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Steel and Whiskey Together in G20 Discussions

by internationaldirector

Written By: Darren Morris – Corporate Finance

Among the discussions and agreements that arose during the G20 summit held at the beginning of July in Hamburg, Germany, the problem of steel-production overcapacity was one that will have to be settled once and for all. A strict calendar for completion was set by G20 participants:

  • prior to August, the collection and sharing of information will need to be improved;
  • by November, credible capacity-reduction policies will have to be announced.

What made the G20 move forward suddenly on steel-overcapacity production?

The challenge is to move quickly and prevent US President Donald Trump from taking the leap and carrying out his threat to tax steel imports into the United States in the name of national security—a decision that would automatically trigger retaliatory measures on the part of Europeans. Heating up tensions a little more at the G20 summit, steel threw the European Union, the United States and China into a curious three-player game, illustrating the complex sets of alliances around the commercial stakes.

Jean-Claude Juncker, president of the European Union (EU), declared before the opening of the summit, “It seems that some are considering taking measures against steel imports in the near future. If this were to continue, the European Union could react accordingly.” Without naming it, Jean-Claude Juncker was referring to the US anti-dumping investigation initiated in the spring by President Trump on imports of cold-drawn mechanical tubing and certain carbon and alloy steel cut-to-length plates, which could lead to the announcement of additional import taxes.

European countries are the main exporters to the United States and are targeted by Trump.

In fact, on the list of enquiries published by the US Census Bureau for April 2017 on its steel-trade data were a number of investigations addressed against European countries, such as “Issuance of Antidumping Duty Order” and “Final Affirmative Antidumping and Countervailing Duty Investigations”. According to the statistics published by the Census Bureau on steel trade entitled “Total US steel imports November 2016 Year to Date final figures”, US steel imports amounted to 27.5 million tonnes (or $20.3 billion), of which 7.9 million tonnes ($6.5 billion) were shipped from the EU, and only 0.7 million metric tons from China (for a value of $0.8 billion).

China is an important partner of the European Union, but not of the United States.

The US cold drawn steel procedure involved $152.6 million in US imports in 2016 and targeted export countries such as Germany ($38.8 million), China ($29.4 million), Switzerland ($26.2 million), India ($25 million), South Korea ($21.3 million) and Italy ($11.9 million). However, the European Union launched its own offensive against Chinese steel: on June 9, the European Commission took further measures against some of the steel products coming from China, which had been accused of receiving public subsidies that impeded free competition. Meanwhile, the US’s April 2017 imports from China represented just 2 percent of all US steel-mill imports.

China is by far the world’s top steel producer, accounting for around 50 percent of world production. But it is consuming its own production to a large extent. Thus, one can read in the Census Bureau report that the volume of Chinese steel-mill exports decreased by 26.7 percent to 26.5 million metric tons in year-to-date 2017 (through April) from 36.2 million metric tons in year-to-date 2016. And the United States received only the 25th largest share of Chinese steel exports at 0.94 percent, or 248.9 thousand metric tons so far in year-to-date 2017.

The real situation of the United States is that it is producing steel at three-quarters of its production capacity. And US steel published a $180 million loss in first quarter 2017, although its competitors posted profits. Increasing the costs of imports could help the US steel industry but would mainly impact Europe and not China.

Bourbon whiskey retaliation?

Europeans do not like to see themselves threatened by Washington, with trade being one of the thorniest subjects at the G20. “In no case can Europe be put on the same level as countries that have practices of unfair competition,” said the French president, Emmanuel Macron, promising a “very rapid” reaction in case of measures against European exports. And Europeans rapidly issued a list of US products that could be subject to sanctions, ranging from Kentucky whiskey to orange juice and dairy products.

Jean-Claude Juncker refused to be that precise but stressed that Brussels, ready for the battle, would take only “a few days” to react. China remained silent on the issue but answered to Europeans that they had misunderstood the financial-loan scheme put in place for Chinese steel producers.

What is really at stake?

Beyond the steel-import issue and resultant talks, for which G20 had promised a year ago to exchange information but did not succeed, what is really at stake is the world-trade exchange between countries, which President Trump is threatening. But Washington has sent out contradictory signals on this subject: if the United States were to finally accept a formula on the attachment to free trade discussed at the G7 of Taormina, Sicily, last May…but Donald Trump reiterated the protectionist line he hammered out during his 2016 presidential campaign. German Chancellor Angela Merkel called for a multilateral solution to the overcapacity of steel. Otherwise, the likelihood of bilateral measures will simply be greater.


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