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On Global Trade & Investment

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No. 21 of 2016

FRIDAY, APRIL 1, 2016

Filed from Portland, Oregon

Click here for Tuesday China MES quote from Senator Wyden.

TATA, UK STEEL, AND THE BREXIT SEESAW

"Following the strategic view taken by the Tata Steel Board regarding the UK business, it has advised the Board of its European holding company, i.e. Tata Steel Europe, to explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts."

The Tata Steel Board

Cyrus Mistry, Chairman
March 29, 2015

CONTEXT I - STEEL

Steel is the quintessential cyclical industry, and it is clearly going through a period of wrenching difficulty, with looming job losses around the world. In the UK the steel crisis shot to the top of the political priorities list this week, following Tuesday's announcement from Mumbai, where the Tata Steel Board met on to consider the future of its UK facilities. Today's quote is taken from the statement the Board issued after that meeting.

The message that all parties took from that meeting was that Tata's UK steel facilities are on the auction block. More urgently, it was read to mean that production might be closed down, including at Tata's largest UK facility at Port Talbot, Wales, with some 4,000 employees. That's a big number but only a fraction the potential job losses that closing the Tata's UK steel plants might entail. More than one press account suggests that over 40,000 British jobs could be at risk.

There are several strands to this story, and to some extent any discussion of the issue needs to take account of these three big ones:

The global steel story, including the decades of high-profile antidumping and countervailing duty cases;

The more focused story of steel making in the UK;

And the connection, the tie-in, between this latest development and the UK's pending referendum on its membership in the European Union.

Voters in the United Kingdom of Great Britain and Northern Ireland will decide on June 23 whether to remain as a member of the EU or to leave.

The relationship between the referendum and the current steel crisis is the principal topic for today, but first let's take note of those other two elements, namely, the global situation, and steel making in the UK.

The Global Situation. Essentially, we are in a classic down period for steel, but one with a twist - the twist being China's tremendous excess capacity and her efforts to unload that onto world markets. The Office of the U.S. Trade Representative has scheduled a hearing on just that issue for April 12. Here is some background from the Federal Register notice announcing that hearing:

"According to the OECD Secretariat, global crude steel making capacity more than doubled from 2000 to 2014, with global capacity growth led by an unprecedented expansion in capacity by China. ...

"At the same time, global demand for steel in weakening."

Steel in the United Kingdom. As for the UK, we'll not go back to Henry Bessemer, the Englishman who patented the famous, eponymous, and indeed revolutionary process in 1856 that permanently changed the nature of steel making as well as the role of steel in modern economies. But, we will take note of more recent developments - and ownership - of the major British steel producers.

1967 - The British Government assumes ownership of 14 major steel producers, and the British Steel Corporation is formed.

1988 - The British Steel Corporation is privatized, becoming British Steel plc.

1999 - British Steel merges with the Dutch firm Koninklijke Hoogovens and becomes the Corus Group.

2007 - Corus Group is taken over by Tata Steel.

2016 - The next chapter, now being written.

CONTEXT II - LINK TO THE REFERENDUM

The Tata Board statement is about the finances of Tata Steel in the UK, not about the EU. But there is this:

"The company has also been in deep engagement with the UK Government in recent months seeking its support to achieve the best possible outcome for the UK business, within the restrictions of State Aid Rules."

The reference to state aid rules features prominently in the Brexit component of the steel crisis debate.

Some believe this most recent steel crisis is especially difficult because of Britain's membership in the European Union. If the UK were not an EU member, their argument runs, it would be free to offer whatever supports the government chose to provide. But it is an EU member, and for EU members, those "state aid rules" limit the subsidies they can offer their firms.

Another argument in the leave camp's quiver is that the UK would be better able to protect itself from Chinese dumping if Britain controlled its own trade policy.

But, "Hold on!" say, those in the remain camp. The EU would almost certainly be tougher on China - and the dumping of Chinese steel products into EU markets - if it were not for the role that Britain is now playing within the EU.

One strand of this argument has to do with the "lesser duty rule," which the WTO explains this way:

"Article 9 of the [WTO Anti-Dumping] Agreement establishes the general principle that imposition of anti-dumping duties is optional, even if all the requirements for imposition have been met. It also states the desirability of application of a "lesser duty" rule. Under a lesser duty rule, authorities impose duties at a level lower than the margin of dumping if this level is adequate to remove injury."

Both the U.S. and the EU have anti-dumping orders in place against steel imports from China. The EU, however, uses the "lesser duty rule," in these cases, while the U.S. does not. The difference in the duties is dramatic. "EU tariffs on steel are currently just 9 percent, compared with the United States which has levies up to 236 percent," according to a recent article in the Telegraph.

Putting all of this in a Brexit context is complicated by the fact that the government of Prime Minister Cameron has been lobbying within the EU to retain the lesser duty rule while others have sought to lift it. In addition, the Cameron government has been urging the EU to grant China the market-economy status, MES, it wants. Whatever the merits of that case, market economy status would work to China's advantage in dumping disputes.

We shall leave for another day the larger question of UK steel policy vs. the UK's China policy. Suffice it to say that the back-and-forth of those two sets of policies are now part of both debates, the one over the steel crisis and the other over the EU referendum.

COMMENT

There are lots of other issues here, and the situation is fluid to say the least. One of those issues has to with the electoral politics of the referendum and how this steel crisis is likely to affect them. That's anyone's guess, but let's speculate. If in fact there are major job losses in places like Port Talbot between now and June 23, that could well translate into more "leave" votes from those regions.

On the other hand, if a Continental white knight - Germany's ThyssenKrupp, for example - were to come to the rescue, the remain camp might be the electoral winner, depending of course on how things actually played out, that is, whether jobs were lost or saved.

We expect to return to these issues soon. For today, we'll conclude with these three thoughts:

First, it is clear is that the June 23 referendum on Britain's EU membership is now very much a hostage to fortune. Any development of any significance will have an EU referendum dimension to it. In other words, all such issues between now and June 23 will be harnessed to the Brexit debate.

Second, one has to be impressed by the global scope of this crisis: today's made-in-China glut of steel, the board meeting in Mumbai that set the steel issue ablaze in London and Port Talbot, and, of course, the referendum. Formally, it is simply about the UK's relationship to the rest of the EU but, as a practical matter, it will affect global commerce writ large.

Finally (and this is more in the nature of a footnote), the EU's limits on state aids are a boon to the trading system to the extent that they limit subsidies. As to how effective they are, it is a good guess that some of the 28 manage to get around them. For those honoring them, however, they have almost certainly been a help to ministers in EU Member States. When you have to say "no" to someone, it is nice to be able to point the finger of blame elsewhere, to EU regulation for example.

Those rules also represent an area where the EU is "ahead" of the United States. We put the word "ahead" in quotes for a reason. We are not arguing that Washington should curb the competition among the various states. We are only noting that, for the most part, it doesn't.

SOURCES & LINKS

Tata Steela's Full Statement is a link to this document as published by Wales on Line.

USTR Announces hearing is a link to the USTR Federal Register notice of March 4, with details on the upcoming hearing on the steel situation and background on the issue to be address.

Tata's Pain is a Bloomberg story that includes some speculation on the possible involvement of ThyssenKrupp in the current UK steel crisis.

From the MP for Port Talbot takes you to an article by Stephen Kinnock, which appeared earlier this week in The Guardian. Mr. Kinnock, a member of the Labour Party believes that the government should do whatever is necessary to save the Port Talbot Plant, including nationalization. He emphatically does not believe that leaving the EU would make things better.

EU Row Over Steel takes you to the Telegraph article mentioned above, including the reference to EU and U.S. tariffs - anti-dumping duties.

Job Cuts At Port Talbot is a Sky News Report with some figures on this issue.

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