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25/09/2016

Rating agency says ignoring ‘lesser duty rule’ could protect European steel against China

Trade & Society

Rating agency says ignoring ‘lesser duty rule’ could protect European steel against China

Although more than 4.000 jobs have been lost in the steel industry in the UK, the country is against limiting the "lesser duty rule".

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Pressure is mounting on EU member states to change the rules that would allow imposing higher tariffs, after Fitch rating agency said that it could help to reduce the dumping of Chinese steel to Europe.

The European Commission urged the member states in recent weeks to adopt its 2013 proposal to limit the ‘lesser duty rule’.

The rule states the EU imposes trade defence measures below the dumping margin if such lesser duty is sufficient to remove the injury to the EU industry (i.e. at the level of ‘injury margin’).

The backers, led by the United Kingdom, consider that ignoring the lesser principle rule would harm other parts of the value chain, so the price of imposing higher tariffs would be paid by importers, users and consumers.

EU division dilutes efforts against steel dumping

Over 5000 steel employers and workers will take the streets in Brussels today (15 February) calling for more protection from Chinese imports, as the Commission and Dutch presidency were passing the buck on increasing tariffs.

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But Fitch argues that ignoring the ‘lesser duty rule’ could materially reduce the steel imports to the EU.

This would help to address the severe crisis affecting the steel sector, where 75,000 jobs have been lost over the last years.

EU ministers pledge concrete action for embattled steel sector

European Union ministers agreed a list of “concrete actions” to deal with the crisis facing the steel sector – but failed to agree on urgent measures that steelmakers are demanding to stem a flood of cheap imports from China which caused 5,000 job looses in the sector over the past three months.

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“We believe removing the rule would have a significant impact on Chinese imports in particular, because the injury margin calculated on these imports is much smaller than the dumping margin,” the firm said in a statement.

Duties imposed by the Commission on Chinese cold-rolled flat steel products last month were 13.4%-16%. But if the lesser duty rule had not been in force the duties imposed would have been 52.7%-59.1%.

“We believe Chinese firms would be much less likely to accept duties at that level even over the relatively short term and would either cut production or seek to move volumes to other regions,” the firm said.

The rating agency added that in isolation this would be positive for the EU steel market and for large rated producers such as ArcelorMittal and ThyssenKrupp due to our expectation of positive demand growth from key steel-consuming sectors in the EU in 2016.

The comments came amid the growing pressure from the European steel industry and a group of member states, led by France, to modernise the trade defence instruments, including the limitation of the lesser duty rule.

While the crisis of the steel sector has worsened, the EU is in the process of deciding the best approach to grant China ‘Market Economy Status’ (MES).

EU straining to grant China MES

Trade ministers met on Tuesday (2 February) to weigh options presented by the European Commission on the thorny issue of granting China market economy status.

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China has argued that under Section 15 of the WTO Accession Protocol there is a legal obligation to grant it MES from December 2016.

Andres Barceló, Director General of the Association of Steel Companies in Spain (Unesid) told Euractiv.com that limits on the lesser duty rule should not come as a sweetener to accept the market economy status for China later this year.

Fitch also warned that the impact of ignoring the lesser duty rule may be negated if the EU grants China Market Economy Status, as this would effectively limit the level at which the EU could impose tariffs.

The use of non-market-economy methodologies has generally led to higher anti-dumping duties in past trade investigations.

Positions

Axel Eggert, the director general of Eurofer, said that "Brussels’ trade policy must be reinforced, forcefully tackling distortions by third market players. The finger is most often pointed at China, but dumping of steel is widespread and is undertaken by a number of our trade partners."

In an op-ed published in Euractiv, he wrote that "the EU’s trade remedy instruments must be made more effective and quicker to deploy in order to defend against unfair trade practices. Presently, the year-and-a-half long complaint and investigation process sacrifices jobs with no commiserate benefit. Compared to other major trading blocs, the EU’s trade defence arrangements are pathetic."

Chinese Ambassador to the EU, Yang Yanyi, has called on member states to moderate their tone and take a constructive attitude. In an op-ed published in EurActiv, Ambassador Yanyi said China is pushing through comprehensive reform and further opening up with the determination of a “warrior who cut off his wounded wrist to save his life”.

“For example, to effectively deal with the overcapacity problems of the steel industry, China has made unremitting efforts to control new capacity and eliminate outmoded capacity,” she wrote.

 

Background

When China joined the WTO in 2001, it was considered a centrally planned economy, and the terms of its accession required the country to be treated as a "non-market economy" for 15 years.

In a nutshell, prices and costs were regarded as artificially low and unreflective of normal market forces due to state subsidies that its domestic industries enjoyed. As a result, it was easier for other countries to launch anti-dumping probes and impose high duties on Chinese exports.

Beijing has long interpreted the accord to mean that it would automatically be given MES at the end of 2016. Already, more than 90 countries, including the ASEAN states, recognise the MES of China. Australia and New Zealand have agreed to an FTA with China. However, the US, the EU and Japan haven’t given their say yet on the MES. They would need to pronounce themselves by the end of the year.

Further Reading