Global forum formed to reduce overcapacity

The United States government and others, including the European Union, are amping up the volume on the rhetoric in an effort to get China to reduce its overcapacity and overproduction of steel. It’s a move the domestic steel industry has been pushing for and its leaders have expressed gratitude for the additional pressure being placed on the People’s Republic. Now the question becomes whether all the talk will do any good.

It all started in July of last year when the issue of China’s steel industry was raised at a meeting of the G20, representing the world’s largest economies. From there, the G20 countries were joined by several others—all steel-producing countries and members of the Organization for Economic Cooperation and Development (OECD)—to form a 30-country group called the Global Forum on Steel Excess Capacity. The forum, which will report annually to the G20 ministers, is supposed to facilitate market-driven solutions to decrease excess capacity in the global steel market.

Excess Capacity

At issue is China’s build-out of excessive steel production capacity, a situation which has led to a global glut of the metal, falling market prices, and aggressive exporting by China. According to the U.S. Department of Commerce, global excess capacity has more than doubled from 2000 to 2014, and continues to expand. The impact of the crisis on U.S. industry has included price declines, steel plant closures, and over 15,000 jobs lost. A recent EU report noted that China’s spare steel production capacity has led to “a dramatic increase of exports, the destabilization of global steel markets and depression of steel prices world-wide.” Steel imports from China to the EU have surged in the last three years and market prices for some steel products have dropped by 40%. The U.S. and EU have brought trade defense actions against China, seeking antidumping and countervailing duties.

“Government directed subsidies make fair and responsible trade in steel all but impossible, drive down steel-related wages and employment in the United States, and contribute to inefficiencies throughout the steel supply chain,” said Richard Chriss, executive director of the American Institute for International Steel (AIIS). “Excess steel capacity created and sustained over many years hurts a host of steel-related industries in the United States.”

“We are pleased that this important Global Forum began its work, and especially appreciate the leadership and commitment of the U.S. government representatives to address the global steel overcapacity crisis and the market-distorting policies and practices that have enabled it,” said Thomas J. Gibson, president and CEO of the American Iron and Steel Institute (AISI). “The high levels of unfairly traded steel imports in the U.S., and the massive build-up in steel capacity in other countries that fuels it, are the most critical issues facing the steel industry today. We look forward to the Global Forum continuing to engage key countries in a cooperative effort to help level the playing field for the North American steel industry.”

The AIIS last year issued a series of principles to guide the U.S. government in its excess steel capacity talks. “The ultimate aim of these international discussions should be to turn political commitments into new binding disciplines on SOEs [state-owned enterprises] and related trade-distorting subsidies,” a clear reference to China as the primary offending party.

First and foremost, among SIIS’s principles, was to seek commitments in international forums such as the G20 to reduce excess steelmaking capacity. That principle appears to have been largely accomplished. Another of the principles was to “engage as many allies as possible in the overall effort to help push this process forward.”

EU Steeled to Reducing China Steel

The European Union appears to be solidly behind the efforts to reduce China’s excess steel capacity. The EU is the second steel producer in the world after China, producing on average 170 million tons of crude steel per year.

The European Commission—the EU executive body—last year proposed a new method for calculating dumping on imports from countries where there are significant market distortions, or where the state has a pervasive influence on the economy. “The purpose,” said an EC statement, “is to make sure that Europe has trade defense instruments that are able to deal with current realities—notably overcapacities—in the international trading environment.”

The European Commission has—as has the U.S. through the International Trade Commission (ITC) and the Department of Commerce (DOC) —also imposed anti-dumping and anti-subsidy duties, to shield the EU’s steel industry from the effects of unfair trade. But these defensive measures only address the effects of global overcapacity on trade — not its root causes. That’s why the formation of the Global Forum on Steel Excess Capacity is seen as an important step toward rightsizing global steel capacity.

First Step

The forum’s goals are ambitious, noted the EU’s trade commissioner for Cecilia Malmström. “It recognizes that subsidies and state support contribute to overcapacity and require attention,” she said. “Members will exchange information and policies, and address overcapacity, by enhancing the role of the market and changing the structure of the industry.”

“This is the first time that this issue has been publicly addressed at such a high level by so many major countries in such a prominent forum,” said Chriss. “As such, this is an important step in the right direction.”

Another lever the U.S. can hold over China’s head on the steel issue is the grant of market economy status (MES). China has claimed that it should automatically receive market economy status following the 15th anniversary of its accession to the World Trade Organization (WTO) on December 11, 2016—a designation which could have an impact on steel dumping cases brought in the U.S. However, U.S. law requires that the Department of Commerce make an MES determination based on a six-factor statutory test. Former Commerce Secretary Penny Pritzker reiterated that position last November, much to the delight of the domestic steel industry.

The debate resolves around how to parse the language of China’s 2001 WTO Protocol of Accession. Most legal experts don’t think China is automatically entitled to MES, but the debate is underway.