Flawed petition?

At a recent public hearing on Megasteel Sdn Bhd’s
petition for safeguard measures on imported hot-rolled coil (HRC),
Melbourne-based trade lawyer Jeff Waincymer (pic) presented strong
objections from members of the Malaysia Iron and Steel Federation
(MISIF). Waincymer is a Professor of International trade law at the
faculty of law, Monash University and an Australian government nominee
acting as a non-governmental panelist for the World Trade Organisation.
He is also a panelist in the Kuala Lumpur Regional Centre for
Arbitration. Working with Howard Consulting, Waincymer has defended
anti-dumping cases in Australia against Malaysian exporters. His areas
of expertise includes international trade and investment law,
arbitration and taxation. Here are excerpts from an interview with
StarBizWeek’s HANIM ADNAN. SBW: Based on your
experience in handling international trade dispute cases, why was there
such a strong objection to Megasteel petition among mid and downstream
steel players? Waincymer: It needs to be understood
that the initial petition called for a safeguard of 35% on top of 25%
duty for all HRC imports with two small exemptions. This will stop all
imports and allow Megasteel to sell whatever, whenever, to whoever it
wants at whatever price it wants. At the public hearing,
Megasteel completely changed its position and conceded that it did not
want the measure to apply to duty exempted goods. It made a defamatory
allegation against government officials and/or unnamed importers to the
effect that there are problems with the current exemption system, which
it implied was the real reason for the petition. It refused to
articulate the actual goods it was concerned with or provide revised
import figures excluding goods it was not claiming were injuring it.
Instead, it says it will “work” with people to exempt them from the
measure if it is imposed. The petition is thus based on an
illegal proposal to make imposition of duty dependent on future claims
by Megasteel; it fails to even begin to provide required data, reasons
and argument; it would cripple downstream users and dissuade future
foreign direct investment; it could lead to multi-billion investment
protection claims against the Government for indirect expropriation of
existing major investments that would be crippled by the measure; it
would also inevitably embarrass the Malaysian government if a positive
duty was applied as I am confident that a WTO challenge would have to
succeed in terms of the procedural inadequacies in the application. The Government should not take responsibility for flaws in the petition. What was the basis for Megasteel to seek for a safeguard measure instead of anti-dumping action on HRC? Please elaborate. Frankly,
I cannot think of any reason why it could benefit Megasteel. If all
currently exempt goods are still exempted, it has no impact. If
Megasteel gets artificial market share and inevitably raises prices,
Megasteel and its customers will face a raft of overseas anti-dumping
actions, crippling all steel exports. If it cannot compete
adequately on quality, price and delivery, end-users will still not buy
from Megasteel even if they cannot import HRC as they will instead
import cold rolled steel and coated products and Megasteel will lose
even more sales. If Megasteel tries to use its market power to
force agreements from individual companies as occurred prior to the
government reforms, it will be challenged before the new Competition
Authority which begins on Jan 1, 2012. This flawed petition should also be salutary for the prospective investors, who rumour has it have been offered a share in Lion Group’s Amsteel and perhaps Megasteel. For
prospective foreign investors such as China-based Baosteel, we wonder
what it would think of Lion Group and Megasteel that speak of
improvements in annual reports but present a petition suggesting it may
not be viable without a blast furnace, which in turn is not viable
without a safeguard protection. We fail to see why that is a
sustainable business model. In Baosteel’s case, we also wonder what it
would think about buying into a company that seeks a safeguard against
China simply because it sees China’s production capacity as a threat of
imminent serious injury as is alleged in the petition. [You must be registered and logged in to see this image.] Waincymer
says if Megasteel’s HRC safeguard measure is imposed, it would almost
certainly be copied by others in the region against Malaysian and other
exports.
In your view, will the Government side with
Megasteel to impose the safeguard measure? Kindly explain by giving
both sides of the picture. It is inappropriate to predict a
decision while it is on-going. However, we have made it clear why the
proposed measure is illegal under WTO law and the Malaysian
Constitution; why it could not be supported in local courts or the WTO;
why a positive finding would lead to such challenges as well as likely
investor protection claims; why the petition has flawed logic and
inadequate data; why the real causes of Megasteel’s financial problems
almost certainly lie elsewhere. Our submission have alluded to
over-gearing (remarkably its liabilities exceed assets); poor quality in
relation to matters such as rolled in scale and holes; poor trade terms
practices; drastic loss of export markets when found to be dumping at
very high levels overseas (implying rather disappointingly that it
discriminates against Malaysian customers on price) and its general
unwillingness to try and fill a lower end niche well, rather than try
and claim to be all things to all people. Thus, it would not be
logical at all for the Government to accept such a safeguard measure
just to “save an (allegedly) injured company”, when it is so obvious
that it is injured by other factors, but not from “allowed” imports. If
the Government wants to help Megasteel, it should do it in a way that
does not hurt the rest of the economy, and instead provides real
incentives for Megasteel to improve performance. Monopolist
protection does the opposite as the last 10 years of its output attests
on such measures as rolled in scale, holes, width variances and delivery
timelines. Is there a possibility that more safeguard
measures will be undertaken by domestic steel players for other steel
products given the influx of foreign steel products in Malaysia? If
Megasteel’s HRC safeguard measure is imposed, it would almost certainly
be copied by others in the region against Malaysian and other exports.
That is what occurred when the United States imposed a steel safeguard
some years ago. Governments too easily forget that such protection only
“works” if others cannot copy. Everyone locally and regionally would
follow suit, causing even further disruption to manufacturing. The
Government will hopefully understand that manufacturing needs
predictability to support massive investment decisions in a global
economy. Therefore, the Government (we hope) will speedily avoid accepting this flawed petition. Perhaps,
the most important thing to understand is that Megasteel is really only
complaining about the current exemption regime and not imports per se.
It disagrees with end-users as to what it can and will make to what
specifications and to what quality. The application for import
duty exemption on imported steel materials is currently processed by
MIDA (Tax Exemption Committee), and approval is subject to whether such
material is available locally. If Megasteel is unhappy with that
process, all it needed is to set up an objective testing process and
independent adjudicator so that we can determine what it truly can
produce in commercial quantities, in a timely manner and at quality
levels needed by end users. The SMIs and MNCs who need HRC for
manufacture in in Malaysia, will support it where Megasteel can produce
appropriately. Where it cannot, they need to be able to get stable
supply from imports. We have offered to work with Megasteel to
put objective rigour into the list of things it claims to want to
produce. That does not need a safeguard inquiry but we at least hope
that is the outcome from the process once the petition is rejected. An
objective system will avoid uncertainty and allow for efficient and
effective planning. It will also protect government officials and/or
importers from further unseemly defamatory allegations by Megasteel. Therefore, we urge the Government to take this approach rather than pursue the safeguards petition.