The U.S. may need to take further and "more creative" actions beyond tariffs to protect U.S. industries and workers against China's growing excess industrial capacity, the U.S. Treasury's top economic diplomat said on Wednesday.

Jay Shambaugh, Treasury Undersecretary for International Affairs, told a Council on Foreign Relations event that China's production has become "untethered" from its own demand or demand in the global economy, unleashing exports that threaten jobs in the U.S. and other countries.

He said the traditional trade defense toolkit, including the "Section 301" tariffs that President Joe Biden recently increased, may not be sufficient to deal with such challenges.

"More creative approaches may be necessary to mitigate the impacts of China’s overcapacity," Shambaugh said. "We should be clear: defense against overcapacity or dumping is not protectionist or anti-trade, it is an attempt to safeguard firms and workers from distortions in another economy."

Shambaugh did not elaborate on further steps that may be necessary or under consideration by the Biden administration.

NEW TRADE REMEDIES

A group of bipartisan lawmakers and steel producers earlier on Wednesday called on Congress to pass new legislation that would apply U.S. anti-dumping and anti-subsidy duties on Chinese goods to those produced by Chinese companies in third countries.

The "Leveling the Playing Field 2.0" bill sponsored by Representative Terri Sewell, a Democrat and Representative Bill Johnson, a Republican, also would allow China's "Belt and Road" subsidies for projects in other countries to be counted in anti-subsidy cases.

The Biden administration also on Wednesday unveiled a new effort with Mexico to combat China's circumvention of U.S. steel and aluminum tariffs, instituting a new North American "melted and poured" standard for steel imported into the U.S. from Mexico.

Shambaugh's remarks amplified concerns voiced by U.S. Treasury Secretary Janet Yellen on a trip to China in April, when she warned that Beijing's overinvestment and excess production capacity in key industries was unacceptable. The trip foreshadowed Biden's steep tariff hikes on an array of Chinese goods, including electric vehicles, solar panels, semiconductors and critical minerals.

He defined China's overcapacity as "production capacity in excess of domestic demand and untethered from global demand," stemming from persistent overinvestment that is facilitated by extensive state support.

China's production capacity in some industries far exceeds global demand projections, including for solar panels, lithium-ion batteries and electric vehicles, he said, adding that China's factory utilization rates were falling, while the share of money-losing firms was rising, reaching 28% of publicly traded Chinese automakers.

"These conditions would not appear in a normal, market economy. What we are seeing is a fundamental distortion, driven by government policy," Shambaugh said.

It would be better for China to work with other countries to address their concerns and rein in excess capacity to boost efficiency and productivity, expand its social safety net and boost domestic demand efficiency.

"We will take defensive action if needed, but we would prefer for China to take action itself to address the macroeconomic and structural forces that are generating the potential for a second 'China shock' for its major trading partners," Shambaugh said.

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US tightens steel, aluminum import rules to curb China tariff evasion

The United States unveiled stricter rules Wednesday on steel and aluminum imports from Mexico, moving to prevent China-origin goods from avoiding tariffs.

The election-season actions by President Joe Biden's administration mark the latest in efforts to guard against excess industrial capacity in China, which Washington has warned could bring a flood of unfairly priced goods to other markets.

China accused the United States of "protectionism," denying talk of overcapacity in its steel and aluminum sectors.

Steel arriving via Mexico will qualify for duty-free benefits only if melted and poured in that country, or in the United States or Canada, White House National Economic Advisor Lael Brainard told reporters. Otherwise, they will face tariffs of 25 percent.

Aluminum imports from Mexico that contain primary aluminum smelt or cast in China, Belarus, Iran or Russia will also face a 10 percent tariff.

Mexico will require importers to provide information about the products' countries of origin.

"These actions fix a major loophole that the previous administration failed to address, and that countries like China use to avoid US tariffs by shipping their products through Mexico," Brainard said.

She charged that "Chinese steel and aluminum entering the US market through Mexico evades tariffs, undermines our investments and harms American workers in states like Pennsylvania and Ohio."

As Biden's reelection bid enters a critical stage, the president has been working to win over voters in swing states including Pennsylvania.

"China and other nations must not be allowed to exploit trade with our neighbors in order to avoid US trade enforcement," said Scott Paul, president at the Alliance for American Manufacturing.

But Liu Pengyu, spokesman of the Chinese embassy in the United States, criticized the argument of overcapacity as a "political tool" to "suppress the Chinese economy."

- 'Forward-looking' -

A senior US official conceded the latest measures are "forward-looking."

Nearly 90 percent of some 3.8 million tons of steel imports from Mexico is already melted and poured in either the United States, Canada or Mexico, an official said on condition of anonymity.

Similarly, of the 105,000 metric tons of aluminum from Mexico, 94 percent was smelted or cast in the three North American countries.

But officials maintained China was producing beyond domestic demand, saying excess capacity is bound to be exported -- potentially impacting other markets.

"These joint actions with Mexico will help to ensure the long-term viability of our steel and aluminum industries," said US Trade Representative Katherine Tai.

The Treasury's under secretary for international affairs, Jay Shambaugh, told an event in Washington that the United States is not alone in trying to combat negative spillovers from China's "non-market practices."

In May, the United States announced steep tariff hikes on Chinese imports including electric vehicles and semiconductors.

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China's exports seen rising more quickly in June amid fresh tariff fears

China's exports likely grew at the fastest pace in fifteen months in June, as manufacturers front-load shipments in anticipation of tariffs from a growing number of the country's major export markets.

Trade data on Friday is expected to show exports grew 8.0% year-on-year by value, according to the median forecast of 31 economists in a Reuters poll, up from the 7.6% increase in May and the best pace since a 10.9% gain in March last year.

Imports likely grew 2.8% last month, faster than the 1.8% gain seen in May, suggesting factory owners are buying more parts to be turned into finished goods for export.

Stronger-than-expected exports have been one of the few bright spots for an economy that is otherwise still struggling for momentum despite officials' efforts to stimulate domestic demand following the pandemic. A prolonged property slump and worries about jobs and wages are weighing heavily on consumer confidence.

The $18.6 trillion dollar economy is so overwhelmingly competitive across so many sectors, including steel, solar and consumer goods, that even new trade restrictions wouldn't really slow the export juggernaut, analysts say.

Still, as the number of countries considering stepping up curbs on Chinese goods increases, so too does the pressure on its exports to prop up progress towards the government's economic growth target for this year of around 5%.

Washington in May hiked tariffs on an array of Chinese imports, including a quadrupling of duties on Chinese electric vehicles to 100%, while Brussels last week confirmed it would also impose tariffs, but only up to 37.6%.

Exporters are also on edge heading into U.S. elections in November in case either major party tips fresh trade restrictions.

Turkey last month also announced it would impose a 40% additional tariff on Chinese-made EVs, while Canada said it was considering curbs.

Meanwhile, Indonesia plans to impose import duties of up to 200% on textile products, which China is its biggest supplier of, India is monitoring cheap Chinese steel, and talks with Saudi Arabia over a free trade agreement have reportedly stalled over dumping concerns.

A global cyclical upturn in the electronics sector should also help exporters in the world's No.2 economy, which is investing heavily in expanding production of older chips, known as legacy chips, that can be found in everything from smartphones to fighter jets.

South Korean exports to China - a leading indicator of China's tech imports - jumped 16.8% last month.

The European Commission has reportedly began canvassing the bloc's semiconductor industry for its views on China's expanded production of legacy chips, which could constrain the Asian giant's strong export performance in electronics.

The median estimate in the poll predicted China's trade surplus will come in at $85.0 billion, up from 82.62 billion in May.

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