MEMO/01/214
Brussels, 6 June, 2001
The EU and the Threat of US safeguards against
Steel Imports
Issue
Since the second half of 1998, after the import surge caused by the financial crisis in
South East Asia and increased supply from the former Soviet Union economies, the
American steel industry, its unions and sympathetic Members of Congress have
been pressing the US Administration to provide additional protection for its steel
industry. Following the defeat of the “Steel Quota Bill” in 1999, last year’s further
increase in imports and historically low prices have given new impetus to the “Stand
Up For Steel” campaign for Government intervention. The increasing number of
steel firms unable to resist a deteriorating market situation and seeking shelter from
their creditors under chapter 11 of the bankruptcy law has added even more political
weight to demands for protection.
Until its end, the Clinton Administration managed to diffuse such demands. But, the
new Administration is now coming under stronger pressure to protect the steel
industry by self-initiating a section 201 safeguard investigation. Indeed, it might have
to address problems in the US steel industry in order to secure passage in Congress
of essential legislation, like “fast track” authority. Accordingly, USTR Robert Zoellick
has repeatedly referred to S.201 as an option that can be “more useful than other
actions as it combines temporary protection with actions to strengthen future
competitiveness”, and stressed the requirement for strong commitments and
restructuring plans from the domestic industry to justify its use.
In addition to their direct effects on EU exporters, such measures would divert
substantial quantities of third party steel to the Community market. In advance of
any US decision, we are therefore highlighting the extent to which American
problems are home grown, the inappropriateness of safeguard measures, and the
dangers they represent.
The American situation - Underlying Factors
The US steel market has long been a battlefield where mini mills have been
progressively gaining supremacy at the expenses of traditional integrated
mills. Following the evolution of new technologies, mini mills have first ousted the
integrated mills from most of the long products market and, more recently, have
become leaders on the commodity flat products market. Today, integrated mills only
retain some beam production in the long product sector and mini mills produce
roughly one third of the hot rolled coils made in the US. Their cost and price
leadership for hot rolled and cold rolled flat products is unquestioned and they
already significantly influence the coated sheet market, where integrated mills retain
no more than 57 per cent of hot dip galvanized capacity.
The last episode of that war was displayed when Nucor decided to kill the price
increases for hot rolled, cold rolled, and coated flat products, announced by the
integrated mills, at the beginning of this year. It is very likely that the purpose of this
move was to push more quickly out of business those mills that are unable to
compete in the present market circumstances.
The current low price levels in the US market are therefore primarily caused by
ferocious price battles between US producers. Uneconomic US producers are
trying to keep their operations afloat by ‘dumping’ steel on the internal market at rock
bottom prices. Imports have been unable to compete with these US domestic prices
and as a consequence have dropped steeply since a number of months, to levels
that are now far below the average import level of even before the Asian crisis.
Subsidies granted by states and local communities have supported the
expansion of the mini mill sector. The US frequently attributes their industry’s
difficulties to competition from subsidised imports and opposes the financing of new
plants by international lending organisations such as the World Bank. In fact, rather
than merging and cutting capacity like the Europeans, the US has added capacity in
the nineties, mainly in mini mills that have received substantial direct subsidies from
individual (mainly southern) States and local communities. Moreover, outdated and
uneconomic capacity in the US is often receiving local subsidies to continue
operations.
The additional mini-mills mean that US capacity increased from 99.7 million tonnes
in 1993 to 118.6 million tonnes in 2000. Over the same period EU capacity fell by
1.9 million tonnes (detailed figures are in the annex - table 1).
In spite of a booming demand, most integrated steel producers have not
adjusted to a fast changing world market. While mini mills deployed all the new
technologies that gave them a significant cost advantage over the traditional
integrated mills, and enabled them to compete with imported products, most of the
traditional part of the US steel industry has lagged behind in closing older, non
economic facilities, restructuring and consolidating. Blinded by constant protection of
one sort or another, financially hindered by the millstone of legacy costs (including
pension commitments), they did not, unlike the European steel industry, use the
1990s to complete the restructuring process started in the 1980s under the
protection of the system of Voluntary Restraint Agreements.
Accordingly, the “decade of trade laws”, as the former CEO of Bethlehem Steel
called the 1990s, has only confirmed the decline of the integrated part of the US
steel industry. In spite of the longest period of US economic expansion, booming
steel demand, and, on average, high price levels, most integrated mills have been
unable to make sufficient profits to invest adequately in modern new facilities, reduce
their costs, and be competitive enough to withstand the current more difficult market
conditions (see chart 1 in annex). Furthermore, they have significantly lagged
behind their European and Japanese competitors in spending on research and
development, one of the keys to future competitiveness.
In addition, US financial analysts and major steel users are worried that US steel
producers do not have the critical size required to be world-class players. The lack of
concentration in the US industry is illustrated by the fact that whereas, in the EU, two
third of production (160 million tonnes) are produced by six companies, in the US,
two third of production (100 million tonnes) are produced by 12 companies.
Consequently, there is no American company amongst the world’s ten largest steel
firms. By contrast, before the proposed Usinor-Arbed-Aceralia merger that will
create the world’s largest steel producer, there are five European firms in the top ten.
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There is no such thing as a US steel industry crisis, but only a crisis of parts of the
integrated sector of the US steel industry. Many mini mills are faring well and have
showed good financial results, even during last year. Indeed, for some of them (e.g.
NUCOR, SDI) 2000 was a year of record profits. The specialty steel sector is not in a
bad shape either. The increase in energy prices is boosting the market of certain
pipe and tube producers. Even competitive integrated mills, like AK Steel or US Steel
have turned significant profits during 2000. The present market situation is ultimately
only significantly hurting those integrated companies that have not made the
necessary adjustments during the last ten years (further financial information is
shown in table 2).
The American situation - Safeguards would be an inadequate answer.
The reality behind the S.201 approach is much more complex than one might
suspect. Indeed, S.201 is not likely to bring the industry the across the board
protection it has been seeking, it would likely hinder the restructuring process, and
could affect the competitiveness of steel using sectors:
- Imports in recent months are already significantly below the average of import
levels before and after the Asian crisis.
- Protection of the US steel market would unduly benefit companies that do not
need it while it could delay the adjustment process of those companies that are
not competitive. Indeed, import relief would likely provide them with just enough
breathing space to stay in the market for another 3-5 years, harming the
competitive companies and further fuelling the ongoing campaign against
imports in the future.
- The probability of self-initiation of a S.201 investigation might cause a
destructive race to the ports by some exporters, as happened in the past.
- If restructuring actually takes place under the protection of safeguard, it will be
extremely difficult to avoid disruption of steel users’ supplies. The remedy would
have to be adapted not only to changes in demand but also to the reduction of
domestic supply resulting from the closure of uneconomic facilities.
The American situation – Another approach is necessary to resolve
the current crisis.
If:
- The current crisis is essentially affecting the ailing integrated part of the US steel
industry because it has been unable to adjust to market evolutions during the
last decade;
- Even in that part of the industry, competitive companies (e.g. AK Steel, US
Steel) have had good financial results in 2000;
- The mini mill sector is displaying record financial results in the flat products
sector and has already undertaken the necessary restructuring in the long
product sector;
- Stainless steel and OCTG producers are, on the whole, faring well
Then:
- A safeguard approach is not appropriate
- An across the board protection is not justified
- Other approaches from the US Administration and Congress are required to
address the real issue: remove the internal domestic obstacles that have
hindered the restructuring and consolidation of the integrated steel producers.
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Restructuring in Europe
There have been two substantial periods of major restructuring of the European steel
industry. The first, in the early 1980s, saw a reduction in hot rolled capacity of
31 million tonnes whilst more recently, a further 19 million tonnes was removed
between 1992 and 1996. This latter restructuring was characterised by much more
limited intervention by governments, widescale privatisations, and the maintenance
of the principle of free trade. There has also been a continuous reduction in the
labour force, from almost 1 million in 1973 to around 270 000 today.
The latest merger proposal between Usinor, Arbed, and Aceralia, following previous
mergers to form ThyssenKrupp and Corus, shows that restructuring is now an
ongoing, private sector process. Whilst, during periods of economic downturn, such
companies will still be faced with lower capacity utilisation rates (which cause some
commentators to talk of significant overcapacity in Europe), it is for the companies to
decide whether to maintain this capacity so it can be used during the next upturn.
Response to the South East Asia crisis
As table 3 shows, following the South East Asian crisis, the European Union has
absorbed more than its share of surplus steel production as compared to the United
States. Between 1997 and 1999 the European Union moved from a substantial net
exporter of steel mill products to a net importer of 800 000 tonnes. This represented
a deterioration in the EU’s trade balance of 13.4 million tonnes.
In 2000, the economic recovery in Europe was accompanied by a disproportionate
increase in steel imports (20% compared to 1999), with significant peaks in some
highly sensitive products like hot-rolled coils. Although EU steel exports also
increased in 2000 for only the second time (after 1999), the EU was a net steel
importer of 1.5 million tonnes.
By comparison, the United States, which has always been a significant net importer,
imported 28.8 million tonnes in 1997, saw this figure rise by 10 million tonnes in 1998
before falling back to 34 million tonnes in 2000. The change in net balance for the
United States is around half that for the EU. In addition, the figures for the early
months of 2001 show a significant slow down in American imports.
Instruments available to the US
Some in the US Administration or industry might argue that such safeguard
measures would have relatively little effect on the EU, as the level of our exports to
the US has been relatively stable. But this ignores the diversionary effect of
transferring most of some 3 to 9 million tonnes of steel imports (according to the
reference period) from the American to the EU market (as the only area capable of
absorbing such imports given the continued depression of Far East economies).
The European Union has been willing to fully share the burden of the South East
Asian crisis and economic difficulties in the CIS countries. Clearly, in such
circumstances, “burden shifting” by the US would be extremely unfair and strongly
opposed, as the US Administration could have recourse to a much more appropriate
approach.
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EU response
In advance of any decision by the US Administration, the EU is eager to clarify the
debate and arrive at a correct joint analysis of the market and the factors underlying
its evolution. The EU will also call for a special high level meeting of the all major
steel producing countries, to discuss the current situation and examine possibilities
for action. Should unilateral US safeguards ultimately be introduced, we would
review whether they were WTO compatible and, if not, take appropriate action in
Geneva.
To meet WTO requirements, the United States would need to show that there was a
surge in imports; that this increase in imports resulted from “unforeseen
developments”; and that there was a causal link between increased imports and
injury to the US.
Conclusion
Whilst no one would dispute that some parts of the US steel industry are in great
difficulties, this primarily results from a failure to restructure and build a competitive
industry. Rising imports in past years reflected a booming economy and insufficient
domestic supply. They are not the cause of the US industry’s problems. The EU
has taken more than its share of the burden of responding to the South East Asian
and CIS crises.
Safeguard measures would not resolve the integrated steel industry’s problems and
would represent an attempt to shift the burden of American restructuring to Europe.
It would risk provoking other countries whose steel industries faced difficulties to
adopt similar protectionist measures and so run counter to the EU and US’ joint
objective of an open, liberal trading system.
Note: all figures are in metric tonnes
Q&As
Safeguard measures wouldn’t significantly affect EU
True that the first round effects would be limited if import restraints were to be set at
their average level over the last three years (as EU exports have been relatively
stable over recent years). But countries facing limits on their ability to export to the
US would inevitably seek other markets. Depending on precise nature of US
measures, up to 10 million tonnes of steel could be diverted. And given continuing
economic difficulties in Japan and South East Asia, much of this steel would end up
in the European Union.
Safeguard measures are better than continuation of AD/CVDs as they can be
linked to restructuring
Do not disagree about need for US industry to restructure. But this should not be
achieved at the expense of industries in other parts of the world. Following the
traditional approach of the OECD steel committee, EU and US should share the
burden of responding to the South East Asia economic crisis. Safeguard measures
would instead shift the burden to Europe.
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EU companies do not have to pay health costs; US companies do
True that methods of financing health care are very different. But European
companies and workers pay for health care by means of higher taxes and social
security contributions than their American equivalents. Not for Europe to advise the
US on how to fund its health care - but these differences cannot provide a
justification for safeguard measures.
US companies do not face fair competition - others subsidise their steel
industries
Sixth steel aid code (in force since 1996) only allows subsidies for research and
development, environmental protection and closure. Commission has enforced code
rigorously to ensure a level playing field for all competitors.
Wrong to imagine that American industry is subsidy free. A report published last
year estimated that US state and local subsidies to the steel industry easily
exceeded $1.3 billion with the lion’s share paid in the 1990s.
Such state and local subsidies form only a small part of the favourable treatment
received by the US industry. . Other advantages include favourable treatment from
the Pensions Benefit Guarantee Corporation, the federal loan guarantee program,
applied research and development subsidies, “Buy American” programmes and
Clean Air Act exemptions. The same report estimated the total value of such Federal
subsidies since the late 1970s at $16 billion.
EU adopted “accompanying measures” when it restructured industry in 1980s
True that EU paid subsidies in the past - but these subsidies were used to
restructure, reduce capacity and create an internationally competitive industry.
Agreements on export levels were used at a time when such agreements were
acceptable under the GATT. Must recognise the new world of the WTO.
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