China’s $8.5 billion in steel spurs Latin America toward tariffs

(Bloomberg) - One after another, Latin American nations are following in the footsteps of the US and Europe by imposing prohibitive tariffs on Chinese imports — a strain in what’s been an otherwise cozy relationship.

Mexico, Chile and Brazil have hiked - and in some cases more than doubled - duties on steel products from China over the past several weeks. Colombia may be about to follow suit.

The levies may seem out of turn, given how the Asian superpower has entrenched itself in Latin America in recent years. China has become the biggest buyer of raw materials from the region and a major investor. At the same time, Latin America has given China another market to sell its goods as it faces stiff US and European tariffs. It’s sending nearly 10 million tons of steel a year, valued at $8.5 billion, to Latin America — a huge jump from a mere 80,500 tons in 2000, according to regional steel association Alacero.

Now, that relationship is being tested by a global turn toward protectionism, and a flood of Chinese imports that threatens to put Latin American steel producers out of business and risk a combined 1.4 million jobs.

“This is an important test of China’s interests and intentions,” said Margaret Myers, director of the Asia and Latin America Program at the Inter-American Dialogue. It’s also a “test of Latin American resolve in challenging what is a critical economic partner.”

Brazil will soon introduce a tariff-rate quota system to stop predatory pricing of imported alloy. While the official announcement didn’t mention China, last year’s 62% surge in Chinese shipments to 2.9 million tons is behind the measure, said people briefed on the matter.

“It’s a sign to the world that Brazil has rules — it’s not a no man’s land,” said Marco Polo de Mello Lopes, the head of industry association Aco Brasil, who held talks with the government for nine months before it announced the new rules.

Pushing back against China, however, can be fraught with risks — particularly for smaller export-driven economies that rely on Chinese demand for their raw material sales, from cherries to copper.

There are plenty of examples of Beijing suspending purchases and investments in reaction to what it sees as unfair and unilateral measures. There was a brief period during which China banned soybean products from Argentina in response to wide-ranging anti-dumping measures. Following the 2018 arrest of a Huawei executive in Vancouver, China blocked canola shipments from two Canadian companies.

China’s Ministry of Commerce didn’t reply to a request for comment on the recent tariffs imposed by Latin American nations.

For the self-proclaimed leader of the Global South, there’s also a broader symbolic risk that comes with a potential united front against its exports.

“In some ways, these developing countries are the better bellwether of global trade sentiment towards China,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics. “They suggest the protectionist walls against Chinese goods are going up in many disparate places, not just rich countries.”

Existential crisis

Latin America’s trade relationship with China has, in many ways, also had a positive impact on the region.

Chile’s economy, for instance, has benefited greatly from sending raw materials to China and buying back processed or manufactured goods. The country’s free-trade strategy — including bilateral accords with China and the US — opened up huge markets for its grapes, wines, salmon, wood pulp and minerals, helping it become one of the region’s most prosperous nations.

But like other commodity export-driven economies, Chile has struggled to compete in downstream markets — such as turning raw lithium into battery components or iron ore into steel products.

For Brazil, having the world’s best deposits of iron ore isn’t enough to make its steel mills competitive with China, even as it’s developed some manufacturing capacity.

Take miner Vale SA, which extracts rich iron ore from the red earth of the Brazilian Amazon. Much of it is shipped 10,000 miles to the Chinese port of Qingdao and fed into any one of the country’s hundreds of massive steel mills. There it’s blasted and shaped into basic alloy products.

The problem is when some of that steel makes the return trip, it arrives to Brazilian manufacturers at a heavy discount to prices charged by local steel mills owned by Gerdau, CSN and ArcelorMittal.

In Colombia, where Chinese shipments are coming in at a 50% discount, steelmaker Paz del Río has asked the government to raise import tariffs and help it return to profitability, Chief Executive Officer Fabio Galán said in an interview last month. The influx of Chinese alloy is not only risking jobs but it has completely displaced imports from Brazil and Mexico, according to the company. In the year through April, 92% of steel wire imports came from China and Russia.

“The biggest risk is that steel becomes another go-to example for the argument that China is exporting its excess capacity,” said Beddor. “It’s especially an issue because steel might prompt developing countries to accept that narrative in a way they would not regarding, say, electric vehicles.”

At the same time, Chinese investors have also been a key partner for Latin American nations looking to take their commodity-driven economies further downstream. The country has become a big spender in Latin America and the Caribbean, investing $187.5 billion in between 2003 and 2022 in industries such as energy, transport and mining, according to a report from the Inter-American Dialogue.

Though Chinese spending in the region has slowed of late, investments have continued in key industries. Industrial and Commercial Bank of China has grown in Argentina. In Brazil, electric car juggernaut BYD Co. is building its first factory outside Asia, and is planning to announce another in Mexico by year-end. In Chile, BYD and Tsingshan are developing lithium cathode factories. Since 2005, China Development Bank and China-Export Import Bank have provided $136 billion in loan commitments to the region.

With the recently imposed tariffs, Latin American nations may be betting that China is now so entrenched in the region that Beijing won’t engage in reprisals. President Xi Jinping is expected to make his first trip to South America in five years, for the APEC and G-20 leaders’ summits, putting renewed focus on relationships in the region.

In addition, while the amount of Chinese steel entering Latin America is significant for the region and harmful for local mills, it’s about 1% of the billion metric tons that Chinese mills churn out each year. That may minimize the risk of irking Beijing.

“These countries potentially have more leverage than they have in the past because they are more critical as a destination for a lot of these goods,” said Myers. “That said, they’re still hugely dependent on China. So everybody’s going to be walking this fine line.”

‘Band-Aid’

For Latin America’s steel-making nations, the levies still aren’t a perfect solution.

For example, the new stiff tariffs in Chile will push up costs in the all-important mining industry that uses steel balls to grind down ore.

“There is a need to show a response to the dilemmas caused by economic globalization,” said Francisco Urdinez, director of Nucleo Milenio Iclac, a Chile-based think tank that studies Sino-Latin American relations. “But it’s not a fundamental solution. It’s just a band-aid that ends up generating redistribution from consumers to producers.”

Then of course, there’s the issue of steel dumping, the practice of selling the product for far less than local competitors. Raising tariffs won’t be enough to stop it in Brazil, said Humberto Barbato, who heads the nation’s electronics industry association, Abinee, a significant steel consumer. Instead, the government should prioritize the purchase of products with local content, he said. “The Chinese have a lot of flexibility to change the price.”

Though top Brazilian steelmaker Gerdau applauded the country’s new tariff-rate quota, CEO Gustavo Werneck warned it wouldn’t solve the long-term problem of competitiveness in the local industry such as the high cost of energy.

“China is going to make exports a major source of finance” for the country’s transition from industrialization to a more consumption-driven economy, Werneck told journalists at a press conference.

In all, Latin America’s steel protections are much more limited than the tariffs former President Donald Trump implemented during his administration. That only makes it more likely that China may simply try to defend the cases in the World Trade Organization, according to University of Queensland Associate Professor Scott Waldron.

“Any counter-measures will be limited,” said Beddor.

Already, he said, officials have “started to curb steel production, and that is likely to be the primary focus going forward, rather than how to retaliate against upset trade partners.”