer imports, hurting farmers in other countries. A potential unintended benefit will be reaped if, in the current environment of high global meat prices, China's tariff unexpectedly frees up world supplies and helps mitigate pressure on pork prices facing consumers outside China.

China's Average Tariffs Before, During, And After The Phase One Agreement Of 2020–21

China's tariff increase on pork and tariff cut on steel have had neutralizing effects on its average tariff applied to imports from most countries. Over the last few years, China has, indeed, kept its average applied MFN tariff—which affects imports from the European Union, Japan, and other major economies—low (figure 4).

In response to the Trump administration's trade war that began in 2018, at the same time that China was raising tariffs to retaliate against the United States, it was reducing its tariffs on imports from most of the rest of the world. China lowered its applied MFN tariffs from 8.0 percent at the kickoff of the trade war to 6.6 percent by the time the Phase One agreement was signed, in January 2020.

What happened next to those tariffs is worth investigating, however, especially as China subsequently bought none of the additional $200 billion of US exports promised in the Phase One agreement over 2020–21. In the deal, China did not agree to remove its tariffs on US exports to encourage purchases of US goods. (Beijing did establish an ad hoc exclusion process whereby Chinese firms could ask the Ministry of Finance to exclude tariffs from their purchases.) Nevertheless, China could have indirectly incentivized buying US exports—by, for example, raising its tariffs on imports from third countries that it had lowered during the trade war.

For the most part, China did not raise those tariffs. Its average applied MFN tariff held steady at 6.6 percent over 2020–21. And on January 2022, the suite of China's tariff changes—decreasing import duties on 347 products and increasing them on 21 others[4]—caused its average applied MFN tariff to fall slightly, from 6.6 to 6.5 percent.

Yet, focusing on average tariffs misses out on these important examples of China's very active use of trade policy to mitigate the effect of changing prices at home. Even with pork, China did not appear to break the rules in either 2020 or 2022, as its legal commitment at the WTO was not to raise its tariff above 12 percent.

For such a large country in the trading system, there is a better way. The rest of the world wants China to bind its tariffs for products like pork at a lower level. Then, when tough times emerge for either its consumers (as in 2020) or farmers (as in 2022), Beijing should turn to its domestic policies to help mitigate the effects. Relying on tariff changes to help those groups ends up shifting more of the policy's cost onto the rest of the world.

The Problem With Ignoring China's Export Policies

The implications are similar for China's use of export policies. When China joined the WTO, in 2001, it committed to limit its use of export taxes. The steel export taxes it introduced in 2021 appear within those commitments and thus may not break any rules. (China faced legal challenges and lost formal WTO disputes over its export restrictions on raw materials and rare earths.) Yet, if China acting within the rules continues to hurt other countries, then the rules are a problem that the trading system must be modified to solve.

These other Chinese export restrictions are inconsistent with at least the spirit of trade rules. For example, China's failure to rebate steel product VATs that were rebated in the past (and continue to be rebated for other products) has the same immediate-term economic impact as a new export tax. Restricting fertilizer exports via unjustifiable inspections or government orders not to sell abroad is also problematic.

Irrespective of China, the fact that the WTO imposes fewer constraints on how and when countries restrict exports relative to imports is a historical flaw that needs to be fixed. In part, the loophole stems from the origins of the 1947 General Agreement on Tariffs and Trade (GATT). As the major economies at the time rarely used export taxes, trading partners did not bother negotiating rules to constrain them. (Indeed, export taxes are unconstitutional in the United States.[5])

On steel in particular, trade negotiators may need a further course correction. For nearly a decade, the United States, the European Union, and other economies have been increasingly worried about China's growing share of world production. Historically, however, the concern has been over the impact of China's export expansion on decreasing—not increasing—world steel prices. The United States responded with antidumping and countervailing duties to block most imports of Chinese steel by 2016. As steel is a commodity, however, China's exports went to third markets, third-country exports to the United States increased, and in 2018 the Trump administration imposed its infamous 25 percent "national security" tariffs, which mostly affected direct imports from US military allies. (The Biden administration has not removed that protection; it has simply rearranged it into a set of import-limiting quotas so that firms from the European Union, Japan, and the United Kingdom suffer less from tariffs and instead share in the benefit from higher prices in the US market.)

The worry is whether steel trade policymakers continue to focus exclusively on fighting the last war. The industry needs to be greener, as suggested, by the recent US and EU initiative to negotiate a "global arrangement to address carbon intensity and global overcapacity." Yet, China's switch to export restrictions helps keep prices lower at home at the expense of the rest of the world. If disproportionately aimed at early-stage steel products, they could even act as a subsidy that aids Chinese downstream and steel-using industries, much like the OECD found China had done with its selective export taxes and VAT rebates for the aluminum value chain (OECD 2019).[6]

The Need to Reengage With China on Trade

Despite ever-shrinking political will, there is an ever-growing list of economic reasons to reengage with China on trade. Whether on steel, on adjustments to a greener economy, or even on global food security, attempts to regularize future trade relations must grapple with the reality that China has become extraordinarily large and continues to use policies that other major economies do not. To much of the rest of the world, what matters most is not containing China but constraining the size and suddenness of the costs that its policy choices impose on people outside its borders.[7]

Notes

1. According to the Food & Fertilizer Export Restrictions Tracker maintained by David Laborde of the International Food Policy Research Institute, Russia quickly followed China's lead by imposing export restrictions on fertilizers in November, before imposing more restrictions in February 2022. According to the Food and Agriculture Organization, Russia accounted for 16 percent of global exports of nitrogenous fertilizers, 19 percent of potash, and 14 percent of phosphates in 2019.

2. Not everyone in the rest of the world is hurt by China's export restrictions on fertilizers. Fertilizer firms in other countries benefit from higher prices and less competition from Chinese suppliers.

3. Not everyone in the rest of the world is hurt by China's export restrictions on steel. Steel-producing firms in other countries benefit from higher prices and less competition from Chinese suppliers.

4. Products are identified at the eight-digit Harmonized System (HS) level. This count includes only products with tariff cuts across the entire eight-digit HS category.

5. Article I, Section 9, Clause 5 of the US Constitution states, "No Tax or Duty shall be laid on Articles exported from any State."

6. See OECD. 2019. Measuring Distortions in International Markets: The Aluminium Value Chain. OECD Trade Policy Paper 218, https://doi.org/10.1787/c82911ab-en; Julien Gourdon, Laura Hering, Stéphanie Monjon, and Sandra Poncet. 2022. Estimating the Repercussions from China's Export Value-Added Tax Rebate Policy. Scandinavian Journal of Economics 124, no. 1: 243–277; and Piyush Chandra and Cheryl Long. 2013. VAT Rebates and Export Performance in China: Firm-Level Evidence. Journal of Public Economics 102, no. C: 13–22.

7. This result is a long understood policy implication stemming from the research most closely associated with Kyle Bagwell and Robert Staiger. See, for example, Kyle Bagwell and Robert W. Staiger. 1999. An Economic Theory of GATT. American Economic Review 89, no. 1: 215–48; Kyle Bagwell, Chad P. Bown, and Robert W. Staiger. 2016. Is the WTO Passé? Journal of Economic Literature 54, no. 4: 1125–31; and Robert W. Staiger. Forthcoming. A World Trading System for the Twenty-First Century. Cambridge, MA: MIT Press.