Designing Tariff Structure for an Import Substitution Industry: The Case of Steel

1. Designing Tariff Structure for an Import Substitution Industry: The Case of Steel Nozomu KawabataTohoku University Sep. 9 2003

2. Protection Billet Imports No Capacity Sheets Imports Sheets Imports Production Structure of the Vietnamese Steel Industry Long Rolling Mill Customers in Vietnam Protection Blast Furnace Steelmaking Plant Over Capacity Pipe Fitter Very Small Hot Strip Mill Very Small Over Capacity Cold Rolling Mill Over Capacity Galvanizing Plant Protection

3. Key Issues of the Steel Industry are… • To solve the overcapacity problem by market selection at some processes • To construct the competitive producers at steelmaking and flat rolling processes • SSC’s steelmaking plant will start at 2004 • VSC’s cold rolling mill will start at the end of Dec. 2004 • VSC’s hot strip mill will start at 2007 or later

4. Unclear! Governmental Policy until Now for Long Products (AFTA and non-AFTA) Import prohibition was removed

5. Governmental Policy until Now for Flat Products(AFTA)

6. Unclear! Governmental Policy until Now for Flat Products (non-AFTA)

7. Inconsistent Policy • Inconsistency between trade and competition policy • Protection + Free entry = Overcapacity • Confusion in the licensing process to new investment of foreign producers • Modern efficient producer to be welcomed? • Exacerbating the overcapacity to be stopped?

8. Problems (1) • Lack of the predictability of investment environment • It means…… • Difficulty to make a plan of investment and rationalization for the modern producers and foreign investors • Incentives to opportunistic entry for the inefficient producers →Adverse selection

9. Problems (2) • The balance between liberalization and temporal protection is not clear • On one hand, too high rates are observed. • 40% for long products leads to high price for customers. • It is exceptionally high in the world • On the other, policy for the new mills is not clear • Based on the experiences in the world, temporal protection is necessary for new steelworks

10. Solutions(1) • Design the tariff structure to non-AFTA countries immediately • Especially, tariff scenario until 2006 should be fixed and announced • Pay attention to…… • The reduction of overcapacity by the rational market selection • The temporal protection for the new steel mills. But permanent one should be avoided • Reliability of governmental policy

11. Solutions(2) • For that…… • Free trade in 2015 should be a goal • Cascade tariff structure should be kept • Decide the timing and scope of the tariff reduction base on the concrete condition of industry • Trade laws for anti-dumping and safeguard should be streamlined for treating the external shock

12. Tariff Scenario for Long Products (AFTA)

13. Tariff Scenario for Long Products (non-AFTA)

14. Tariff Scenario for Flat Products (AFTA)

15. Tariff Scenario for Flat Products (non-AFTA)

16. Change from the original scenarios presented at Main Report • Scenarios have been revised base on the… • Governmental policy until now • Governmental choice is similar to the third option presented in main report • Delay of the construction of cold rolling mill • A risk of irrational profit squeeze of galvanizing producers