Report from the Commission to the Council on Steel re-balancing action
Date: 2002-07-17
Institutions: European Commission
Subjects: United States, economic analysis, financial equalisation, international market, iron and steel industry, iron and steel product, protective clause, report, steel

EN

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.7.2002
COM(2002) 428 final

REPORT FROM THE COMMISSION TO THE COUNCIL

on Steel re-balancing action

   
REPORT FROM THE COMMISSION TO THE COUNCIL

on Steel re-balancing action

1.

INTRODUCTION

Article 3 of Council Regulation (EC) No 1031/2002 of 13 June 2002 establishing additional
customs  duties  on  imports  of  certain  products  originating  in  the  United  States  of  America1
requests  the  Commission  to  present  a  report  on  "the  state  of  discussions  with  the  USA,  in
particular on the issue of product exclusions and on trade compensation …".

In  the  light  of  the  delays  in  US  decision  making  on  the  so  called  "exclusions"  (of  products
from  the  safeguard  measures)  the  Commission  will  only  be  in  a  position  to  present  its
recommendations on this important issue, including necessary proposal later this week.

As  essential  background,  this  report  presents  the  impact  of  US  steel  safeguards  on  US  and
world markets (2) and a state of play on WTO dispute settlement, including envisaged timing
(3).  This  report  then  assesses  the  current  state  of  play  on  product  exclusions  (4)  and  on
compensations (5).

2.

THE IMPACT OF US STEEL SAFEGUARDS ON US AND WORLD MARKETS

When  the  US  safeguards  were  announced  on  5  March,  President  Bush  said  “The  U.S.  steel
industry  must  use  the  temporary  help  today’s  action  provides  to  restructure  and  ensure  its
long-term competitiveness.”  This  section  examines  the  impact  of  these  measures  on  the  US
steel  market,  the  likelihood  of  restructuring,  and  the  consequences  that  will  follow  the
withdrawal  of  these  measures  after  the  WTO  ruling. It  concludes  that  the  safeguards  are
producing very large artificial price increases, thereby encouraging the maintenance of
uneconomic  capacity  and  that  withdrawal  next  year  will  cause  further  market
disruption.  Paradoxically,  by  any  yardstick  it  is  the  US  economy  (in  particular  steel
users)  and  the  international  and  domestic  reputation  of  US  trade  policy  that  have
suffered from the adoption of these measures, whereas the economic impact outside the
US and on the EU has been so far more limited.

2.1.

The impact of the US steel safeguard on the US market

2.1.1.

Impact of Safeguard on US steel prices

The ITC recommendation in December and the Presidential announcement of steel safeguards
on 5 March have had a dramatic impact on US steel prices. Hot rolled coil prices for delivery
in the third quarter of this year are more than 20 per cent up on prices in the first quarter and
over 40 per cent higher than those of the third quarter of 2001.

Such  a  substantial  price  increase  is  even  more  remarkable  given  that  US  steel  prices  were
already  significantly  higher  than  those  in  the  rest  of  the  world  (an  average  of  around  9  per
cent higher than EU prices over the period 1995 to 2001 and somewhat over 9 per cent in the

1 

OJ L157, 15.06.2002, p.8.

2

                                                
last quarter of 2001). Similarly, in October 2001, US prices were higher than Japanese prices
by between 10 (quarto plate) and 50 (wire rod) per cent

2.1.2. Other factors tending to maintain uneconomic US production

The ability to maintain prices consistently in excess of world levels can be accounted for in
part by the high level of protection already enjoyed by the US steel industry. It is estimated
that there are in excess of 200 anti-dumping and anti-subsidy measures covering this sector,
which both discourage competition from imports and put upward pressure on prices.

In addition, and contrary to the impression that is often given by the United States, US steel
firms  receive  a  wide  range  of  federal,  regional  and  local  subsidies.  According  to  a
comprehensive study published in 19992, “the steel lobby has won at least $16 billion ($21.8
billion  in  constant  1999  dollars)  in  federal  subsidies  for  domestic  steel  makers  from  US
taxpayers  with  additional  billions  received  from  state  and  local  governments.”  These
subsidies  include  pension  bailouts,  tax  refunds  and  loopholes,  environmental  regulation
exemption subsidies, “Buy America”  requirements and emergency loan guarantee schemes.

A  necessarily  partial  survey  of  publicly  available  information  reveals  at  least  six  US  steel
firms  receiving  Federal  and/or  State  assistance  this  year,  including  a  $250  million  Federal
loan guarantee, a grant of $30 million from State governments and a variety of tax breaks as
well  as  a  State  guarantee  to  a  local  utility  company  to  ensure  that  it  recovered  the  costs  of
providing the power supply for a proposed new electric furnace.

2.1.3.

Impact of high prices on US production

Although more than 30 US steel companies are in one or other form of bankruptcy, most have
continued  producing  steel.  In  addition,  recent  price  increases  have  meant  that  a  certain
number of mothballed facilities (including parts of the former LTV group) have restarted or
plan to do so in the near future. In addition, there are examples of firms planning to upgrade
or expand their capacity. By the end of the year, we might expect to see a return to the market
of  LTV  (4-6  million  tons),  Trico  (1.5  million  tons)  and  possibly  other  mills  currently  in
bankruptcy.

So far, US crude steel production this year has been broadly comparable to that of 2001. As
additional plants start or increase production in response to the higher prices, there could well
be a moderate decline (some $40 – 60) in price levels over the coming months. And a more
dramatic  drop  in  prices  -  in  other  words,  a  rapid  reversal  of  the  “bubble”  element  of  the
current  price  levels  -  cannot  be  excluded.  Such  estimates  are,  of  course,  averages  and  price
reductions will vary considerably from product to product and to some extent from producer
to  producer.  In  particular,  as  sheet  prices  have  risen  far  more  than  those  for  plate  or  long
products, they may be more vulnerable to a reversal.

Further downward pressure on prices may arise from the decision of US firms that use steel as
an  input  to  move  production  offshore  in  response  to  the  higher  prices  and  section  201
additional  tariffs.  The  extent  of  this  delocalisation  will  depend  on  the  number  of  product
exclusions  that  are  granted  for  types  of  steel  that  are  not  available  from  US  domestic
producers. Demand factors will also be relevant. At present, automobile production appears to

2 

“Paying the Price for Big Steel”  by William H Barringer and Kenneth J Pierce (American Institute for
International Steel)

3

                                                
be  holding  up,  but  construction  is  in  decline.  Given  uncertainty  about  developments  in  both
the currency and equity markets, forecasts are more than usually hazardous.

2.1.4.

Impact of the elimination of the US steel safeguards on the US market

We expect the WTO dispute settlement process to result in a definitive ruling against the US
safeguard  measures  in  the  second  half  of  next  year,  likely  around  August.  Following  this,
either the measures will be withdrawn or Article 4 of Council Regulation (EC) No 1031/2002
of  13  June  2002  will  automatically  come  into  effect.  This  would  mean  additional  duties  on
certain products imported from the United States with a value of $2.2 billion. Faced with this
alternative,  it  is  to  be  expected  that  the  US  Administration  will  chose  to  conform  to  their
WTO obligations and withdrawn the steel safeguards.

The  withdrawal  of  these  protectionist  measures  and  a  consequent  increase  in  imports,  at  a
time  when  US  steel  prices  are  already  likely  to  be  on  a  downward  trend,  could  lead  to
anything from a further significant decline to a collapse in prices. Either would pose, in a very
acute form, the question of whether US firms - particularly but not exclusively those that had
added  capacity  during  the  period  of  high  prices  -  could  be  viable  at  price  levels  close  to  or
even below those experienced in EU or far eastern markets.

In  summary,  it  can  be  seen  that,  although  the  US  Administration  promoted  its  policy  as
offering  the  industry  short-term  protection,  enabling  it  to  restructure  and  improve  its
competitiveness, the effect has been to reduce the incentive to take difficult decisions such as
closing  uneconomic  plants. Indeed  one  could  say  that  the  effects  of  the  measures  are
almost precisely the reverse of the stated objectives.

In the longer term, when the price bubble bursts, the situation will deteriorate further. Some
time  in  the  second  half  of  next  year  we  are  likely  to  see  yet  another  repetition  of  the  “steel
industry crisis”  that  has  occurred  every  three  to  five  years.  No  doubt,  as  in  the  past,  such  a
crisis will lead to calls for yet more protectionism, including WTO illegal use of antidumping
and  countervailing  duty  measures.  However,  the  cycle  will  only  be  broken  if  the  US
authorities and industry are willing to address the underlying issues, notably the problem of
uneconomic capacity and market distortions.

2.1.5. US Competitiveness

Over the past twenty or thirty years integrated steel producers in high wage economies have
faced  increasing  competition  from,  on  the  one  side,  mini  mills  exploiting  technological
advances  to  produce  steel  more  cheaply  and,  on  the  other,  firms  located  in  developing  or
transitional  economies  whose  labour  costs  are  significantly  lower.  Successful  integrated
producers  have  responded  by  improving  their  own  technology,  focusing  on  higher  quality
products and being extremely responsive to their customers’  requirements. In many cases, this
has involved mergers and rationalisation to create larger, international companies, which are
better able to exploit economies of scale.

By contrast, the large, integrated U.S. steel producers have been in structural decline over this
period in the face of intense competition from their domestic mini-mills, which, using much
smaller scale plants with electric arc furnaces, have grown from 10 to more than 50 million
tons of capacity. Thus, in considering the US steel industry’s competitiveness and the need for
restructuring, it is essential to draw a clear distinction between what, in reality, are two very
different industries.

4

Table 1

Estimated Pretax Cost of production for Sheet Products, 1998 and 2000 ($ per Metric
Tonne)

Producer

March 1998

April 2000

Japanese Integrated Firms

U.S. Integrated Firms

German Integrated Firms

Brazil

South Korea

U.S. Mini-mills

Former Soviet Republics

474

483

467

441

336

394

331

496

481

440

389

378

376

283

Source: World Steel Dynamics, Steel Strategist #24, June 1998 and  Steel Strategist #26,July
2000.

Another way of expressing this point is looking at the hourly labour required to produce a net
ton of steel. On this basis, US minimills need approximately one hour with Steel Dynamics
Inc. currently claiming to need only 0.4 worker-hours to produce a ton of steel. By contrast
US integrated producers need 3-4 worker-hours to produce a ton of steel. In 2001 US Steel
used 3.1 worker-hours to produce a ton of steel.

The cost of production as described is not, however, the only element with an impact on US
competitiveness.  What  makes  the  situation  acutely  difficult  is  the  additional  problem  for
many of the large integrated US producers which, to be profitable, are obliged to recover the
costs not only of their existing workforce, but also the pension and health care costs of former
employees (the so-called “legacy costs”). In effect, this means that these companies need to
be more efficient (in terms of worker-hours per ton of steel) if they are to compete with firms
that  do  not  have  such  burdens  of  the  past.  In  addition,  these  legacy  costs  have  acted  as  a
barrier to merger; as a result there is no US company amongst the world’s largest steel firms.

Finally, one might draw on the points explained in the preceding sections to note that a large
proportion  of  US  integrated  steel  firms  are  in  financial  difficulties  despite  the  fact  that  they
are benefiting from steel prices that are significantly higher than those on offer in the rest of
the  world.  This  might  be  seen  as  providing  yet  another  reason  to  conclude  that  many  such
firms are high cost producers that would have great difficulty in withstanding the significant
fall in prices that is likely to follow the WTO ruling.

2.2.

Proliferation of safeguard measures in other markets

The  taking  of  protectionist  safeguard  measures  on  a  large  spectrum  of  steel  products  by  the
USA has triggered chain reactions around the world, where the relevant authorities and steel
industries fear to see the already severe impact of those measures on their business due to a
decrease in their exports to the US market, increased by trade diversion to their own market.

5

Canada, China, Chile, the Czech Republic, Hungary, Mexico, Poland, Bulgaria and Romania
have initiated or are in the process of initiating safeguards investigations. In addition, China
and  Hungary  have  imposed  provisional  safeguard  measures..  It  is  again  important  to  recall
that all these investigations are, at least ostensibly, linked to the imposition of measures in the
US.

2.3.

The OECD process

The OECD high level steel dialogue, which held its first meeting in September 2001, aimed at
finding an agreed multilateral approach to the underlying problems of the world steel market -
the  existence  of  uneconomic  capacity  encouraged  by  subsidies  and  other  distorting  policies.
Although  this  process  proved  to  be  insufficient  to  resist  the  political  pressure  within  the
United  States  for  unilateral  protectionist  action,  the  safeguard  measures  will  do  nothing  to
addressing the underlying problems and, to some extent, will actually add to them.

Whilst  recognising  the  difficulties  inherent  in  seeking  an  international  steel  agreement,  the
Commission intends to continue participating actively in the OECD discussions and any other
forum  that  might  address  these  issues.  It  believes  that  such  an  agreement  would  need  to
address subsidies from all levels of government, that a monitoring mechanism should be set
up to enforce this, and that participants in the agreement should agree not take trade defence
measures against each other’s  steel  imports.  To be successful this will require a willingness
on behalf of all participating governments, including that of the US, to contribute by making
politically  difficult  choices.  The  current  exercise  has  been  unsuccessful  in  doing  so,  largely
because the US was seen as only paying lipservice to it.

3.

STATE OF PLAY ON WTO DISPUTE SETTLEMENT, INCLUDING ENVISAGED TIMING

In  response  to  the  US  steel  safeguards,  a  coalition  involving  the  EC,  Japan,  Korea,  China,
Switzerland,  Norway,  New-Zealand  and  Brazil  has  engaged  WTO  dispute  settlement
procedures against the US.

As  a  first  step,  joint  consultations  held  on  11-12  April  2002  demonstrated  that  the  US
measures are really a matter of major concern for all the players on the global steel market.
These joint consultations revealed that all the complainants raise highly similar claims against
the US safeguard action3.

As a second step, because these consultations have failed to solve the dispute, a single Panel
was established against the US steel safeguards pursuant to Article 9.1 of the DSU (with the
same Panelists and timeframe), following the requests presented by the EC on 3 June 2002,
Japan and Korea on 14 June 2002, China, Switzerland and Norway on 24 June 2002 and New
Zealand on 8 July 2002. Brazil should join this Panel later in July.

3

These claims include a violation of the precondition of “unforeseen developments”  laid down in Article
XIX GATT; a lack of increased imports, as required by Article 2.1 SA; an incorrect definition of the
domestic  industries  that  produce like  products,  as  required  by  Articles  2.1  and  4.2(a)  in  conjunction
with Article 4.1(c) SA; a lack of serious injury or threat thereof serious injury, as required by Articles
2.1  and  4.2(a)  SA;  an  absence  of  causal  link  between  imports  and  serious  injury  or  threat  thereof,  as
required by Articles 2.1 and 4.2(b) SA; a breach of the proportionality principle set forth in Article 5.1
SA;  a  lack  of  parallelism  between  the  scope  of  the  safeguard  investigation  and  the  scope  of  the
safeguard measures; inadequate setting forth of the findings of facts and law in the various documents
underlying the US decision, as required by Article 3.1 SA.

6

                                                
As regards the next steps, the Panel should be composed by the end of July 2002, the Panel
report should be issued in April 2003 and the Appellate Body Report should be circulated in
September 2003.

Once the dispute settlement proceedings have been concluded, as set forth in Article 4 of
Regulation (EC) No. 1031/2002, five days after the adoption by the Dispute Settlement
Body of the Report condemning the US measures, additional duties listed in Annex II to
that Regulation will apply automatically.

Such automatic application of re-balancing measures is meant to ensure the immediate
termination of the US measures after their condemnation in WTO and to avoid delayed
withdrawal of US illegal safeguards which has systematically occurred in past cases. In
this regard, the US safeguard measure on Line Pipe, found inconsistent with WTO rules
in  February  2002,  is  still  in  force.  The  EU  and  other  trading  partners  are  facing  an
increasingly unpredictable US trade policy. The Council's decision to apply rebalancing
action  automatically  next  year  is  therefore  of  great  importance,  not  only  in  order  to
protect  EU  steel  interests,  but  more  widely  to  make  such  systematic,  but  still
unpredictable, recourse to WTO illegal measures a costly proposition.

4.

ASSESSMENT OF THE STATE OF PLAY ON PRODUCT EXCLUSIONS

As part of the ITC investigation, firms were able to request that certain products be excluded
from  any  safeguard  remedy.  As  a  result,  some  product  exclusions  were  included  in  the  5
March 2002 Presidential Proclamation and a further, very limited, number were announced on
5 April 2002. These exclusions are best regarded as part of the initial safeguard measures and
should  therefore  be  distinguished  from  the  subsequent  exclusion  process,  which  reduces  the
impact of those measures.

Requests made during the investigation, or before the deadline of 23 April 2002 (“first round”
requests)  were  allocated  “X-numbers”.  Subsequent,  “second  round”  requests,  made  by  the
deadline of 20 May, were allocated “N-numbers”. 150 N numbers were published on 5 June,
134  on  14  June,  135  on  19  June,  131  on  27  June  and  a  further  82  on  8  July.  In  total,  over
1 200 requests are said to have been made.

The US authorities’  stated intention was to grant only those exclusions "that do not undermine
the objectives of the safeguard measure". They said that they would take into account factors
such  as  whether  the  item  is  currently  being  produced  in  the  United  States;  whether  it  is
available in sufficient quantities from domestic sources; whether substitution of the product is
possible; the level of inventories; and whether the requested product is under development by
a U.S. producer who will imminently be able to produce it in marketable quantities.

During  this  assessment  process,  US  producers  have  been  given  the  opportunity  to  submit
comments and objections. It would appear that such objections have been given considerable
weight in reaching the final decision and that relatively few significant exemptions have been
granted  in  the  face  of  firm  opposition  from  the  domestic  industry.  In  addition,  certain
European companies have complained that the US authorities have failed to register, or have
ignored, without any explanation, some of their formal requests for exclusions.

Four exclusion lists, made up of a total of 247 product exclusions, have been announced, on 7,
17  and  24  June  and  on  11  July.  About  150  of  these  exemptions  have  been  granted  either
directly to European companies, or to US steel consumers purchasing their needs to European

7

companies.  It  is  estimated  that,  up  until  11  July,  this  exemption  process  has  reduced  the
impact  of  the  initial  safeguard  measures  on  EU  steel  producers  by  some  $230  million.  By
comparison,  those  measures  originally  hit  European  exports  to  the  US  worth  around  $2.3
billion.

The total excluded quantities represent approximately 330 000 metric tonnes, whilst the total
of the requests presented by EU companies exceeds 2.7 million tonnes (although it is possible
that there is a certain element of double counting in these requests).

Total EU exports

First list

Second list

Third list

Fourth list

7 June
2002

17 June
2002

24 June
2002

11 July
2002

Total

Metric tonnes

150 000

60 000

80 000

40 000

330 000

(* millions US $)

100

45

55

30

230

Whilst a number of small, specialist companies have had most or virtually all their requests
accepted, the share of acceptance for the larger companies is typically in a range between 5
and 15 per cent. In some cases, however, lower acceptance rates reflects late filing of requests
and so may not be a reliable indication of the final outcome.

Moreover, a number of caveats should be recognised:

·   exemptions are for products, not for particular companies. It is therefore far from certain
that  a  European  firm  will  gain  the  full  benefit  from  a  particular  exemption  even  if  it  has
made the request. This is a particular problem when “first come first served”  quotas limit
the exemption;

·   quota  limits  for  some  product  exemptions  will  only  be  determined  at  a  later  stage.
European companies might therefore only benefit on a fraction of the quantities requested;

·   companies report that some exemptions have been granted in such limited quantities or for
such  a  limited  range  of  products  that  they  will  be  unable  to  take  advantage  of  them.  In
some  cases  the  exemption  is  so  restricted  that  it  will  not  be  attractive  to  the  steel  using
company. For example, it makes little sense for an American company to take advantage of
an  exemption  to  buy  one  very  specialist  type  of  steel  if  it  has  to  pay  the  full  safeguard
tariffs  on  other  similar  types  of  steel  that  it  needs.  In  other  cases,  the  fixed  costs  of
producing a specialist product are such that it would not be economic only to manufacture
the limited quantity benefiting from an exclusion;

·   some requests have been tabled by US consumers and the identity of their main supplier is
not  always  known.  Moreover,  the  Commission  services  might  not  have  been  able  to
identify  certain  request  originating  from  certain  highly  specialised  European  companies
producing niche products.

In  theory,  all  the  X-number  requests  should  have  been  dealt  with  by  3  July  although,  in
practice,  this  deadline  proved  to  be  non-binding  whilst  certain  N-number  requests  were
moved up the queue. On 3 July, a Presidential Proclamation set a new deadline on 31 August
2002 to consider pending exclusion requests.

8

5.

STATE OF PLAY OF DISCUSSIONS WITH THE US ON COMPENSATION

The issue of compensation under Article 8 SA does not only arise in the specific case of the
US  steel  safeguards  but  is  really  of  systemic  nature.  The  requirement  to  maintain  a
substantially equivalent level of concessions between Members applying safeguard measures
and  exporting  Members  affected  by  these  measures  is  the  cornerstone  of  the  Safeguards
agreement.

Members applying safeguard measures have to provide adequate trade compensation for the
adverse effect of their measures, otherwise exporting Members affected by these measures are
entitled  to  suspend  substantially  equivalent  concessions  vis-à-vis  the  Members  concerned.
Suspension  of  concessions  can  apply  as  soon  as  violations  of  WTO  rules  have  been  found
through Panel and/or Appellate Body procedures and without delay against safeguard actions
which have not been based on an absolute increase in imports.

In the ongoing discussion with the US, the EC has indicated its expectations in terms of trade
compensation to the US that tariff reductions should be agreed for products where the EC is
principal or substantial supplier, for a total amount of duty reduction equivalent to the amount
of duty collected through the application of tariff increases imposed by the US on average EC
steel exports in 1999-2001.

In addition to methodological questions, discussions with the US have allowed clarification of
the  US  domestic  process  to  present  a  compensation  offer.  Thus,  the  US  President  has  the
authority to decide trade compensation under Section 123 and 131 of the 1974 Trade Act in
the form of tariff reductions limited to 30% and after consultation of the ITC, which has 90
days to deliver its recommendation.

The US has not accepted so far the principle that it should offer compensation in the form of
tariff  reductions  in  other  products  than  steel.  In  part,  this  is  due  to  differences  on  the
interpretation  of  the  provisions  of  Article  8  SA.  It  should  be  noted,  however,  that  any
interpretation  of  Article  8  SA,  which  would  allow  WTO  Members  to  implement  safeguard
measures  without  facing  any  consequence  before  the  Appellate  Body  has  ruled  on  their
safeguard  actions  even  if  there  has  been  no  absolute  increase  in  imports,  would  inevitably
lead to systemic abuse of safeguard action.

Therefore,  the  Commission  considers  that  even  the  US  should  have  a  long  term  interest  in
avoiding an interpretation of Article 8 SA that leads to a proliferation of safeguard actions.

6.

CONCLUSIONS

As a conclusion of this report, the Commission wishes to highlight the following:

·   WTO  dispute  settlement  is  expected  to  result  in  a  ruling  on  the  illegality  of  the  US
safeguard action at around September of 2003. The automatic application of the long list of
rebalancing  measures  upon  a  negative  WTO  ruling  -  as  provided  in  Article  4  of  Council
Regulation 1031/2002 - is the best guarantee that the illegal safeguard measures should be
terminated immediately upon a WTO ruling.

·   The  US  steel  safeguard  is  having  a  significant  negative  impact  on  the  US  economy  (in
particular for steel users), whereas the impact outside the US and in the EU has been so far
more limited. Upon termination of the steel safeguard, it can be expected that the absence
of  US  restructuring,  together  with  a  potential  collapse  in  prices,  would  result  in  a  new

9

crisis affecting the US steel industry. Therefore, a broad international initiative should be
envisaged to tackle the difficulties faced by the world steel industry.

·   The product exclusions granted so far by the US have been manifestly insufficient. Many
pending  requests  would  allow  steel  users  to  have  access  to  products,  which  are  either
purchased  in  small  quantities,  at  low  quality  or  high  cost  from  US  steel  makers,  thereby
limiting the negative impact of the steel safeguards on the US economy and on EU exports.

·   The  issue  of  compensation  remains  of  great  systemic  importance  to  avoid  abuse  of
safeguard action. Discussions  with  the  US on compensation are ongoing, although so far
the US has not accepted the principle that it should offer compensation in the form of tariff
reductions in other products than steel. The Commission considers that even the US should
have  a  long  term  interest  on  avoiding  an  interpretation  of  Article  8  of  the  Safeguard
agreement that leads to a proliferation of safeguard actions.

In the light of the elements above, the Commission will present recommendations, including
any necessary proposal.

10