Steely questions

High-level international talks on steel get under way at the OECD, 18-19 December 2002. We asked Herwig Schlögl, OECD Deputy Secretary-General, to explain.

OECD Observer: What are the main issues at stake in the OECD steel talks resuming this December?

Herwig Schlögl: The OECD High-Level Steel Initiative launched in September 2001 focuses on two principal areas. First, the closure of inefficient steel-making capacity and related industry restructuring; and second, the strengthening of multilateral rules – what we call “disciplines”– on government measures and industry practices that distort steel markets and are one of the main causes of inefficiency in the first place.

At the meeting on 18-19 December 2002, further progress is likely to be made with respect to the intergovernmental peer review of steel capacity and industry restructuring. The high-level group will also discuss ways to improve monitoring, so as to ensure more accurate, complete and timely reporting and review.

As far as accelerating and facilitating closures is concerned, the group may give a mandate to the OECD Capacity Working Group to come up with ways that will help finance the social and environmental costs associated with closures. This could include further work on the use of levies, for instance, on steel consumption, to help pay for closures.

Further co-operation with international financial institutions, such as the World Bank and regional development banks, will also be explored. On tackling government measures, the main issue will be a decision on what countries could do to cut back subsidies. They will be asked to endorse a talks’ process towards an agreement that would sharply limit government support for steel, and in the meantime to make immediate voluntary commitments to limit, and where possible eliminate, steel subsidies.

Do we know how much over-capacity there is in the market? Will we be talking numbers or broad principles?

HS: There is no single agreed definition of over-capacity. However, world crude steelmaking capacity, which is about 1,067 billion tonnes, exceeded production by around 225 million tonnes in 2001. The overhang is expected to decline in 2002 and 2003 to a level of around 178 million tonnes. According to the information provided by countries participating in the OECD talks, up to 128 million tonnes of inefficient steelmaking capacity have already been or will be permanently closed between 1998 and 2005.

A more important question is how much of this overhang is inefficient – in other words, capacity that would not be kept on stream without government support. Remember, while it is over-capacity that has clearly led to a glut in the market, the OECD initiative is designed to clear that glut by improving efficiency. It is not some attempt to prop up steel prices artificially – that would be contrary to the spirit of the OECD. Rather, our intention is to remove unfair distortions in the market place and restore efficiency.

Facilitating the closure of such inefficient capacity is one of the key issues that is being addressed at the OECD in December and beyond.

Why is steel such a thorny market to deal with?

HS: Steel producers face particular problems when demand is declining because of the high costs of exiting the market. Companies cannot easily close shop and leave, but are often bound to workers, whole communities and local economies, sometimes over many generations. Moreover, governments worldwide often intervene in their domestic steel market for strategic or protective reasons, and this has contributed to the massive build-up of over-capacity, resulting in significant, longterm distortions in steel markets.

In addition, international steel trade is more affected by industry practices and government measures than almost any other traded merchandise sector. Take the likes of safeguard measures, anti-dumping and countervailing duty orders: steel, which represents only 2% of total world trade, is the target of up to 50% of all measures taken under each of these areas, and trade disputes over the alleged abuse of trade remedies are common.

Steel producers have been at loggerheads before. What might make the difference this time?

HS: Our High-Level Steel Initiative provides a unique opportunity to reach agreement on a broad range of such front-burner issues. Virtually all steel producers in the OECD area, and a good number in transition and developing economies, are determined to find a solution to the problems we face in the global steel market. In fact, agreement among industry participants on the need for a multilateral solution and the appropriate way to address the main culprit of market-distorting subsidies appears to be even stronger than among governments. If a sufficient number of governments had the political will, I am convinced that an agreement could be struck quite quickly. That would be good for steel and international trade in general. OECD governments are participating in the meeting, as are governments from most key steel-producing non-OECD economies. This is most encouraging.

If there is an agreement, how can you ensure it will be implemented?

HS: We would like a multilateral agreement on steel subsidies hammered out at the OECD to be eventually incorporated into the WTO framework. This way, any failure to carry out the provisions of the agreement would be subject to binding settlements under the WTO’s Dispute Settlement Mechanism. This framework should be finalised in 2003, which is why we need to get off to the best possible start at the OECD in December. If we do that, then support for the agreement will grow.

And if the deadlock is not broken in December?

HS: First of all, I would say that there is not really any deadlock as such. Participants in the OECD process concur – without exception, I think – that subsidies are one of the principal factors contributing to the steel industry’s long-term problems with over-capacity. They would all like to see the situation change for the better. How this could be done is not so clear, particularly when viewed in the broader context of international trade. Once again, however, I would emphasise that if the political will were there, impediments would melt away like ice cream on a summer’s day. Remember, there is no explicit deadline for the OECD High-Level Steel Initiative, so discussions could continue. But in my view, in order to keep up the momentum of this process, substantive progress on the two issues at stake in the December meeting is absolutely vital for this important initiative to succeed.

For more information on the steel talks and their outcome, contact dsti.contact@oecd.org or visit the Newsroom on www.oecd.org

©OECD Observer No 235, December 2002




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