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EU Struggles with Formulating Plan for Trade Deal with Mainland China, over Market Economy Status and Steel Imports

It came to light on 7 March 2016 that the EU is likely to be considering linking mainland China’s plan for market economy status with a deal on steel imports. It is reported that the EU may propose accepting mainland China as a market economy country, thereby leading to lower trade defence tariffs on Chinese-origin imports, as long as mainland China agrees to reduce the amount of steel products exported to the EU. The deal, if it were eventually struck, would be made so as to protect the EU steel industry.

It is widely alleged that EU steel producers have suffered serious injury from low priced Chinese steel entering the EU market despite the current anti-dumping measures and ongoing investigations. Cheap steel imported from mainland China is being blamed for job losses and plant closures in the EU. It is claimed that, since 2008, there have been approximately 85,000 job losses in the EU steel sector. During 2015, there were thousands of redundancies and significant losses reported by European steel producers. More job losses and plant closures are predicted if nothing changes and mainland China were to obtain market economy status.
 
Hong Kong traders may be aware that several EU stakeholders blame mainland China for subsidising its loss-making steel mills through easy access loans. It is contended that mainland China has continued to produce steel despite overcapacity; the surplus steel is flooding the EU market with cheap imports, which in turn causes serious injury to the EU steel industry.

Mainland China is also accused of exporting other types of steel products at prices below the cost of production in breach of the EU’s anti-dumping regulations. According to the critics, mainland China has increased dumping due to a reduction in domestic demand for steel caused by a slowdown in the Chinese economy. It was reported that in 2015, global exports of steel from mainland China rose by 20% and reached a record of 112.4 million tonnes. In the EU, there was said to be a 53% increase in steel imports from mainland China.

Yet, in accordance with Section 15 of China’s 2001 Accession Protocol to the WTO, from 11 December this year mainland China is to be treated as a market economy by WTO members. In principle, non-market economy status may no longer be used as a tool to enforce higher anti-dumping duties against imports from mainland China, as is currently the case.

Should the EU grant this status, it is unlikely that the EU would be able to maintain higher anti-dumping duties against imports from mainland China. It will be difficult for the EU to administer higher tariffs in response to alleged unfair practices by mainland China without being in breach of its own WTO agreement.

It has simultaneously come to light that mainland China is urging WTO members to “keep their promise” to end analogue country methodology and to treat it as having market economy status as from the end of this year. It is reported that mainland China is of the view that it will automatically attain market economy status in December. This is disputed by other countries who claim that they will need to adopt new legislation. The reality is unclear.

In related news, the UK is spearheading the campaign for anti-dumping measures on Chinese steel imports to be increased. Following a meeting of the Member States’ trade ministers in Brussels on 29 February 2016, it became more apparent that other Member States, including France and Germany, are supporting the need for urgent trade defence action against steel imports. European trade associations and European steel producers are also urging the EU to intensify its defences against the alleged dumping of Chinese steel products.

As the apparent overproduction of steel in mainland China is fast becoming a global issue, the EU’s critics, including Dominic King, the UK steel policy chief, argue that the US has introduced a new tariff of 266% on imported Chinese coiled steel. The current EU tariff on imported Chinese coiled steel contrasts lamentably with that figure, at just 16%. The difference between the tariffs demonstrates why many in the EU consider the current tariffs to be too low. The UK has openly accused the EU’s executive of inviting the Chinese steel industry to dump their products in the EU.

This issue comes at a challenging time for the EU with the British “Brexit” referendum in June 2016 and growing Euroscepticism. Furthermore, pressure is mounting from European companies who are warning of a trade war. The increasing tension was evident on 15 February 2016, when thousands of steel workers, members of the European steel trade union and European industrial companies took to the streets in protest. Their message was clear: “stop China dumping”.

Hong Kong traders will recall that in February 2016, the European Commission announced the commencement of three investigations into steel products made in mainland China. Furthermore, the European Commission has agreed to speed up these investigations “where possible”. If any of the investigations demonstrate that these products are entering the EU at dumped prices the EU will impose anti-dumping duties.

It is also noteworthy that in February 2016, the European Commission issued new tariffs on certain cold-rolled flat steel products imported from China. The European Commission found that these products were being sold in the EU market below the cost of production, causing injury to EU producers.

There is no perfectly clear indication about what the EU will do in order to both meet its WTO commitments regarding mainland China’s market economy status, and assist its ever-weakening steel sector. An official EU public consultation on future trade defence measures against exports from mainland China is currently ongoing, and may help in providing direction to the EU’s lawmakers. As noted above, one option that could be seriously considered for eventual implementation is the granting of market economy status on the condition that mainland China agrees to sharply reduce the amount of steel products exported to the EU. Apparently, mainland China’s trade minister has sent a letter to the EU Trade Commissioner, Cecilia Malmström, promising to decrease the country’s steel output by between 100 and 150 million tonnes.

Alternatively, the EU could strengthen its anti-dumping defences by introducing new legislation. Any proposed legislation will have to follow the ordinary legislative procedure. Given current EU timescales, it would be at least a year before any new legislation is introduced. Otherwise, the EU could continue to implement the current anti-dumping rules, and maintain the status quo,  although this could lead to a trade war between the two giant trading blocs – a situation that no one is keen to see materialise. 

At this stage, a deal between the EU and mainland China appears to be the quickest and most efficient method of securing some protection for the EU steel industry.

Content provided by Picture: HKTDC Research
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