By Dan Steinbock
In the 2016 Hangzhou Summit, G20 leaders recognised that excess steel capacity is a global issue and China is in the spotlight for this crisis. The postwar era has witnessed two steel overcapacity crises. As the global steel sector is coping with overcapacity, multinational industry giants are struggling with consolidation and adjustment.
Not just China
In China, steel output witnessed its highest record in March, as growth was fueled by excess demand in the construction sector. In the United States, President Trump’s “Buy American, Hire American” executive order was expected to have little impact on U.S. steel, which left steel executives apprehensive and trade unions frustrated.
While steel output in India is forecast to double by 2031, Tata Steel’s proposed merger with the steel operations of ThyssenKrupp is at risk because of complex negotiations around pensions and opposition from German trade unions.
Japan, the second largest steel producer in the world, has alleged that duties imposed on steel imports by India violate trade norms of the World Trade Organisation (WTO). As the 19th Global Trade Alert report concluded, “protectionism in the steel sector has been ratcheting up since 2010.” Yet the G20 spotlight fell on China despite multiple international disputes.
Steel overcapacity in the 1970’s
In the postwar era, crude steel production has grown in three phases. Prior to mid-70’s, global steel production grew by 5% annually, driven by Europe’s industrialisation and growth in Japan and the Soviet Union.
As this boom period ended with two energy crises in the 1970’s, stagnation ensued and global steel demand barely ticked 1.1% annually. Some steel growth prevailed but mainly in the Asian regions of Korea and Taiwan, which were too small to drive global growth amid the Soviet collapse and the Japanese asset crisis in the 1990’s.
A third period ensued between 2000 and 2014 as China’s industrialisation led to expansion in steel production and demand creating annual output growth by 13%. In the past two decades, world crude steel production stands at 1,670 million tonnes. Today, China accounts for almost half of the total.
Policy responses across time
Four decades ago, the leading industrial nations opted for costly protectionist policies in the steel sector. In contrast, China is eager to sustain globalisation and to accelerate world trade and investment.
Did the United States and Europe opt for the kind of defaults they now advocate to China? No. Instead, more aggressive trade practices arose in these nations. Washington and Brussels adopted fairly similar external policy measures but quite different domestic measures.
In the U.S., policymakers avoided direct intervention in the domestic market and allowed large losses suffered by its domestic firms to result in huge plant closures. In contrast, Brussels imposed production quotas and minimum prices; later it sought to restrain subsidies and investment while reducing capacity.
Learn lessons, implement solutions
Steel overcapacity crises are multilateral and have global repercussions. Efforts to penalise a single economy are reflective of unilateral and partisan strategies being deployed by crisis-affected economies.
Secondly, the first steel overcapacity crisis involved major economies, which opted for solutions that harmed world trade and investment. Such policies should be avoided today.
The current steel crisis involves all major economies, while the leading role belongs to China. China continues to support world trade and investment for global growth prospects. Emerging economies should not be penalised for rapid economic development.
In the steel crises, international media and partisan observers rely on aggregate data. However, this data should also be assessed in terms of the level of economic development and per capita terms because large economies have larger steel demand by default. In this light, the rank of top producers is not led by emerging economies.
Finally, any sustained success in overcoming the second global steel overcapacity crisis must be based on multilateral cooperation with all major steel producers for rapid economic development in the future.
Dr Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore).
The original version of this commentary was released by T20 blog on April 26, 2017.
Featured Image Source: Reuters
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