Report from the Commission to the Council on Steel re-balancing action
Date: 2002-09-24
Institutions: European Commission
Subjects: United States, financial equalisation, international market, iron and steel product, protective clause, report, settlement of disputes, steel

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 24.9.2002
COM(2002) 532 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

Following the presentation of the report from the Commission of 17 July, the Council adopted
conclusions on 19 July whereby:

“the  Council  invites  the  Commission  to  submit  an  additional  report  as  well  as  a  proposal
regarding the definitive content and application of Annex I to Regulation 1031/2002, and will
decide  on  this  proposal  taking  account  of  the  decisions  on  product  exclusions  and
compensation to be made by the US. The Council intends to revert to this issue by the end of
September.”

Accordingly, this additional report provides an update of recent developments concerning the
impact  of  the  US  steel  safeguards  on  US  and  world  markets  (2),  dispute  settlement  (3),
product exclusions (4) and compensation (5).

2.

THE IMPACT OF US STEEL SAFEGUARDS ON US AND WORLD MARKETS

2.1.

The impact of the US steel safeguard on the US market

The 17 July report explained that the US safeguards had produced very large artificial price
increases,  thereby  encouraging  the  maintenance  of  uneconomic  capacity  and  that  their
withdrawal  next  year  will  cause  further  market  disruption.  More  recent  data  has  confirmed
this  analysis,  with  continued  upward  pressure  on  prices  and  the  cost  of  steel  in  the  US
remaining well above world levels.

In  addition,  it  is  striking  that,  in  recent  months,  a  number  of  US  steel  firms  have  reported
“improved results” in the form of smaller financial losses than in the corresponding quarter of
the previous year. There must be a real question mark about firms that are still unable to break
even at a time when the US market is protected by the safeguard in addition to numerous anti-
dumping and anti-subsidy measures and when prices have climbed so sharply. Such firms will
face  acute  difficulties  when  the  price  bubble  breaks  and  when  the  safeguard  is  withdrawn
following its condemnation by the WTO.

As  a  result,  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.

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2.2.

Proliferation of safeguard measures in other markets

The taking of protectionist safeguard measures on  a large spectrum of  steel  products by the
US  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 increased
by trade diversion to their own market.

Canada,  China,  Chile,  the  Czech  Republic,  Hungary,  Poland,  have  initiated  or  are  in  the
process  of  initiating  safeguard  investigations  and  other  countries  (Bulgaria,  Romania)  have
been  indicated  to  be  considering  similar  initiative.  In  most  if  not  all  cases,  this  is  likely  to
result into the adoption of protective measures. In fact, measures are already in force in China,
Hungary, Poland, Chile and Mexico.

Although  in  theory  there  is  a  tendency  in  all  these  countries  to  follow  the  EC  model
(safeguards as  a  safety  net  against  trade  diversion),  in  practice  most  of  them  have  not  been
able  to  resist  domestic  protectionist  lobbies.  Hence,  the  measures  they  introduced  are  more
restrictive,  sometimes  considerably,  than  the  EC  safeguard  measures.  All  this  can  only
increase the pressure on other countries to follow the example. In the medium term, free trade
in the steel sector could be seriously compromised, and it is again important to recall that all
this is, at least ostensibly, linked to the imposition of measures in the US.

3.

STATE OF PLAY ON WTO DISPUTE SETTLEMENT

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

The thorough co-operation achieved in the consultations phase continued in the Panel stage,
with  the  establishment  of  a  single  Panel,  composed  of  the  same  panellists,  to  consider  the
requests of all the complainants. Following the composition of the Panel on 25 July, a close
co-ordination ensured the presentation of highly convergent arguments in the submissions to
the Panel.

The Panel report is  expected  for  March  2003.  The  Commission  is  confident  that  this  report
will conclude that the US measures are inconsistent with WTO requirements  on safeguards,
since  the  steel  measures  literally  repeat  the  flaws  already  found  in  previous  US  safeguards
condemned in WTO. If the US appeals, the Appellate Body is expected to circulate its report
in September 2003.

In  light  of  the  fact  that  the  Panel  report  is  likely  to  be  based  on  the  confirmation  of  prior
rulings  of  the  Appellate  Body,  an  appeal  would  only  represent  a  delaying  tactics.  The
Commission  therefore  considers  that  the  US  should  be  encouraged  to  withdraw  its  illegal
safeguard measures upon the issuance of the Panel report.

It should be recalled that the adoption of either the Panel report (if there is no appeal) or the
Appellate  Body  report  by  the  WTO  Dispute  Settlement  Body  automatically  triggers  the
application of additional tariffs on the long list of products comprised in the EC re-balancing
Regulation.

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4.

STATE OF PLAY ON PRODUCT EXCLUSIONS

The  Commission’s  report  on  steel  re-balancing  action  published  on  17  July  explained  the
process  by  which  firms  could  request  that  particular  products  should  not  be  subject  to  the
additional  tariffs  imposed  by  the  safeguard  measure.  It  noted  that,  to  that  date,  the  US
authorities had published four lists, made up of a total of 247 product exclusions. About 150
of  these  exemptions  were  granted  either  directly  to  European  companies,  or  to  US  steel
consumers purchasing their needs to European companies. The previous report estimated that,
up  until  11  July,  the  exemption  process  has  reduced  the  impact  of  the  initial  safeguard
measures on European steel producers by some $230 million.

The  US  Administration  published  a  further  list,  excluding  14  products,  on  18  July
immediately  before  the  Commission  recommended  the  postponement  of  the  decision  on
whether  to  take  early  countermeasures.  Two  further  lists,  totalling  215  product  exclusions,
were  announced  in  press  releases  issued  on  12  and  22  August  and  formalised  by  means  of
publication in the Federal Register on 30 August1.

Our  assessment,  based  on  detailed  information  provided  by  European  firms  and  industry
associations, is that the additional exclusions announced since the 17 July report could enable
EC steel firms to export 650 000 tonnes to the United States without paying additional tariffs
and reduce the impact of the original safeguard measures by a further $420 million. Thus, in
total, the seven lists that have been published may affect EU produced steel worth some $650
million. This figure represents nearly 30% of the $2.3 billion of EC exports estimated to be
affected by the original US announcement. Alternatively, it can be seen that, if total EC steel
exports to the US were to remain at their 2001 level of $4 billion, approaching 60 per cent of
these exports would avoid additional tariffs.

Whilst the  substantial  additional  exclusions  granted  in  August  were  certainly  welcome,  and
will benefit both European exporters and the many US firms that need high quality steel from
Europe,  the  refusal  to  grant  many  well  founded  requests  remains  surprising  and
unsatisfactory.

Although the USTR press release issued on 22 August said “This concludes the review of all
pending  exclusion requests that were  filed on or  before  May  20,  2002”,  we  understand  that
firms have been invited to identify technical problems with the descriptions of the products,
as  published  in  the  Federal  Register,  and  that  this  might  lead  to  the  publication  of  further
notice designed to remedy such problems.

In  any  case,  the  process  will  restart  in  November  2002  with  the  possibility  to  apply  for
exclusions that would take effect from March 2003. Of course, companies whose requests are
successful will still have had to pay additional tariffs (or been shut out of the US market) for a
year. In addition, the value of such “second year” exclusions will be limited by the fact that,
in the same month, the WTO Panel is expected to rule against the US safeguard measures.

1 vol 67, No 169 pages 56182 ff

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5.

STATE OF PLAY ON COMPENSATION

The Safeguard Agreement establishes a balance between the right for a WTO Member to take
safeguard action – provided that WTO requirements are complied with – and the obligation to
maintain  a  substantially  equivalent  level  of  concessions  with  WTO  Members  affected  by
safeguard measures.

In  the  steel  case,  the  US  has  questioned  the  obligation  under  Article  8  SA  to  provide
compensation  for  the  adverse  trade  effect  of  the  steel  safeguards  in  the  form  of  tariff
reductions on products other than steel.

Anyhow, the Commission considers that a proper interpretation and application  of  Article 8
SA is of major systemic importance in order to avoid  the proliferation  of  abusive safeguard
actions.

6.

CONCLUSIONS

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

(cid:1)  the  product  exclusions  decided  by  the  US  in  August  contribute  to  mitigate  the  negative

trade effect of the US steel safeguards;

(cid:1)  however,  the  product  exclusions  represents  less  than  30%  of  the  total  impact  of  the  US
safeguards on EC export and more than 40% of EC total steel exports to the US are still
subject the US protectionist measures;

(cid:1)  the  EC  should  therefore  vigorously  pursue  its  WTO  challenge  against  these  measures,
which is expected to result in the condemnation of the US illegal safeguard action by the
Panel in March 2003;

(cid:1)  the  US  should  be  encouraged  to  withdraw  its  safeguard  measures  immediately  after  the

Panel report;

(cid:1)  a broad international initiative should be envisaged to tackle the difficulties to be faced by

the steel industry;

(cid:1)  the  issue  of  compensation  remains  of  great  systemic  importance  to  avoid  abuse  of

safeguard action;

(cid:1)  adequate pressure should be kept on the US to reduce further the negative trade impact of

its safeguard action by way of additional product exclusions;

In light of the elements above, the Commission does not propose, at this stage, the application
of Annex I of Regulation 1031/2002.

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