Global steel crisis resulting in increased adoption of trade defence measures

July 2016 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

The crisis facing the steel sector globally has been widely publicised. Global steel demand has yet to rebound to pre-financial crisis levels, and growth is weak, resulting in significant overcapacity. Factories are shutting down around the globe, and political pressure is mounting. Not surprisingly, this is having a severe impact on international trade in steel products.

With domestic demand contracting in several countries, producers have been seeking out export markets. This has particularly been the case for China, which has been blamed by the EU, the US and other major steel producing nations for the collapse in steel prices and resulting crisis. But other countries have also shouldered some of the blame; however, those nations are claiming that they are not the (sole) source of the crisis.

For some time now, there have been calls to address the overcapacity plaguing the industry. In the US, the steel industry, unions and lawmakers have been calling on the United States Trade Representative (USTR) and the White House to take stronger action against cheap steel imports, in particular from China, and to press China to decrease steel capacity. Similar calls have been made by the steel industry, unions and politicians in the EU. There was an unprecedented joint protest by workers and employers which brought thousands to the streets of Brussels in February 2016, calling on action to be taken, in particular against China.

Attempts have been made to address the issue politically. In mid-April 2016, the Organisation for Economic Co-operation and Development (OECD) met in Brussels together with representatives from the global steel industry for high level talks to discuss the matter. While certain joint statements were made after the meeting on how the governments would address overcapacity, little was achieved and the participants failed to reach a consensus. At the end of the meeting, the US singled out China as the cause of the meeting’s failure, and the USTR threatened trade action unless China took “timely and concrete actions to reduce its excess production and capacity”.

After the OECD meeting, the matter was discussed during the annual Economic and Trade Working Group between the EU and China, a preparatory meeting for the EU-China summit. While the EU is more muted towards China, it has nevertheless been pressuring China to make more efforts to address the global steel crisis, in particular by cutting subsidies and other support measures. The EU has also been having regular bilateral meetings with China through the EU-China ‘Steel Contact Group’. Similar bilateral ‘Steel Contact Group’ meetings have been set up by the EU with Japan, India, Turkey and the US.

While little has been achieved bilaterally or multilaterally to address the issue, several countries have been taking unilateral trade defence measures to protect their domestic industries. These are actions taken to protect a domestic industry from imports that are harming them, and there are generally three different types of trade defence measures.

First, anti-dumping measures generally impose duties on imported products that are deemed to be dumped and causing injury to the domestic industry producing the products in question in the importing country. Dumping generally occurs when goods are exported for less than their selling price in the home market, third-country markets, or below a theoretical domestic price based on costs and a profit that is deemed reasonable.

Second, countervailing measures are actions taken by the importing country whereby duties are generally imposed to counter subsidised imports, when these are found to cause injury to the domestic industry producing the products in question in the importing country.

Finally, safeguard measures are actions generally taken to protect a particular domestic industry from an unexpected surge of imports, once again when such imports cause injury to the domestic industry.

A fundamental difference is that, while anti-dumping and countervailing measures only target the country or countries specifically covered by the proceedings, safeguard measures target all third country imports, regardless of origin. This makes them far more trade restrictive than the other two trade defence measures, but far more attractive to the domestic industry. While anti-dumping and countervailing measures target behaviour that is considered to be unfair (certain subsidisation or dumping), safeguard measures simply target a surge in imports.

The EU currently has about 37 trade defence measures in force on steel products, and about 10 ongoing investigations. The majority of these investigations and almost half of the measures concern steel products from China, but several other countries are also targeted. In addition, the European Commission announced in its March 2016 communications – ‘Steel: Preserving sustainable jobs and growth in Europe’ – that it “is imposing a record number of trade defence measures to offset the detrimental effect of dumping on Europe’s steel industry” and that it will take steps to strengthen its trade defence measures and accelerate the process. As a result, the EU has started monitoring all imports of a long list of iron and steel products, as part of a series of measures that aim to support the EU steel sector. Under the system, the steel products covered will require an import licence when imported into the EU. This will allow the EU to act quickly to initiate investigations and impose trade defence measures.

With respect to the US, several trade defence measures are in force on many steel products, and a number of new investigations have been initiated recently. While China is usually the target, other countries covered by US measures or investigations include Austria, Belgium, Brazil, France, Germany, India, Italy, Japan, Korea, Malaysia, the Netherlands, Russia, South Africa, Taiwan, Turkey and the UK. In 2015, a historic number of trade defence investigations were initiated in the US, almost two-thirds of which relate to steel. Close to half of US trade defence measures currently imposed are on steel products, and of the ongoing investigations, about three-quarters involve steel products. Importantly, US initiations in 2016 are set to exceed the record number of 2015. Some of the duty levels imposed in the US exceed 500 percent.

Measures regarding steel products are in force and investigations ongoing in other countries as well. Australia has several trade defence measures and ongoing investigations regarding steel products originating in several countries, such as China, Finland, Indonesia, Italy, Japan, Korea, Malaysia, Spain, Sweden and Thailand. Twelve different steel products are facing anti-dumping measures in Australia.

South Africa has recently initiated a safeguards investigation regarding steel products. India has several measures in force and ongoing investigations against a number of countries as well, such as Brazil, Canada, China, the EU, Japan, Korea, Malaysia, Russia, Ukraine and the US. While often the target, China too has several measures in force and a number of ongoing investigations. For instance, in April 2016, preliminary anti-dumping measures were adopted on grain oriented flat-rolled electrical steel from Japan, Korea and the EU, ranging from 14.5 percent to 46.3 percent.

In fact, with most of the frequent users of trade defence measures appearing to have several measures in force and ongoing investigations against steel products, the measures and countries targeted are too many to list. With respect to anti-dumping alone, almost half of all investigations initiated worldwide in 2015 concerned the steel industry, with 41 new anti-dumping investigations targeting steel products having been initiated, as compared to 23 in 2012 and 2013.

The increasing global trend of using trade defence measures to target steel products is starting to raise concerns. For instance, whereas safeguard measures are only meant to be used in times of emergency, several countries have recently warned that their use is becoming commonplace, especially with respect to steel. Since 2013, almost 40 percent of safeguard measures were related to the steel sector, and around 80 percent of recently initiated safeguard investigations concern steel products.

But the problem is not limited to safeguard measures. At the World Trade Organisation (WTO), several WTO members complained at the end of April 2016 that the global steel crisis is resulting in a worrying increase in trade defence measures targeting steel products.

This is resulting in severe trade distortions. It has become commonplace for a particular company or industry to request the initiation of trade defence measures in their domestic market, while facing the imposition of trade defence measures in their export markets. It is furthermore resulting in increased costs for downstream users. Steel being a vital input for several industries, the economic effects of this phenomenon should not be underestimated.

Renato Antonini is a partner, and Eva Monard and Byron Maniatis are associates, at Jones Day. Mr Antonini can be contacted on +32 2 645 1419 or by email: rantonini@jonesday.com. Ms Monard can be contacted on +32 2 645 1510 or by email: emonard@jonesday.com. Mr Maniatis can be contacted on +32 2 645 1413 or by email: bmaniatis@jonesday.com.

Renato Antonini, Eva Monard and Byron Maniatis

Jones Day