1. SBB China Steel Export Seminar Shanghai, 17 April 2007 "THE POLITICS OF STEEL TRADE“ "EU Trade Policy towards China" by R. PLIJTER, Adviser on Industry, DG TRADE, European Commission

2. EU Trade Policy towards China Introduction The fast growth of the Chinese steel industry has created headaches around the world. This relates to high raw materials prices, fast growing exports of Chinese steel, reduced exports of steel of other nations to China. At the same time, China declares its steel industry of strategic importance and has created an unfavourable investment climate in the steel industry. Is all this criticism fair? Is this irresponsible behaviour in a world steel market where producers are enjoying and users are suffering from high steel prices? Seen from Brussels, in the European Commission where we are largely at the receiving end of these developments, we think that to a considerable extent this criticism is justified and that China, the government and the steel industry, should do something about it. First some background concerning the Community's trade policy in general, and in steel in particular, some recent developments in the EU-China steel trade relations and finally some issues to illustrate what our problems are and what we think should be done.

3. The Community trade policy Low import duties in general and zero for steel products. Open market for foreign investment as illustrated by the Mittal take-over of Arcelor and by Tata of Corus. In principle, no state aid, except for environmental improvement above the legal requirements, research and development and capacity closures. Only a limited number of AD cases and a track record of restraint in the 2002 US 201 crisis. Following steel crises in the 80ies and 90ies of the last century and subsequent restructuring, Europe has a healthy steel industry with, after the further recent consolidation process, steel companies which can follow and adapt to the market rather than overreact and spoil the market. It is also a steel industry which adapts to problems as global warming by investing in solutions by which the carbon imprint of steel-making will be reduced. Some 20% reduction has already been achieved since 1992. The research is directed towards an ultra-low carbon steel-making process. I take it that in this forum I do not have to explain the dramatic development in the Chinese steel industry in terms of capacity and production. One figure only: since 2001, an annual growth in production on average of 25%. Therefore, I now turn to the EU-China steel trade relations.

4. EU-China trade relations in steel Also in the bilateral steel trade relations dramatic developments have taken place. From a solid net importer of 1,3 million tonnes in 2003, China has become a net exporter to Europe of 4,7 million tonnes. Behind these dry figures are hidden: -a reduction of Community exports; a result from increased production in China in the higher levels of the value chain. -an important export drive, overall about 50 million tonnes, of which Europe received in 2006 around 6 million tonnes. This contrasts strongly with the low level of ambition on export in the new steel policy. -China took in 2006 around 15% of total European imports. Overall, imports are 18% of European consumption at this stage. These developments have taken place when prices for steel were at high levels. In general, the steel industry has been capable to pass on the considerable higher costs of raw materials to their customers. Steel users, in 2004 but also now, are complaining about these high prices, in Europe in particular where the competitiveness of the industry in general is a matter of high priority. Steel producers, however, fear that an uncontrollable avalanche of steel imports will destroy the market. Governments fear that further restructuring would become unavoidable as a result of competition from imports, mainly from China, where there is serious suspicion of subsidies, failing restructuring and protection of the Chinese steel industry as a strategic sector. In short: China is not a market economy.

5. The issues Let me spell out the issues: First on the side of raw materials, there we have had serious problems mainly on coke. In 2004, the existing licencing system created artificial price increases for exported coke. In Europe, where we import around 4.5 mio tonnes of Chinese coke every year, we saw price increases to four times the previous level. At some stage the price of an export licence was higher than the actual product. This lead to a serious distortion of competition with the help of the licencing system which is in itself contrary to rules of the WTO. We are grateful that a practical solution could be found and since then coke exports from China come to Europe in quantities that our industry needs at reasonable prices. However, we continue to take issue with the licencing system. China has promised but has not yet presented a system that is WTO compatible. Concerning iron ore, China and Europe are in the same boat: we both have to import this raw material. Early 2006 we were worried that the Chinese government intended to interfere in the markets when industry had to accept a new price increase. However, we noted that this finally did not materialize. This year we welcome the leadership of your industry to take responsibility for contractual price negotiations and the smooth conclusion of those.

6. Secondly, on the side of production capacity, I noted already that in China market forces do not function properly. Subsidies, government ordered loans, export tax manipulation have created a situation where supply does not get the signals of the demand side and has created overcapacity. At the same time, old, inefficient and polluting capacity, according Chinese government and industry sources around 75 mio tonnes, is not closed and is allowed to go on producing. Declarations of good intention to start the closure process have up till now produced very little. At the closure of this years People's Congress your prime minister made such declarations also. We follow closely its implementation. At the same time, the Chinese steel industry is fragmenting. Where elsewhere in the world the market share of the biggest steel companies in total production is growing, in China the contrary can be seen. That is a reason for concern since relatively small companies are not capable to influence market conditions and even tend to increase production when prices fall and consequently make things worse. Therefore, consideration in the Chinese steel industry is necessary in order to create a more responsible industry capable to adapt to market conditions. The creation of bigger steel companies would also allow China to participate in the globalisation process that is affecting the global steel industry. A further aspect of this globalisation process is that companies of other countries should be capable to invest in China. The new Chinese steel policy considers the steel industry a strategic sector which implies that majority share holding is not allowed. We think this is wrong and not in the interest of the Chinese steel industry. In Europe we have experienced the devastating effect of a policy of national champions at the cost of a long and painful restructuring process. In the context of negotiations between Europe and China on a new Partnership and Cooperation Agreement we intend to address this issue in a general way. The steel policy will certainly be a hard point for Europe.

7. Finally, on trade in steel products. Earlier, I referred to the steep increase of imports of Chinese steel into the European market. We consider this growth unsustainable. First of all in the light of the risks for the European market. Also, given the lack of a proper functioning of the Chinese internal market, exports are an easy alternative for the necessary restructuring and closure of inefficient polluting capacity. It is exporting internal problems which create external problems. We are happy to have the Steel Contact Group as an informal mechanism to address these issues between officials and industry from both sides. Most recently we discussed these issues on 2 February. The Chinese side at that occasion accepted our concerns and undertook to diversify its exports away from Europe. In Brussels we follow the developments closely. With our system of import licences, the prior surveillance system, we monitor the situation. First indications are that Chinese steel imports are stabilising, but at the very high level of the last quarter of last year. The Chinese steel industry has to pick up its responsibility more firmly and put its words into action. Last week, I discussed these issues again with my Chinese counterparts and made them aware of the high concern we continue to have. Further discussions with China will take place this week in the Economic and Trade Working Group in the context of our present bilateral agreement. I am sure that also Commissioner Mandelson when he will visit China in June will discuss the matter with Trade Minister Bo.

8. Conclusion From these issues emerge that China should take a more responsible position in the global steel industry: -it should do away with WTO incompatible measures in the field of raw materials; -it should consolidate the steel sector and close inefficient and polluting overcapacity; -it should participate in the globalisation process and allow steel companies from elsewhere to participate with majority share holding in this sector. All these measures are doable in a situation of continued strong economic growth and strong growing demand for steel. If these measures are not taken now, they will only become more difficult when a weaker steel market will come. Thank you for your attention.