In the 2016 G20 Summit, advanced economies accused China for steel overcapacity. Before the Hamburg Summit, similar charges have surfaced. Yet, the postwar era has witnessed two steel overcapacity crises. The current debate cannot afford to ignore the past lessons.

 

steel overcapacity
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As the global steel sector is coping with an overcapacity crisis, multinational industry giants are struggling with consolidation and adjustment.

In China, steel output climbed highest on record in March, while the faster-than-anticipated growth in the first quarter was fueled by the use of steel 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. Meanwhile, Secretary of Commerce Wilbur Ross announced an investigation to determine whether Chinese and other foreign-made steel is a threat to U.S. national security.

While steel output in India was forecast to more than double by 2031, Tata Steel, one of the industry giants, sought to write a cheque of $663 million to its UK pensioners as a one-settlement to support future consolidation, even as its proposed merger with the steel operations of Thyssenkrupp were at risk because of complex negotiations around pensions and opposition from German trade unions.

As 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 Organization, the WTO is setting up a panel to resolve the dispute. Indeed, as The 19th Global Trade Alert Report concluded, “protectionism in [the steel] sector has been ratcheting up since 2010.” Yet, the G20 spotlight in the steel crisis has focused on China, despite the international nature of the disputes.

 

Steel overcapacity crises    in the 1970s and today   

Even before the 2016 G20 Summit in Hangzhou, then-President Obama was urged by US lawmakers, unions and trade associations to address China’s steel overcapacity. He was seconded by the EC president Jean-Claude Juncker, Japan’s Prime Minister Shinzo Abe and his Canadian counterpart Justin Trudeau.

All G7 nations seized the G20 Summit to spotlight China’s steel overcapacity but it was not the first time that these economies were struggling with such a crisis.

“Recent years… have been very difficult ones for the steel industries of the United States and Europe. Production in both regions has dropped by more than one-third and employment has fallen even more. In recent years there have been either large losses or small profits.” That could have been one of the G7 critics in Hangzhou. But it wasn’t. It was David Tarr, a senior economist with the US Federal Trade Commission, who in 1988 was examining the steel crisis in the US and Europe.

Since the postwar era, crude steel production has grown in three phases. Prior to mid-70s – often called the “golden era” of the advanced economies – global steel production grew an impressive 5% annually driven by Europe’s reconstruction and industrialization, and catch-up growth in Japan and the Soviet Union – according to data by International Iron and Steel Institute, Eurostat, and American Iron and Steel Institute.

As this boom period ended with two energy crises in the 1970s, stagnation ensued and global steel demand barely ticked 1.1% annually. In the US, the challenges of the Rustbelt led to labor turmoil, offshoring and the Reagan era. In the UK, similar turmoil paved way to the Thatcher years. Some steel growth prevailed but mainly in the Asian tiger economies of Korea and Taiwan, which were too small to drive global growth, amid the Soviet collapse and the Japanese asset crisis in the 1990s.

A third period ensued between 2000 and 2014 as China’s industrialization led to massive expansion in steel production and demand fueling annual output growth by 13%. Between 1950 and 1980, world crude steel production climbed from 189 milllon tons to 715 million tons. Until the mid-1990s, it barely increased. But in the past two decades, it has more than doubled to 1,670 million tons. Today, China accounts for almost half of the total – as the US did in 1950.

While China’s industrialization and urbanization may continue another 10-15 years, the most intensive expansion is behind. As a result, the sector is facing overcapacity and stagnation for 5-15 years.

 

Policy responses in the 1980s and today

In early 2016 European Chamber of Commerce in China released a report about Chinese steel overcapacity, which included a section on the “history of overcapacity.” In addition to its recommendations, it urged Beijing to take stock of the late 1990s, when Premier Zhu Rongji shut down state-owned enterprises, which left 40 million workers redundant. But would Zhu’s tough medicine work in contemporary China?

When Zhu began his stabilization program in the mid-90s, China’s urbanization rate was only 30% and there was great potential for industrialization, urbanization, export-led expansion and catch-up growth. Advanced economies were not yet mired in secular stagnation. Between 1995 and 2015, China shifted more than 300 million people to the cities. Assuming stability and steady growth, China can still move more than 290 million to its cities between 2014 and 2050. But neither double-digit catch-up nor export-led growth are any longer possible.

Did the United States and Europe opt for the kind of defaults they now advocate to China? No. The recommendation to permit massive defaults in China is precisely not the way the US and Europe resolved their postwar steel crises. Instead, the open postwar trading regime took a step back as more aggressive trade practices arose in the US and Europe.

Washington and Brussels adopted fairly similar external policy measures but quite different domestic measures. In the US, policymakers avoided direct intervention in the domestic market and allowed large losses suffered its domestic firms to result in huge plant closures. In contrast, Brussels initially imposed production quotas and minimum prices; later, it sought to restrain subsidies and investment, while reducing capacity. Brussels was able to smooth the process of transformation, but mainly in the short-term. As both Washington and Brussels sought to protect their market through non-tariff barriers, they embraced protectionist external policies.

In the next five years, China’s steel sector plans to shrink capacity by 100-150 million metric tons. If current overcapacity is reduced by 30% in targeted sectors – steel, coal mining and cement – these cuts would translate to layoffs of up to 3 million workers in the coming 2-3 years. In the coal and steel sectors, the government hopes to allocate $15.4 billion in the next two years to help laid-off workers find new jobs, particularly in the service sector.

Four decades ago, the leading industrial nations opted for costly protectionist policies in the steel sector. In contrast, China is eager to sustain globalization and to accelerate world trade and investment, even as it has rolled out the One Belt One Road (OBOR) initiative and the creation of the Asian Infrastructure Investment Bank and the BRICS New Development Bank.

 

Applying the right lessons

What are the lessons of the past crises and these new developments? Steel overcapacity crises are multilateral and have global repercussions. Any effort to penalize a single economy reflect crisis participants’

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