Downstream steel sector owes Macsteel a very expensive bottle of whisky

SA’s safeguard duties on hot-rolled steel were meant to terminate on August 17 last year, but the International Trade Administration Commission (Itac) of SA and trade, industry & competition minister Ebrahim 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 hearing, resulting in the duties terminating in August this year.

To make sense of events it is important to understand what a safeguard duty is and why it is implemented. When a country joins the World Trade Organization (WTO), as SA did as a founding member in 1995, certain commitments are made to the other members. One of these 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 about 2004, when concerns were raised about the (potentially abusively) dominant position ArcelorMittal SA (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. It was granted its 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 that allows for our WTO bound rate to be breached temporarily to allow an affected industry time to adjust. If a safeguard duty remains in place for longer than three years (the WTO-agreed period for the temporary breach of the bound rates), affected countries can claim compensation in the form of reduced duties on their products sold 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 former US president Donald Trump’s duties on steel and aluminium.

Initiate review

Amsa was granted a 12% safeguard duty, to reduce each year (from 12% to 10% and then 8%) until termination in August last year. Safeguard duties are not implemented against less developed nations and countries that account for less than 3% of the import volume in the original period of investigation.

If duties are to be extended beyond three years, Itac needs to initiate a review at the halfway mark and complete the review before the three years are up. The duties could then be extended for up to six years, but they need to reduce each year and cannot be extended any further than that. If the safeguard duties terminate, as they should have last year, no further safeguard duties can be implemented for another two years.

While the safeguard duties are in place countries 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 in SA, a few important developments occurred. Fifty temporary rebate items were created just on hot-rolled steel, accounting for the vast majority of all temporary rebates available. These rebates give duty relief on imports while they cannot be supplied by Amsa. This was an astonishing development since it implied that Amsa either could not supply the volumes required, or did not manufacture certain technical grades of steel. 

Trading patterns also shifted as steel consumers found new sources of supply that were exempt from the safeguard duties. When this happens, Itac can impose the safeguard duties on new countries as soon as they pass 3% of the import volume in the original investigation period. Amsa complained about this shift in supplying countries, both in media releases and in its application for the extension of the safeguard duties, calling it circumvention.

Strange position

But it is not circumvention. It is simply common sense, and the remedy is for Itac to extend the safeguard duties to those countries. But this safeguard was poorly administered and nothing was done. 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 its pleas went mostly unheard, either by Itac or the minister.

This placed the safeguard in the very strange position of being simultaneously ineffective and harmful — ineffective because most of the imports were either rebated or from exempted countries, and harmful because Amsa prices its products according to a price control formula. The duties allowed a higher domestic price, to the detriment of companies that could not import.

The extension of the safeguard by an extra year was questionable for the following reasons:

• The duty was explicitly imposed for three years, with a clear termination date in the original implementation gazette.
• It did not phase down after year three.
• There was no talk of compensation and retaliation, which is baked into the system when the three-year deadline is passed.
• There was no midterm review, and the review has still not been completed almost a year after the expiry.

In the court papers Itac blamed Amsa for asking for the duty as late as it did, but the regulations actually place the burden on Itac to initiate the midterm review. They don’t address why Itac took so long to initiate the investigation after it received the application on April 1 2020, giving Itac enough time to verify the application and initiate and finalise the investigation before expiry on August 16 2021. Instead, Itac initiated the investigation only on July 24, giving it just three weeks to receive comments, consider them and hold public interest hearings (which it refused to do). Interested parties had been given 20 days to respond, taking the deadline to August 13, just three days before the duties expired.

Downstream industry

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 after 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, and the result was a termination of the duties in August 2021. Can Amsa bring another safeguard application? Yes, but no safeguard duties can be imposed for another two years, hopefully giving the downstream industry a moment to catch its breath.

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

• MacKay, a former associate director of the Deloitte SA tax division, is founder and director at XA International Trade Advisors.