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South African Safeguard duties on hot-rolled steel to terminate in August 2021

By Donald MacKay | Jun 3, 2021

The safeguard duties on hot-rolled steel were meant to terminate on 17 August 2020, but ITAC and Minister Patel decided to extend them beyond their termination date. Macsteel challenged this decision and a settlement was reached with the Minister, on the day of the court hearing, resulting in the duties terminating in August 2021.

Understanding safeguard duties

To make sense of what happened, it’s important to first understand what a safeguard duty is and why they are implemented. When a country joins the WTO, as SA did as a founding member in 1995, certain commitments are made to the other members. One of these commitment is an upper limit on the level of Customs duties we can impose on a given product, known as the bound rate. In the case of hot-rolled steel this is 10% and this was the duty level we kept in place until around 2004, when concerns were raised around the (potentially abusively) dominant position ArcelorMittal (AMSA) held in the market. The duties were removed and remained at zero until 2015, when AMSA requested a raft of duty increases back to the bound rate. Included in this application, was the hot-rolled steel we are now dealing with. AMSA were granted their wish and the duties on most primary steel products moved up to 10%.

Shortly thereafter, AMSA applied for a safeguard duty on hot-rolled steel. A safeguard is an emergency measure, which allows the temporary breaching of our WTO bound rate to allow the affected industry time to adjust. If a safeguard duty remains in place for longer than 3 years (the WTO-agreed period for the temporary breach of the bound rates), then the affected countries can claim compensation in the form of reduced duties on their products into SA. If SA refuses to compensate them with lower duties, they can retaliate and impose duties on goods we export to them, which is what happened when China and the EU retaliated against Trump’s duties on steel and aluminium.

AMSA were granted a 12% duty, which reduced each year (12%, 10% and 8%) until it terminated in August 2020. Safeguard duties are not implemented against less developed nations and countries which account for the less than 3% of the import volume in the original period of investigation. Bear this in mind as it will become important in this case.

If you are going to extend your duties beyond 3 years, then ITAC needs to initiate a review at the half-way mark (18 months) and complete this review before the 3 years are up. The duties could then be extended for up to an extra 6 years, but they need to reduce each year. They cannot be extended any further. If the safeguard duties terminate, as they should have last year, no further safeguard duties can be implemented for another 2 years.

While the safeguard duties are in place, you are meant to use the time wisely, to become more competitive. In fact, beneficiaries have to submit an adjustment plan, explaining what they will do to become more competitive against imports.

Once the duties were imposed, a few important developments occurred. 50 temporary rebate items were created just on hot-rolled steel, accounting for the vast majority of all temporary rebates available. This is an astonishing fact and speaks to AMSA either not being able to supply the volumes required, or not manufacturing certain technical grades of the steel. These rebates give duty relief on imports while they cannot be supplied by AMSA.

We also saw a shift in trading patterns as steel consumers found new sources of supply exempt from the safeguard duties. When this happens, ITAC can impose the safeguard duties on the new countries as soon as they pass 3% of the import volume in the original investigation period. AMSA complain about this shift in supplying countries, both in their media release and in their application for the extension of the safeguard duties, calling it circumvention. But it’s not circumvention of course. It’s simply common sense and the remedy is for ITAC to extend the safeguard duties to those countries. This safeguard was poorly administered and nothing was done. As we neared the end of the safeguard period, the duty paid status on hot-rolled steel looked like this.

By 2020, only 15% of the imports of hot-rolled steel attracted duties. Russia surpassed the 3% threshold and remained beyond that level for 17 months, without ITAC doing anything. Taiwan remained over the threshold for 10 months before attracting the safeguard duty. AMSA had applied for the exemptions to be removed, but their pleas went mostly unheard, either by ITAC or the Minister.

This placed the safeguard into the very strange position of being both ineffective and harmful at the same time. Ineffective, because most of the imports were either rebated or from exempted countries and harmful, because AMSA prices their products according to a price control formula. The duties allowed a higher domestic price, to the detriment of companies who could not import.

The legality (or not) of the 1-year extension

The extension of the safeguard by an extra year is questionable for a few reasons. Firstly, the duty was explicitly imposed for 3 years, with a clear termination date in the original implementation gazette. Secondly, it did not phase down after year 3 and thirdly there was no talk of compensation and retaliation, which is baked into the system when you pass the 3-year deadline. Fourth, there was no mid-term review and in fact, the review has still not completed, almost a year after the expiry.

In the court papers, ITAC blame AMSA for asking for the duty as late as they did, but the regulations actually place the burden on ITAC to initiate the mid-term review. They also don’t address why ITAC took so long to initiate the investigation from when they received the application on 1 April 2020, giving ITAC enough time to verify the application, initiate and finalise the investigation, before expiry on 16 August 2021. Instead ITAC only initiated the investigation on 24 July 2021, giving them only 3 weeks to receive comments, consider them, hold public interest hearings (which they refused to do). Interested parties had been given 20 days to respond, taking the deadline to 13 August, literally 3 days before the duties expired.

The litigation

Macsteel challenged the legality of the extension of the safeguard duty. None of the respondents spent a lot of time dealing with the legality or efficacy of the duties while they had been in place, instead simply blaming AMSA for bringing the case late and saying the economic consequences of removing the duties would be dire, a position clearly no longer held, following the settlement proposed by the Minister.

We are not told why the Minister proposed a settlement instead of proceeding with the litigation, but he did, the end result being a termination of the duties in August 2021. Can AMSA bring another safeguard application? Yes, they can, but no safeguard duties can be imposed for another 2 years, hopefully giving the downstream industry a moment to catch its breath.

If you are in the downstream steel sector, I do believe you owe Macsteel a very expensive bottle of whisky.

Michał Jarmoluk image in Pixabay

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