The EU risks trade relations with China over the Tata hype about steel

Visit by Jean-Claude Juncker, President of the EC, to Strasbourg, where he visits the Council of Europe. © European Union , 2016 / Source: EC – Audiovisual Service

It is indisputable that we are running a very important period regarding the trade relations between China and the EU. On the one hand, it is only today that the Commission’s online public consultation on future measures to prevent dumped imports from China is closing; a consultation which had earlier opened on 10 February. The EU is conducting this public dialogue to decide whether it will grant to China the Market Economy Status (MES) by the end of this year.

The Market Economy Status

In short, under Section 15 of the Chinese WTO Accession Protocol, China can be treated as a non-market economy (NME) in anti-dumping proceedings if Chinese firms cannot prove that they operate under market economy conditions. The main implication of NME status in anti-dumping proceedings is the possibility to use other methodologies to determine the normal value of the good, instead of using domestic prices to compute the dumping margin. In general, NME methodologies to calculate normal value have proven to lead to higher anti-dumping duties. In view of these higher duties, and the fact that China faces the highest number of anti-dumping investigations, obtaining earlier recognition of Market Economy Status (MES) has been one of the country’s major foreign policy objectives since 2003. Moreover, China has argued that, according to Section 15(d) of the WTO Accession Protocol, the Section 15 provision allowing for NME methodology expires after 11 December 2016, resulting in a legal obligation to grant MES to China after that date. This interpretation of the section remains highly controversial.

The steel issue

On the other hand, the EU ongoing debate regarding the antidumping rules towards China and the MES status of the country comes in a period where there is a big discussion about China’s steel production and its effect on the rest of the world. Only last Monday the OECD’s High-Level Symposium on Excess Capacity and Structural Adjustment in the Steel Sector took place in Brussels, where the major issues of the steel sector globally were addressed. The main topic discussed there was overcapacity, which combined with the reducing demand for steel around the world and its price tumble (40% decrease in the last two years), poses an imminent threat for the global economy. If one considers the millions of people who are working in the sector globally to cover a demand of 1,488 million tonnes in 2016 (already 0,8% less than 2015), steel remains a major issue threatening business profits and workers’ welfare.

The Tata hype

Only in Europe some 360,000 people work in the steel sector. Amidst a worrying climate about the impact of the sector on the global economy, Tata announced earlier this year that they will close down their steel production factory at Port Talbot in Wales. The factory is officially on sale now and some 4.000 jobs in the UK could be lost, although the exact number keeps changing in the news every week. Most importantly, Tata attributed their decision to shut down their operations in Wales to their bad turnover caused by cheap Chinese steel imported in the EU.

Juncker against China

The Tata case was an “opportunity” for the European business and policy-makers to intensify their campaigns against Chinese steel or even Chinese products as a whole. Exactly one week ago the President of the European Commission, Mr Jean-Claude Juncker, seized the “opportunity” in front of MEPs in Strasbourg. “The steel industry in Europe has problems. Problems we should take seriously. Steel isn’t any old industry. The steel industry is no longer just heavy industry, it is now high-tech industry”…“Steelworkers are highly skilled specialists and they deserve our unconditional support.” He then went on, targeting clearly China: “Free trade should be fair trade. We are now investigating steel products from China to determine whether they were dumped on the market and we will take other measures if necessary.” Like this, the former Premier of Luxembourg, the home of ArcelorMittal, which is a world pioneer in steel, gave the clear political message that the EU is getting ready to push the button against Chinese steel imports.

The EU already last March had announced their plans to confront the steel crisis in Europe and thus answer to the concerns of the European industry and policy makers. The plans include speeding up tariffs on import products that are “dumped” below market price level and increasing the ability to impose heavier duties on imported steel products. The EU also plans to create an alert mechanism to spot imported steel products that could potentially harm the interests of the EU producers.

The bigger picture instead

It is true that the steel sector faces some major challenges globally that all stakeholders need to commonly address and take action upon. However, the solution cannot be to shoot one’s leg. China, the world’s biggest steel producer, relies on its huge export strength to maintain the 6,5% to 7% growth in 2016, a rate that the entire world depends upon. Especially this year, that the Asian giant is facing short term economic turmoil and weakened internal demand. Pressing the button to release heavy tariffs against Chinese steel is a risky gamble that will have inescapably immediate repercussions to the world economy and the EU as well. Besides, China remains EU’s greatest trade partner.

On a separate note, Tata’s move to shut down the factory in Wales and attributing it to China’s steel imports can be misleading, as the Indian company has its own interests and responsibilities regarding their own operations in Europe. Hence, the Tata case should not float an unfair hype against Chinese steel. Most importantly, it should not interfere with the Market Economy Status that China seeks from the EU next December. Instead, a fair and balanced approach needs to be applied, which is in the interest of all parties concerned.

No room for protectionism in the year of the monkey

All in all, the world economy is undeniably shaky in 2016, the year of the monkey. It is in times like these that the problems of the economy should be discussed and resolved with a generous spirit that gives room for the bigger picture, rather than narrow protectionism. For the world and especially the EU economy to live by 2016 and return to prosperity thereafter, a balanced and wise global approach is required.

For instance, it is controversial to see Juncker’s investment plan asking for billions of euros of investment from China, due to the lack of investors inside the stagnant EU economy, and at the same time the EU to greatly jeopardise its strong trade bonds with the Asian giant.

The Sting will be following this primordial trade issue closely.