Trade defence instruments - would Brexit save the UK's steel industry?

27 April 2016


Tata Steel's recent decision to sell its Port Talbot steel plant has prompted public outcry, shining a spotlight on the effectiveness (or lack thereof) of EU trade defence and laws prohibiting certain types of State aid.

The South Wales plant - which employs 5,500 workers - is thought to be losing £1 million a day as the UK steel industry struggles to adapt to increasingly difficult market conditions, exacerbated by a slowing global demand in steel and dumped Chinese exports.

Some Brexit campaigners have cited the lack of governmental response to the crisis - whether through the provision of State aid or the imposition of anti-dumping tariffs on Chinese imports - as an example of ineffective EU law impeding UK ministers from taking action to protect British industry from unfair trade practices[1].

Ahead of the 23 June 2016 referendum, we set out what trade defence and State aid might look like if Brexit were to take place.

Trade defence instruments

Chinese steel manufacturers are estimated to have produced 822.7 million tonnes of crude steel in 2014, 5.6 times the EU's apparent total use, and 53.5% of the apparent total global use[2]. As Chinese domestic demand has slowed, Chinese manufacturers have increasingly looked to sell their product elsewhere; which gives rise to the question as to whether it has been "dumped". China is currently designated a non-market (or command) economy where dumping will be deemed to have taken place where the 'constructed' price of the product in the exporting country[3] exceeds export prices.

Where the dumping of a particular product can be shown to have caused material injury to an EU industry, the European Commission may impose anti-dumping tariffs on exporters of the like product, provided it would be in the EU Community's interest to do so.[4] At present, the tariff on Chinese cold-rolled steel exports into the EU is just 25.3%, compared with the 265.96% tariff imposed by the US on the same product.

If the UK were to leave the EU, the British government would (subject to the rules of the World Trade Organisation) be free to implement its own trade defence instruments and could, theoretically, adopt the highly protectionist approach adopted by the US government in response to dumped goods.

The reality however, is that the UK would almost certainly consider itself politically restrained from adopting a more aggressive approach to dumped Chinese exports.

The UK government has repeatedly emphasised the importance of increasing its trade links with China[5] and, in a post-Brexit world, might be reluctant to impose tariffs that could upset its so-far lucrative relationship with China[6] - particularly while it is attempting to negotiate a new trade agreement with the Asian powerhouse.

Global free trade and anti-protectionism have, since World War II, been a common motif to mainstream politics in Britain[7]. There is little evidence to suggest that Brexit would bring about a radical rethink in this regard.

Indeed, it was the UK that, to the frustration of a number of EU Member States[8], recently vetoed a plan to abolish the EU's "lesser duty rule", which provides that anti-dumping tariffs imposed on exporters should be no higher than is required to prevent injury to the EU industry. The abolition of the rule would have allowed the European Commission to increase many of the tariffs currently imposed on steel products, thereby granting greater protection to the European steel industry[9].

The EU anti-dumping measures are by no means perfect. As the Commission itself recognises, investigations are currently both time and resource consuming for complainants, whose businesses are necessarily already under pressure[10]. Brexit would allow the UK to introduce a more streamlined process addressing these issues. In particular, the fact that material injury would only need to be demonstrated in the UK, rather than across the whole EU, would significantly reduce the burden on both complainants and the investigating authority.

However, Brexit would not change the lack of political will towards the reform most critically sought by the UK steel industry - i.e. the possibility of higher duties being imposed on dumping exporters[11]. To the contrary, any reduction in the UK's bargaining power outside the EU might result in reduced protections to UK industry being accepted as part of trade negotiations[12].

State aid

A separate question is the extent to which the UK government could 'prop up' the ailing steel industry by granting favourable loans or nationalising the UK's steel plants.

A "frequently mentioned objection"[13] to the UK taking such actions is that they would fall foul of EU rules on State aid.

EU law provides that:

"any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market."[14]

There are several narrowly-defined exceptions to the above prohibition, including the grant of short-term rescue aid where certain strict criteria are met.

Member States are obliged to notify their aid schemes and individual grants to the European Commission in advance and must not implement them without the approval of the Commission. The Commission will require Member States to recover any State aid found to have been made illegally.

In the context of the steel sector, the forms of permissible aid are particularly restricted. In the mid-1990s EU Member States and the Commission agreed to prohibit the rescue and restructuring of steelmakers in difficulty[15]. On this basis, the Commission has recently ordered the recovery of illegal State aid granted to steel producers in Belgium, Germany, Italy and Poland[16].

It is therefore certainly true that, legally, Brexit would enable UK governments to take quicker and further-reaching action to support the steel industry.

Whether the UK government would in fact choose to bail out the steel industry is another question altogether.

The UK has an "unspectacular record" in supporting British companies in declining industries[17], and has historically proved to be far less interventionist than other EU Member States, such as France and Germany[18] .
Moreover, any future trade agreement with the EU would almost certainly require the UK to adhere to the EU's existing State aid rules[19]. Roughly 50% of the UK's trade is with the EU[20], rendering the 'EU-27' an unavoidable trading partner post-Brexit.

Thus, in the context of State aid, the hypothetical benefits that would be brought about by Brexit are almost certainly wholly illusory - as a prerequisite of any trade agreement with the EU, the UK would almost certainly be forced to comply with EU State aid rules and/or being required to pay anti-dumping duties on any products supported by State aid[21].

Whose shield?

Highlighting the ineffectiveness of EU trade defence instruments and the inflexibility of State aid rules is an effective way of diverting attention away from what is an extremely difficult political, economic and social question. The sad reality is that the fate of the Port Talbot plant would almost certainly not be in a better position if the UK was not a part of the EU.

The limitations of EU trade defence investigations are currently being reviewed at the EU-level. However, were it to remain in the EU, it is less clear whether the UK government would actually want to change the rules on State aid. Brexit - and the removal of the EU as an easy scapegoat - might require politicians on all sides of the political spectrum to clarify their views in this regard.

Footnotes

[1] E.g. Simon Boyd, a director at REIDsteel, Britain's largest steel construction company, is quoted as saying "while we remain in the EU, the UK government we elect can do little to tackle the dumping of cheap steel or unfair state aid rules." http://www.telegraph.co.uk/news/politics/david-cameron/12207876/EU-row-over-deal-to-save-steel.html

[2] Figures taken from the World Steel Association's 2015 report "World Steel in Figures 2015"; See also, the recent speech of Cecilia Malmström, the EU Commissioner for Trade: http://trade.ec.europa.eu/doclib/docs/2016/april/tradoc_154458.pdf

[3] The constructed 'normal price' is assessed on the basis of an 'analogue' market economy displaying inter alia a similar level of development to the non-market economy.

[4] Regulation 1225/2009. In practice, the Community interest criterion is generally not difficult to establish.

[5] See e.g. the comments of George Osborne at the First UK-China Financial Forum.

[6] By way of example, last year the UK secured £8.2 billion of Chinese investment towards a new nuclear plant in Somerset.

[7] For an interesting discussion about the UK's historical stance towards free trade see: Ha-Joon Chang, (2007), "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism", Bloomsbury Press.

[8] See for example the comments made by the Economy Minister for France, Emmanuel Macron: http://www.ft.com/cms/s/0/a8da356a-f753-11e5-96db-fc683b5e52db.html#axzz45jd3mZ79

[9] The UK has "generally argued" against the imposition of trade defence measures being taken against Chinese exporters. http://www.ft.com/cms/s/0/e5d692b6-f662-11e5-803c-d27c7117d132.html#axzz44PMM8AkJ

[10] The Commission has outlined plans to strengthen its trade defence instruments and shorten investigations. Last month the Commission also published a non-binding paper setting out what could be done to preserve the steel sector in Europe.

[11] See e.g. the comments of the Business Secretary, Sajid Javid: "[t]here are many British companies…that would tell you if duties got out of control … then it would cost them jobs and growth and it would it certainly cut their exports." http://www.theguardian.com/business/2016/mar/30/would-brexit-help-britain-steel-industry

[12] President Xi has encouraged Britain as "an important member of the EU", to play a role in strengthening EU-China trade ties. The Financial Times, China's Xi Jinping urges UK to stay in EU, 23 October 2015 - http://www.ft.com/intl/cms/s/0/df78cae4-797e-11e5-933d-efcdc3c11c89.html#axzz3x2fui1hZ. As part of the EU, the UK is part of the world's largest market, with a population of 505 million and worth roughly £11.3 trillion in 2014 (or 24% of the global economy). (Bank of England, EU membership and the Bank of England, http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf.) Sajid Javid, the Secretary for Business, has said that the UK would be more vulnerable to retaliatory actions from China in response to anti-dumping tariffs if it were to leave the EU. http://www.theguardian.com/business/2016/mar/30/would-brexit-help-britain-steel-industry

[13] http://www.theguardian.com/business/datablog/2016/mar/31/bank-bailout-v-tata-bailout-how-the-costs-compare-steel-crisis. See, for example, the recent article in the Telegraph by Boris Johnson, one of the leading advocates of Brexit: http://www.telegraph.co.uk/news/2016/04/03/pity-the-port-talbot-workers--their-country-is-powerless-to-help/

[14] Article 107 of the Treaty on the Functioning of the European Union.

[15] Commission Decision No 2496/96/ECSC.

[16] http://europa.eu/rapid/press-release_STATEMENT-16-118_en.htm

[17] http://www.ft.com/cms/s/0/e5d692b6-f662-11e5-803c-d27c7117d132.html#axzz44PMM8AkJ

[18] See the value of non-crisis state aid loans made by EU Member States in 2013, page 17 of the Global Counsel Report: "BREXIT: the impact on the UK and the EU", available online at: http://www.global-counsel.co.uk/system/files/publications/Global_Counsel_Impact_of_Brexit_June_2015.pdf

[19] This is the position for Norway as a member of the European Economic Area. See Articles 61 to 63 of the Agreement on the European Economic Area.

[20] HM Revenue & Customs: Overseas Trade Statistics - Non-EU and EU Trade, 8 January 2016, available at https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/EU_and_Non-EU_Data.aspx

[21] Britain's steel industry exported some three million tonnes of steel products into the EU last year. http://www.bbc.co.uk/news/uk-politics-35927542


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