‘Beggar-thy-neighbor’ steel policy ensures everyone loses

Global steel markets do not function properly; there is no doubt about it. National go-it-alone policies, however, are not the cure to this problem. Rather, they threaten to distort markets even further.

The Global Forum on Steel Excess Capacity was formed by the G20 leaders at the Hangzhou Summit in September 2016. Bringing together 33 economies, it is the first global platform on steel issues that includes all the world’s major producers.

{mosads}On Thursday, the members of the Global Forum were able to agree on a report on steel, setting out concrete recommendations how to reduce national steelmaking capacities through a market-based approach and increased transparency regarding existing subsidies for the steel industry.

Thrice per year, the Global Forum will examine participants’ subsidies for steel companies, including those allowed under WTO rules, as well as developments in the restructuring efforts of member countries. The results of the forum give the world a real opportunity to sustainably reduce overcapacity in the steel sector and eliminate market distortions.

Steel: A market unlike many others

Global steel markets are exceptional, as steel is an important input into many other industries and plays a central part in the industrial development of an economy. Steel is mostly used in construction and the production of cars, transportation equipment and machinery.

These sectors account for two-thirds to three-quarters of global steel demand. Demand for steel is volatile, with an above-average dependence on economic cycles. In boom times, when construction and demand for investment goods is high, demand for steel soars.

However, building out additional steelmaking capacity requires years of planning and construction. In a market with volatile demand and not-so-volatile supply-capacities, it is not uncommon that a market can — temporarily — be characterized by overcapacities.

Under normal circumstances, markets tend to naturally rebalance. However, global steel markets today are anything but normal. Few other markets are characterized by more state interventions. Overcapacities, particularly in China, have created considerable stress in many countries, including the European Union and the United States.

According to the German Steel Federation, between 2000 and 2014, the steelmaking capacity of the U.S. fell by 1.9 million metric tons (MT), while China added 990 MT. In comparison, the rest of the world added 313 MT. Moreover, the German Steel Federation estimates that two-thirds of global steel overcapacity, around 430 MT, is in China.

The U.S. steel industry has lost thousands of jobs over the past couple decades. During his presidential campaign, then-candidate Donald Trump addressed this issue, promising a renaissance of American manufacturing and repatriating manufacturing jobs back to the United States.

On this economic platform, Trump won many votes in the communities where this message resonated.

Trade defense instruments — a way out?

A way to counter dumped or subsidized steel are trade defense instruments, including antidumping tariffs. Dumping occurs if a company sells at a lower price in an export market than in its domestic market or below production costs.

If such dumping leads to significant damages in the importing country, its authorities may impose anti-dumping duties.

Since 2015, steel imports have been subject to increased trade defense investigations worldwide. From 2015-2016, the G20 countries initiated 404 new antidumping investigations, 157 of which, or 39 percent, concerned steel products, according to the World Trade Organization (WTO).

President Trump has announced that he will make significantly more use of anti-dumping measures in the future and raised the prospect of new tariffs on steel imports.

In addition to an investigation into potential threats to national security caused by steel imports under section 232 of the Trade Expansion Act of 1962, Trump issued an executive order on March 31 for enhanced enforcement of anti-dumping and countervailing duties.

Trade defense instruments are a justified method to address unfair trade, but they can also be protectionism-on-the-sly themselves. When differences between WTO members arise, they can use the WTO’s dispute settlement procedure to resolve the conflict.

A well-functioning dispute settlement procedure is key to ensure fair trade globally. The WTO fulfills another function: monitoring its members trade policies. WTO members are required to notify trade defense instruments, but many countries do not notify punctually. This must change.

What to do?

Global problems require global solutions. Trade defense instruments should not be misused for protectionist purposes. As history has shown, protectionism has seldom led to more market access.

Through their initial recommendations, the G20 Global Forum on Steel Excess Capacity has taken the first few steps to put the global steel markets on a path toward a more free-market footing. While we welcome this result, we now expect the G20 countries to reduce market-distorting subsidies transparently and reliably.

Doing so on a multilateral basis prevents further distortionary national unilateral actions in trade policy.

The problems of the global steel market cannot be tackled individually; only coordinated actions by the U.S., EU and other like-minded countries can effectively address overcapacity.

The steel markets are a textbook example of how a race of national subsidies, resulting overcapacities and protectionist measures can drive the international community into a beggar-thy-neighbor situation in which everybody loses.

Stormy-Annika Mildner is the sherpa of the Business 20 (B20), the official engagement partner of the German G20 Presidency and the head of the External Economic Policy Department at the Federation of German Industries (BDI). 

Daniel Andrich is the president and CEO of the Representative of German Industry and Trade (RGIT) in Washington, DC. RGIT serves as the liaison office of the Federation of German Industries (BDI) and Association of German Chambers of Commerce and Industry (DIHK).