Executive regulation of US steel industry
THE LOCOMOTIVE
THE LOCOMOTIVE
Executive regulation of US steel industry
Over the past decade, US economy has been in an amazingly
persistent boom, serving as a locomotive for development of other countries via imports of
capital and goods. Though turning into an information technologies economy, the USA did
not lose its basic industries, notably, metal sector. Being a member of WTO and regional
trade agreements, proclaiming open markets and free trade, the United States have and make
use of a number of strong protectionism measures to safeguard domestic manufacturers. This
article shall give a US example to show that the metal industry calls for systematic state
support and co-ordination of actions even in the market economy. Clash of local steel
makers with importers on the US steel market and ways to cope with these problems may act
as a model for forecast of events on regional markets for the coming years.
Protectionism via trade law
US steel manufacturers rely on trade law protection more
than any other industries. Having a strong lobby in the Congress, they constantly attempt
to influence the lawmaking process. On the other hand, importers and consumers of steel
also lobby their interests, while the government adheres to its international commitments.
This way the USA pursues a rather liberal commercial policy. This has led to the Congress
supporting international trade law and simultaneously giving strong protection to local
producers. So, the WTO Rules only prevent the most flagrant violations from the side of
the US, while this country makes use of a flexible system of protectionism measures.
Let’s try to sum up commercial and political measures applied by domestic steel makers
to protect the local market.
Antidumping is applied to protect producers from damage
caused by imports priced below the fair value. Notably enough, fair prices for products
from non-market economies are determined on the basis of analysis of similar products in
market economies, e.g. back in the 1998-1999 investigations Russian steel costs were
compared to those in Brazil.
The Department of Commerce (DOC) and International Trade
Commission (ITC) partake in antidumping inquiries. Producers can initiate the inquiry by
addressing DOC that has the authority to register the address and launch the
investigation. ITC gives preliminary opinion on existence of damage and handles the case
to DOC to determine the dumping margin. After that, ITC makes the final decision on damage
and DOC issues an antidumping regulation.
The regulation imposes no antidumping duty, but requires
the importer to place a special dumping-margin deposit since commencement of the
investigation and for the coming 5 years. Every year DOC may revise the dumping margin and
alter individual deposits. A bill that allowed use of money from this fund to support US
steelmaking caused great concern throughout the world as it encourages antidumping claims.
In five years DOC investigates whether to prolong the sanctions or lift them. WTO
member-states can refer to WTO Antidumping Treaty and challenge the decision of US
authorities, while non-market economies can only appeal to the US Court of International
Trade.
Countervailing duties are applied to compensate
direct/indirect subsidies obtained from exporters’ governments. Their procedure is
similar to that of antidumping inquiry. The duties relate only to subsidies provided by
governments of market economies to private companies. As countries with centralised
management give all the power to executive authorities, US law treats any support of
manufacturers from such countries as subsidies. However, to settle this issue, DOC decided
to rely only on antidumping law to protect against unfair prices charged by non-market
economies.
Until US DOC gives Ukraine a market economy status, US
steel producers can claim that Ukrainian companies receive financial benefits from the
State. Since Ukraine is neither a WTO member nor a party to subsidy agreements with the
USA, US steelmakers may initiate imposition of duties even without proving any market
damage. The Americans admit that privatisation of metallurgical mills in the CIS
eliminated certain subsidies, however, there is an obvious subsidising tax legislation,
special prices for energy and governmental aid. That is why Russian producers frequently
refrain from asking for a market economy status in trade investigations.
Article 201 of trade law that is also referred to as a
protective clause allows trade reparations for industries that are damaged by imports,
even if there is no dumping or other unfair commerce. A threshold level of damage caused
by growing import is an acceptable reason for application of article 201. The latter
provides for numerous penalties, including quotas and increased tariffs. ITC alone is
responsible for initial investigations. It must be determined that growing import is the
main cause of damage and that damage is versatile.
ITC advises the President to approve certain measures,
while the President may refuse to accept ITC advice or alter it. In 1999-2000 US steel
makers appealed to this measure several times, while in mid-February 2001 AISI issued an
address asking for application of article 201 against imports of steel.
Safeguards of article 201 are applied to specific products,
not countries. Approved quotas are distributed among exporting countries based on historic
analysis of their exports. Therefore, countries that never exported such products to the
USA will be banished for the market, which is very dangerous for Ukraine.
Quotas and base import prices. The 1995 WTO Treaty
prohibits member-states to impose any quotas except those of general protection nature
(like article 201). However, if the affected countries do not appeal to the WTO and are
non-members of this organisation, the USA applies indirect quotas. WTO rules allow price
initiative as an alternative to antidumping and countervailing duties. In this case, DOC
has to determine the fact of dumping or subsidies and importer has to agree to limit sales
to avoid unfair dealing accusations. Quotas are not applicable to market economies,
however setting of lowest prices (high enough to cover the dumping margin) is allowed.
Only the non-market countries can stop antidumping inquiries by becoming subject to quotas
instead. Quota agreements impose indicative prices to give a country a fixed market share
via limitation of competitive advantage of its products. Russia entered into such
agreements as regards almost all steel products in mid-1999.
Antitrust law limitations on import. Recently, US producers
have been trying to make use of the Antitrust Act to limit dumping imports. Any company
entering the US market becomes subject to that act; however, the federal court has not
ruled yet that low prices lead to monopolisation of the market and price dictate.
At the same time, the 1916 Act is in force. Pursuant to
that act, producers can initiate antidumping inquiries via federal court if they can prove
imports at prices below market rates and if that threatens the industry. The EU and Japan
frequently claimed this law being as violation of the WTO Rules. Another antitrust
limitation is the Section 301 of the trade law that allows US trade representative with
WTO to initiate investigation or impose direct measures against anti-competition practices
that damage US producers on the global market. However, there have been no precedents of
application of this section yet.
Political games in the Congress. The Congress frequently
supports local steelmakers’ fight against cheap imports. In early 1999 most Republicans
supported the Quota Bill that proposed limitations on foreign trade in steel and
additional protectionism measures to lower imports (estimates show that the bill could
have cost US consumers some $1.4 billion). As the bill violated the WTO Rules and
infringed interests of domestic consumers, the Senate did not give its support to the
bill. So, the Republicans were playing political games with quotas. In early March 2000,
the Congress initiated a bill on steel quotas based on the percentage ratio of
importer’s presence on US market. There are claims for new government credit guarantees
(this time, it is about $10 billion), there are proposals to introduce a 2% tax on steel
sales to be transferred to the pension fund of metallurgical workers.
Is there a way to avoid antidumping penalties? The
complexity of US law and numerous protectionism instruments applied may scare away
potential importers of steel. Certain suppliers try to export as much as possible before
antidumping rules are enforced and then switch to imports to another country. US steel
producers spend millions of dollars to enhance trade law and get legal advice in
antidumping investigations as they think that such money yields more benefit than capital
investments. However, one can hold a stable share of US steel market and avoid antidumping
investigations by the way of careful examination of its potential and joint work with
solicitors.
To get antidumping compensation, one has to do an easy
thing, that is to prove existence of damage. To assess the damage, ITC evaluates the state
of affairs in the whole US industry that makes similar goods, considers imports and their
effect on prices, utilisation of domestic capacities, gross profit margins, return on
equity, stocks and unemployment. Usually, ITC investigates those parameters for three
years preceding the investigation.
Normally, ITC considers sum total imports from all
countries under investigation, however, import from one country below 3% of the total or
cumulative imports from several countries below 7% of the total are treated as immaterial
and are not subject to the inquiry. Making use of this exception, the Czech Rep and
Macedonia avoided antidumping penalties in the 1999 steel plate inquiry. However, article
201 is applicable to total imports, regardless of individual market shares.
Penalties relate only to the goods and countries provided
for in the antidumping regulation; therefore, one can avoid duties by moving the source of
import to another country. Yet, the latest antidumping duties try to consider this
opportunity and embrace both the end products and semi-finished goods. Again, the US
Customs applies US trade law on the border and if an importer fails to name the country of
origin or applicability of antidumping duties or quotas to the goods, he may become
subject to large fines or criminal prosecution. So, one has to get legal advice before
attempting this opportunity.
If there is no chance to move the source of import and the
five-year period of duties is prolonged, one may only require annual administrative
investigations run by DOC. In the course of such investigations, the exporter may prove
that goods were not sold below the normal price over the period and, if successful, he may
be allowed to raise the price at zero dumping margin. Again, careful preparations and
legal advice are required in this case.
State subsidising
In its Steel Measures Plan dated 5 August 1999, the US
Administration insisted on prevention and elimination of direct/indirect subsidies for
steel industries in foreign countries. However, over the past 20 years US steelmakers have
been receiving billions of dollars worth of loans and subsidies within the framework of
federal and local programs and financial programs of individual states. The US executive
authorities give systematic support of steel industry by issuing loans, applying
protectionism, stimulating high manufacturing technologies and providing social security
for the industry.
The best example of subsidising is a billion-dollar program
of state support for non-competitive US steelmakers. Enterprises that qualify for the
program are non-competitive producers that run on high costs, need significant
modernisation investment, including money for environmental measures. IISI specialists
doubt competitiveness of such enterprises compared to mini-mills, even if the former
receive taxpayers’ support.
The program of state credit guarantees approved in 1999 is
a fundamental act that provides federal financial support to the steel industry now.
Companies that fail to obtain regular banking loans may apply to the program. An
individual grant may run up to $250 million for steel mills and $30 million for mining
companies, 85% financed by the State.
Steelmaking companies have managed to save about a billion
dollars on special tax rates provided for in the 1986 Tax Reform Act, whilst PBGC has
accumulated taxpayers’ money to give aid to workers of the steel industry.
In addition, a number of federal and state laws prohibit
usage of imported steel when running public projects (e.g. the Buy American campaign),
thus providing one more type of protectionism and supporting high prices using money of
the taxpayers. As a result of application of such acts, local producers of steel have
obtained about 25% advantage over importers.
Along with preferences, the USA imposed clear limitations
on steel imports, e.g. the 1984 Steel Import Stabilisation Act gave grounds for
“agreements on voluntary limitation of import”. As a result, US steel companies have
managed to make $1.3 to 1.9 billion of extra revenues per annum.
In 1980 the State opened a national complex line for
research and development support that gives aid to modernisation of the steel industry.
The National Science Foundation annually gives about $8 million for development of
high-tech steels, while the National Bureau of Standards issues $1.8 million pa for
development and implementation of modern quality control methods and devices for steel.
Jointly with the American Iron and Steel Institute, the US
Department of Energy has been financing the program of coke-free iron making ($47 million
spent in 1995) that disposes of blast furnace dust and rolling scale. Over the last 20
years, DOE has issued total grants of $3 billion to encourage development of energy-saving
steelmaking technologies.
US steel companies obtained about $155 million for research
and development as regards energy saving problems within the framework of the 1988
National Act for Enhancement of Competitiveness in Steel and Aluminium Making
(incorporated into the 1992 Energy Policy Act).
Local authorities also provide aid to new capacities via
training grants, low interest rates and reduced tax rates applicable to both integrated
manufacturers and mini-mills. While steel manufacturing capacities have been widely
privatised all over the world recently, the USA has been increasing the volume of public
financing for the sector.
AIIS information shows that 18 states still run numerous
programs of aid to steelmaking enterprises. Only in the states of Indiana, Pennsylvania,
Kentucky, Ohio and Illinois the taxpayers pay more than half a billion dollars per year to
subsidise steelmakers. Significant starting subsidies (coming to $100 million per annum)
were given to mini-mills and integrated iron and steel works in mid-1990.
AIIS believes that subsidies distort trade in steel and
should be eliminated as they sustain excessive capacities. While foreign subsidies can be
blamed and should be the matter of bilateral and multilateral negotiations, local
subsidies are also unacceptable. The USA must admit existence of subsidising programs and
support of non-efficient and excessive manufacturing capacities.
The American Institute for International Steel (AIIS) is
the main opponent of US double standards. AIIS is a trade association established in 1990
and bringing together steel exporters and importers from the USA, Canada and Mexico. AIIS
members obtain about 70% of all steel imports of the USA. The Institute’s objectives are
understandable, namely, it wants to fight with high domestic prices and limitations of
steel imports because steel consuming industries in the USA employ 40 times as many
workers as the metal industry and they do not want to depend on price dictate from the
side of domestic producers.
Import forecast for 2001
Since mid-1998 US steel producers have been addressing the
government asking for protection against imports. In 1999 they succeeded and antidumping
sanctions resulted in a sharp drop of import supplies. However, new exporters from
countries that were not subject to those sanctions provided even greater imports in late
1999 and 2000. While the USA manufactured 101 million tonnes of steel in 2000, according
to DOC steel imports came to 34.4m tonnes, 6.2% greater than in 1999 though 8.6% less than
the 1998 record. Due to shortage of certain commodities and high prices, consumers were
placing greater orders and hedging themselves with imports in 2000. As a consequence,
domestic production and stocks were growing in the first half of 2000.
Strengthening US dollar and recovery of domestic demand
encouraged import of semi-finished goods, with import of finished goods that followed. The
third quarter saw announcement of a new rise in steel prices. Therefore, at the end of
2000 steel consumers on US market waited for low prices and had high stocks, especially as
regards flat-rolled steel.
At the beginning of this year, imports were on the level of
early 2000 and then started to grow. A protectionism campaign commenced in the country and
the Steel Recovery Act 2001 was submitted to the Congress. Simultaneously, local steel
producers announced a price rise of $25 to 35 per tonne in the second quarter of 2001.
Under public pressure, the new US administration mentioned
in early March 2001 that it was looking for strong measures to protect steel industry from
growing imports and to lower the imports by 3-7 million tonnes down to less than 30
million short tons. However, we believe that a compromise will be found because the USA
cannot live without imports of steel and especially semis. Therefore, the year 2001 can be
the opposite to the previous period, i.e. sluggish first half-year will be followed with
the dynamic second half of the year.
In conclusion, let’s examine Ukraine’s position on US
steel market in 2000. Unlike Russia, Ukraine did not voluntarily limit the quantities of
metal export. So, Russian and Ukrainian supplies became almost equal, although the
Russians used to export much more in previous years. At the same time, Russian exports in
2000 were more even and predictable. Perhaps, this is precisely what the US DOC wants to
get from Ukraine in the course of negotiations on steel imports.
The initiative on this issue appeared during a meeting of
the Ukrainian-American Trade Commission in Washington, DC, on 7 December 1999. The
Commission signed a Memorandum of Technical Aid for Ukraine that aimed at preventing
Ukrainian producers and exporters from violation of antidumping law and development of
market manufacturing and sale of metal products in Ukraine. Due to rather small imports,
it was hard to propose certain measures to protect US steel market from Ukrainian steel.
Subsequently, US DOC officials started proposing an agreement on voluntary limitation of
exports from Ukraine. Finally, at the Paris negotiations in December 2000, the Americans
openly proposed to settle current and future problems via a universal agreement, similar
to that with Russia. It looks like the new Administration has chosen this approach to
steel imports as a long-term strategy.
In mid-January 2001 a governmental delegation of Ukraine
together with representatives of the leading iron and steel works held the first
negotiations with US DOC as regards the universal agreement on Ukrainian exports. The
negotiations were held as the country’s administration was changing and the key people
were not appointed yet. Sergei Grischenko who headed the delegation informed on principal
attitude of the Ukrainian party and hoped that quotas would be determined based on actual
exports from Ukraine to the USA, 3% ratio from total imports and similar agreements with
Russia. Unfortunately, the Americans proposed much lower quotas than expected (apparently,
that decision was made under pressure of US steel producers and trade unions). Therefore,
the Ukrainian party could not accept the quotas proposed in that universal agreement and
the parties simply signed a Memorandum.
The coming negotiations will be held under influence of
changes in US Administration. The main issue would be discussion of individual commodities
to determine the deserved share of Ukrainian exports to the USA keeping in mind that
Ukraine currently accounts for 8 to 8.5% of the world metal market.
Conclusion
Every developed country has a powerful steel industry
inherited from the first industrial revolution. This is a costly legacy, but every country
tries to save it because despite development in high technologies, steel will remain the
chief structural material in the coming decade. The US example shows that market trade in
metal does not mean absence of state regulation because the market fails to adjust itself.
If steel producers ask for state support, while consumers oppose it, there emerges a
compromise that drives the market and the industry forward.
Ukrainian steel producers should understand that the metal
industry has got to be uniform. It is time to unite the industry. While keeping
independence in market decisions, producers need a wide look and well-defined political,
legal and economic support of the State. The authorities in charge of the industry should
study the experience of fair trade in the USA and in the WTO zone to skilfully apply this
knowledge in Ukraine’s metal industry. While now the Ukrainians are trying to hold the
old markets and access new ones, time will come to fight for Ukraine’s domestic market.
Import of stainless steel to Ukraine gives the first alarm.