This is part two of a two-part series on recent trade developments in the U.K.’s pending divorce with the European Union, read part one here if you missed it.
British Prime Minister Theresa May appears more wedded to a policy of not extending Brexit past the two-year deadline that was dictated by the outcome of the referendum. Possibly due to her years in office as Home Secretary, May seems desperate to reclaim control of the U.K.’s borders and to reject the jurisdiction of European courts, regardless of the economic consequences of taking such a hard-line position.
Committed Brexit supporters have championed the establishment of free trade agreements with countries outside the European Union, almost as an extension of their rejection of Europe. But the reality is geography will dictate that the E.U. is likely to remain the U.K.’s biggest export market after Brexit whatever Brexiters’ global ambitions may be.
Who Loses More Post-Brexit?
According to a Financial Times article last November, U.K. exports to fellow E.U. countries accounted for 48% of total exports and, in the 18 months before that, the figure ranged from 38% to 51%. The U.S., by comparison, was just 22% and few beyond the hardliners give any credence to the benefits of a President Donald Trump-inspired U.S.-U.K. Free Trade deal, knowing that in Britain’s desperation for an alternative to Europe such a deal would likely be very one-sided in favor of the U.S. Read more
The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.
See the latest multimedia version of this story here.
This is our final top-rated post of 2016. Chinese market economy status was a huge issue for the entire year and this interactive package, originally published in May, put all facets of the problem into one package. How China will change its economy to compete with the rest of the world without overproduction for export is still an open question and a major threat to market stability. — Jeff Yoders, editor
Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.
From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.
But nothing compares to what he’s seeing now.
“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”
Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.
However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.
Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.
“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”
And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.
Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”
So what’s different today, compared to 2008?
For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.
A History of Unfair Trade?
The world may have never encountered a more crucial Year of the Monkey than 2016.
That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.
In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more
If China had its way, that time for the U.S. — and the whole gamut of WTO-member nations — came precisely yesterday, December 11, 2016. That’s the date that China claims it should be given MES automatically, according to a line item in the country’s WTO Accession Protocol made official exactly 15 years ago.
So what has happened? Do we all of a sudden live in a world where China is given free reign in trade, on equal footing with the U.S. and E.U.? Not so fast. Read more
President-elect Donald Trump’s recent announcement that he is “all for NATO” may have offered some comfort, but his repeated statements during the campaign regarding the North Atlantic Treaty Organization and Europe’s responsibility to look after its own defense have sent a shiver down the collective spines of E.U. countries, the likes of which they have not felt since the formation of NATO in 1949.
While very few in Europe would agree, it is possible that the President-to-be’s position on NATO may ultimately be to Europe’s greater good. A recent article in Carnegie Europe entitled “America’s European Allies” highlights not just the issue of underfunding, but the appalling state of European defense structures and the inherent inefficiencies that result mean that of the $214 billion (€200 billion) that EU member states collectively spend each year on defense, much is wasted.
Would you rather a standing personnel group? Or an F35?
More troubling even than that failure of accounting is that some states don’t even spend the agreed-upon 2% of gross domestic product on defense, an egregious violation of the compact of being an E.U. member-state. These structural issues undermine the region’s ability to effectively mount a unified defense.
People vs. Weapons
The first issue is high personnel costs. According to the article, cash-strapped Greece spends some 2.38% of the country’s GDP on defense, significantly in excess of the 2% minimum agreed by NATO members summit in Wales in 2014. Unfortunately, out of its total defense budget of $4.6 billion (€4.2 billion), Greece spends almost 70% on personnel alone. No weapons. Read more
Prior to Brexit, the leaders around the world, including Barack Obama, lined up to issue warnings and even veiled threats of the consequences of an exit vote. The International Monetary Fund and World Bank warned of the risk of a stock market crash and sharp recession if the U.K. decided to leave.
Even the U.K.’s own Treasury issued a report and numerous briefing notes to warn of the same dire outcome. Well, for better or worse, the British people went ahead and voted to leave anyway, and guess what? The stock market soared and growth has continued.
The Forecast… Wasn’t Armageddon
This week, the IMF predicted 1.8% growth this year for the U.K. and 1.1% next against a softening global growth background. According to the BBC, Economists for Brexit, a group of eight influential economists which supported the Leave campaign ahead of the E.U. referendum, criticized even this relatively optimistic forecast from the IMF arguing that pre-Brexit forecasts had already been proven wrong. Read more
The E.U. is certainly ramping up the pressure. This year, alone, the European Commission has 37 anti-dumping and anti-subsidy measures in place for steel products, 15 of them concerning China, slapping anti-dumping duties on products such as rebar, cold-rolled carbon steel and cold-rolled stainless steel, ranging between 18.4 and 25.3% for imports from China.
Everybody Gets on the Tariff Bandwagon
The E.U. is scheduled to rule on plate and hot-rolled coil from China in November and while rates haven’t been at the same level as the U.S. where up to 520% duties are have been applied, they are estimated by the industry to need to be in the 30-40% range in order to be effective.
Can China’s zombie steel mills be shut down? Beijing is trying a new tactic. Source: Adobe Stock/ZJK.
Yet despite the unprecedented level of action, carbon steel imports in the year to May rose 21% with China now representing 27% of total E.U. imports, while stainless steel imports rose 17% over the period, E.U. data shows, even though demand remained almost flat. Read more
Much of the focus so far, and nearly all of it gloomy, has been on the impact of the U.K.’s decision to leave the European Union at some point in the future. Most are proceeding with caution because, as yet, no formal announcement of intent has been given and the exit process will take a minimum of two years, so once the dust has settled both sides will dig in for a prolonged period of trench warfare during which the real work will be done, negotiating the exit terms.
Although most (apart from a naive few who are still gazing at the sunlit uplands of total independence) concede Britain will be worse off, at least in the short to medium term, not so much has been said about the impact on Europe.
Durable Trade in Durable Goods
Apart from the fact that the U.K. runs a massive trade deficit with Europe, Germany alone exports close on $100 billion a year of goods and services to the U.K., mostly cars and high-end consumer goods. The UK is also a net contributor to the E.U. budget. Net is the key word here, as Brexiters made much of a spurious £350 million a week figure that supposedly Britain paid to the E.U.
In fact, when the payments the E.U. makes back to British farmers — such as aid to deprived areas, support for research, etc. — the net figure is probably half that, but the U.K. contribution remains a significant part of the E.U.’s €145 billion annual ($160 billion) budget.
E.U. Positive and negative contributor states. Source: Financial Times.
This chart from the Financial Times shows the contributions per capita, not the total contributions, so those countries in the upper section with the larger populations are the major source of funds – Germany, France, the U.K. and Italy
The E.U.’s 2015 budget. Source: Financial Times.
The FT says that, under the pre-Brexit status quo, Britain would have made a net contribution of £65.7 billion from 2014 to 2020, with £47.5 billion ($60 billion) of the total coming in the years 2016-2020. Read more
As if there hasn’t been enough fall out from the U.K.’s decision last month to leave the European Union, a Financial Times article reveals that European Commission president Jean-Claude Juncker is set to ditch fast-tracking the European Union’s trade deal with Canada, officially known as The Canada and European Union Comprehensive Economic and Trade Agreement (CETA), a deal that has already taken five years to negotiate.
In a move criticized as undemocratic, Juncker had sought to push approval through on the nod of trade ministers and ministers of the European Parliament, giving no recourse to the 38 parliaments (some of them are regional, only 28 are national members of the E.U.) if they don’t agree to it.
France, Germany Block Fast-Track
Apparently, Berlin and Paris put a stop to the Commission’s move, seen by some as yet another example of the Commission’s undemocratic behavior put into the spotlight by Britain’s objections to rising control from Brussels. Read more
In its future energy scenarios report, the U.K.’s network operator, the National Grid, said even its most optimistic scenario suggests it will miss the European Union’s15% energy consumption from renewable sources 2020 climate target for member-states by at least two years.
“While we believe the electricity sector can achieve its contribution to the 2020 renewable target, we believe the progress required in the heat and transport sector is beyond what can be achieved on time. As a result, none of our scenarios achieve the 15% level by the 2020 date. Our (most optimistic) Gone Green scenario is the earliest to reach this, meeting the target by 2022,” the report stated.
Our Renewables MMI fell 2% to 53 this month as it still traded in the narrow range it has fluctuated in for much of the year, but the U.K.’s situation mirrors that of many industrialized nations and shows just how difficult it has been to reliably grow renewable energy markets without burning coal or natural gas as backups. Despite the best of intentions, the U.K. simply cannot make its 15% energy reduction targets and the Leave campaign took full advantage of that fact last month when it promised citizens that it would get an independent U.K. out of such deals. But can it? Really?
Can the UK Escape EU Climate Deals By Leaving?
Withdrawing from the E.U. will certainly give the U.K. an easier route on heat and transportation policies in the short-term. The island nation will no longer be obligated to hit the 15% reduction target for 2020 whether it actually leaves two years from now or later.
But when it comes to renewable electricity, long lead-times to build new wind and solar farms (particularly wind in the U.K.) mean most of the projects needed to hit the E.U.’s 30% reduction goal for 2030 have already been granted planning permits and government money has been spent on their contracts. In other words, the genie is out of the bottle for almost all of the U.K.’s 2020 goals and even for some of its 2030 goals. It’s going to be really hard to put that genie, economically, back in the bottle.
The U.K.’s Own Goals Are More Ambitious in the Long Term
There’s also the fact the U.K.’s own unilateral Climate Change Act actually imposes even tougher requirements for cutting carbon emissions. Under the Act, the U.K. must cut its carbon emissions by 80% on 1990 levels by 2050. Again, whoever is Prime Minister and in charge of the National Grid can push the 15% 2020 goal and even the 30% 2030 goal set by the E.U. further off, but that 80% 2050 goal will only hang more ominously over the U.K. like a figurative sword of Damocles if politicians decide to do that.
The 2008 Climate Change Act also requires the government to set legally binding “carbon budgets,” which have already been set up. A carbon budget is a cap on the amount of greenhouse gases emitted in the U.K. over a five-year period. The committee provides advice on the appropriate level of each carbon budget. The budgets are designed to reflect a cost-effective path to achieving the long-term objective of an 80% reduction by 2050. The first four carbon budgets have already been put into legislation and run through 2027.
The early implementation of regulations makes it even more difficult for any future government to get out from under the U.K.’s own 2050 targets as utilities, local governments and the federal bureaucracy has already appropriated money to achieve its short-term goals. So, the possibility of a repeal of the 2008 Climate Change Act is highly unlikely, as well, although some are vocally advocating it just as they did Brexit when that idea was called “bonkers” and we all know how that turned out.
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So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”
If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.
What Might A Future Deal Look Like?
In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.
Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.
The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more