Continued from Part 1.
Crisis-stricken steel sector in lead against China MES
What China critics do point out rightly is the fact that, in particular since the 2008 economic crisis and an ensuing US$ 600 bn stimulus package, government intervention in the Chinese economy has substantially increased. Subsidisation of capital-intensive industries – such as the steel sector – have led to massive overcapacities which are indeed distorting trade flows. Data by the European metals group Eurofer show that coated steel imports from China, for example, surged steeply from 95 million tons in 2014 to 123 million tons in 2015. China has started to tackle its overcapacity problem. It has also stopped subsidising steel exports via tax rebates. But the process of downscaling its steel and other industries will take years.
The EU’s steel sector is among the most active players in a well-organised campaign by business organisations from the chemicals, ceramics, solar panels, textiles, bicycle and other sectors against granting China ‘MES’, as the issue is called. The anti-China-MES camp in the EU blames China for the current crisis in the steel sector. Yet the crisis is the result of a variety of factors, chiefly among them a massive commodities price plunge that is not specific to the metals sector. Steel prices have been affected by the very economic slowdown in China many have called for in a long time to allow it to transition to a more sustainable, consumer driven economic model.
The most important factor in the current steel crisis are prices. The commodity super cycle of the last decade is over. Metals prices have dropped. But despite the recent price falls, these have not reached pre 2006 levels, as shown by the Cologne-based IW Köln Institute’s industry metals price index (below). Most likely, the prices are returning to ‘normal’ after more than half a decade of excessively high prices.
Figure: IW KÖLN, Industrie-Metall-Index, January 2016:
The debate on steel, China and antidumping needs further putting into perspective: the EU steel industry is crying wolf about its imminent demise and destruction. In fact the EU is the second largest producer of steel after China. And the EU is a net steel product exporter.
Back in 2011, when EU coated steel imports from China surged to 165 million tons up from 105 in 2010, few in Brussels or Washington were railing against dumped Chinese products. This indicates that the current campaigning is about something else. And this is nothing else than defending a deeply ingrained but also less and less effective ‘business model’.
The iron and steel sector is worldwide, and in the EU, the largest beneficiary of antidumping cases, which make up close to one third of all antidumping cases globally. This dominance of the steel sector in antidumping has been persistent throughout the years (and decades: after all antidumping was invented in the interwar period for steel) be they economic crisis or boom years. For the steel sector, antidumping is a method to keep competitors out, and to manage prices – not something temporary to fight against ‘unfair’ trade.
Non market economy status makes exporting countries more vulnerable to abuse by EU antidumping authorities. EU antidumping law obliges the Commission to consider requests by individual firms under investigation to be treated as operating in a market economy environment. A February 2016 ruling by the Court of Justice of the EU invalidated two antidumping measures against shoe imports from China and Vietnam on precisely the grounds that the Commission had failed to consider the requests of the exporting firms. In January 2016 a report by the WTO’s Appellate Body upheld an earlier ruling of the Dispute Settlement Body on antidumping duties on steel fasteners against the EU for the way it handled its ‘analogue country’ price methodology in the case.
Most trade economists don’t think antidumping is sound policy, but simply a blunt protectionist tool. For political reasons it is often considered an expedient instrument to accompany transitions and restructuring processes in industries with competitiveness problems. In some sectors, like textiles in the EU, this has clearly been the case. A flurry of antidumping cases were brought after the end of textile import quotas in 2005 under new WTO rules then, but now the textile industry rarely resorts to antidumping as it has restructured and become competitive again, focusing on creative, value-intensive activities.
From a trade economist’s perspective, there are better tools to deal with import surges: safeguards, which are legal under the WTO, but less discriminatory; and accompanying measures to help workers retrain and find new jobs and companies restructure and become more competitive. In the current steel crisis, the EU Commission has started proposing measures of the latter type to help the steel industry cope with the crisis. It has not proposed safeguards.
The EU never resorts to safeguards : these have the ‘disadvantage’ of not permitting targeted discrimination against specific imports, and may only be introduced for relatively short periods, whereas antidumping measures are in place for five years, and are frequently extended for another five years. In the current steel crisis, safeguards would probably be more appropriate to avert what apocalyptic commentators in Brussels call the impeding ‘destruction’ of the EU steel industry. Indeed the steel industry is also grappling with a sudden rise in imports from other countries such as Russia or Korea.
A 2015 study by the consultancy Ernst and Young on the global steel industry entitled “Globalize or Customize: Finding the Right Balance”, highlights that the steel sector is “under pressure to globalize”. In this report, E&Y Partner Carlos Bremer does not mince his words: “Steelmakers can use their resources to fight with trade barriers what appears to be the inevitable globalization of the market, a battle we think they will lose, or they can admit the inevitable and focus on ways to become more competitive.” Consultants like Ernst and Young are not academic ivory tower economists with a purist free trade mindset: they must be trusted for knowing what makes businesses profitable.
To be continued in Part 3.
