Over­com­ing the sec­ond ma­jor steel cri­sis

China Daily (USA) - - VIEW -

Today, ad­vanced economies blame China for steel over­ca­pac­ity. Yet, four decades ago the United States and Europe were the ones that opted for bad poli­cies, which China is seek­ing to tran­scend.

At the G20 Sum­mit in Hangzhou, some world lead­ers crit­i­cized China for its steel over­ca­pac­ity. Be­fore the sum­mit, US law­mak­ers, and trade unions and as­so­ci­a­tions had urged Pres­i­dent Barack Obama to blame China’s trade prac­tices forUS mill clo­sures and unem­ploy­ment and to stress the need for “ag­gres­sive en­force­ment ofUS trade rem­edy laws”.

In Brus­sels, Euro­pean Com­mis­sion Pres­i­dent Jean-Claude Juncker echoedUS con­cerns. In Canada, steel­work­ers and pro­duc­ers urged PrimeMin­is­ter Justin Trudeau to push China for the same rea­sons. In Ja­pan, Prime Min­is­ter Shinzo Abe called for struc­tural re­forms to ad­dress China’s steel over­ca­pac­ity.

Yet, as history shows, the first ma­jor steel cri­sis broke out in the 1970s, start­ing in theUS and Europe.

Inthe post­war era, crude steel pro­duc­tion has grown in three quite dis­tinct phases. Inthe first phase— often called the “golden era” of the ad­vanced economies— global steel pro­duc­tion gre­wan­im­pres­sive 5 per­cent a year, driven by Europe’s re­con­struc­tion and in­dus­tri­al­iza­tion, and catch-up growth by Ja­pan and the Sovi­etUnion.

As this growth pe­riod ended with two en­ergy crises, a pe­riod of stag­na­tion en­sued and global steel de­mand barely grew1.1 per­cent a year. In theUS, the chal­lenges of the “rust belt” led to la­bor tur­moil, off­shoring and the Ron­ald Rea­gan era. In the United King­dom, sim­i­lar tur­moil paved way to theMar­garet Thatcher years.

The third phase en­sued be­tween 2000 and 2015. China’s en­try into the­World Trade Or­ga­ni­za­tion in 2001 ini­ti­ated a pe­riod of mas­sive ex­pan­sion in steel pro­duc­tion and de­mand fuel­ing out­put growth by 13 per­cent a year.

While China’s in­dus­tri­al­iza­tion and ur­ban­iza­tion is likely to con­tinue an­other 10-15 years, the most in­ten­sive pe­riod of ex­pan­sion is be­hind. As a re­sult, the steel sec­tor is fac­ing over­ca­pac­ity and stag­na­tion.

AreWash­ing­ton and Brus­sels now urg­ing Bei­jing to re­solve over­ca­pac­ity by re­sort­ing to the kind of poli­cies they used to tackle the first post­war steel cri­sis? No. After the mid-1970s, the open trad­ing regime took a step back as ag­gres­sive trade prac­tices arose in theUS and Europe. The two adopted fairly sim­i­lar ex­ter­nal poli­cies but dif­fer­ent do­mes­tic mea­sures.

In theUS, pol­i­cy­mak­ers avoided di­rect intervention in the do­mes­tic mar­ket and al­lowed do­mes­tic en­ter­prises to suf­fer large losses, which re­sulted in many plant clo­sures. That trans­lated to sub­stan­tial re­duc­tions of least ef­fi­cient in­te­grated pro­duc­ers and the rise of more ef­fi­cient play­ers, in­clud­ing mini-mills. In con­trast, Brus­sels ad­min­is­tered a de facto do­mes­tic car­tel.

Eco­nom­i­cally, the Euro­pean ca­pac­ity re­duc­tions proved less ef­fec­tive than those in theUS. So­cially, Europe was able to smooth the process of trans­for­ma­tion, but mainly in the short term. As theUS and Europe sought to pro­tect their mar­kets through non-tar­iff bar­ri­ers, they opted for pro­tec­tion­ist ex­ter­nal poli­cies, which im­posed sub­stan­tial costs on economies and con­sumers. In the next two years, China hopes to al­lo­cate $15.4 bil­lion for the coal and steel sec­tors to help up to 3 mil­lion laid­off work­ers find newjobs, par­tic­u­larly in the ser­vice sec­tor. But un­like theUS and Europe in the 1970s, China today is ea­ger to sus­tain glob­al­iza­tion and in­ten­sify world trade and in­vest­ment, as ev­i­denced by theHangzhou G20 Sum­mit, the Belt and Road Ini­tia­tive, as well as the cre­ation of the Asian In­fra­struc­ture In­vest­ment Bank and the BRICS NewDe­vel­op­ment Bank. Bei­jing re­mains com­mit­ted to re­solv­ing the over­ca­pac­ity prob­lem but not at the cost of the liv­ing stan­dards of peo­ple in China or other emerg­ing economies. The ob­jec­tive is to sus­tain China’s eco­nomic rise, while sup­port­ing the in­dus­tri­al­iza­tion of other ma­jor emerg­ing economies. And that is very much in the in­ter­est ofWash­ing­ton, Brus­sels and Tokyo as well. The au­thor is a guest fel­low at the Shang­hai In­sti­tutes for In­ter­na­tional Stud­ies. This commentary is based on his SIIS project, China and the mul­ti­po­lar world econ­omy.

LUO JIE / CHINA DAILY

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