Sunday

19th Jan 2020

Opinion

Steel overcapacity crisis - from Europe to China

  • Brussels is urging Beijing to overcome overcapacity by allowing massive defaults. That, however, is not the way the US and Europe resolved their postwar steel crises. (Photo: Thyssengroup)

The current debate about China’s steel overcapacity may ignore the lessons of the postwar steel crisis in the US and Europe.

Steel has featured prominently on the European agenda for a while now. Last February, thousands of demonstrators protested against Chinese dumping of steel, which they argue threatens jobs and investment.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 30-day free trial.

... or join as a group

In the recent Hangzhou summit, European Commission president Jean-Claude Juncker said the G20 “must urgently find a solution to the problems facing the steel industry”. Moreover, the German government raised the issue at the G20 meetings. In this endeavour, the two were backed by both Washington and Tokyo.

As Brussels sees it, the flood of cheap Chinese manufactured goods, particularly steel and aluminium, is challenging Sino-EU ties at the time when China hopes to obtain market-economy status in Europe by the year-end.

During the February demonstrations in Brussels, European Chamber of Commerce in China released a report about steel overcapacity in China. It included a section on the “history of overcapacity”, but focused on China since the 1990s. That, however, ignores the EU-US postwar steel crisis – and its lessons.

The postwar steel overcapacity

“Recent years… have been very difficult ones for the steel industries of the US 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 Western critics of China in Hangzhou. But it wasn’t. Instead, it was David Tarr, a senior economist with the US Federal Trade Commission, who in 1988 was examining the lingering steel crisis in the US and Europe.

Since the postwar era, crude steel production has grown in three phases. In the postwar era, global steel production grew a strong 5 percent annually. It was driven by Europe’s reconstruction and industrialisation, as well as catch-up growth by Japan and the former Soviet Union.

As this growth period ended in the 1970s, a period of stagnation ensued and global steel demand increased barely by 1.1 percent annually.

A third period ensued between 2000 and 2015 when China enjoyed its massive expansion in steel production and demand, which drove annual output growth by 13 percent. While China’s urbanisation will continue for years to come, the most intensive period of expansion is behind. Once again, the sector is facing huge overcapacity and new stagnation.

Brussels is urging Beijing to overcome overcapacity by allowing massive defaults. That, however, is not the way the US and Europe resolved their postwar steel crises. In the US, policymakers shunned intervention in the domestic market. As domestic firms suffered large losses, huge plant closures ensued. In contrast, Brussels administered a de facto domestic cartel. Initially, it imposed production quotas and minimum prices; later, it restrained subsidies and investment but reduced capacity.

As both Washington and Brussels sought to protect their market through non-tariff barriers, they embraced protectionist external policies.

How China seeks to navigate out of crisis

European critics of China's steel policy urge Beijing to take stock of the late 1990s, when Premier Zhu Rongji shut down state-owned enterprises (SOEs), which left 40 million workers redundant. But would it work today?

When Zhu began his stabilisation programme in the mid-90s, China’s urbanisation rate was 30 percent; as India’s today. There was great potential for industrialisation, urbanisation, export-led expansion and thus for catch-up growth. So between 1995 and 2015, China shifted more than 300 million people to the cities; equivalent to almost the entire US population.

Assuming stability and steady growth, China can still move more than 290 million to the cities between 2014 and 2050. Yet, double-digit catch-up is no longer possible. Moreover, as advanced economies – including EU – linger in secular stagnation, export-led growth is no longer in the cards.

Chinese SOE reforms in 2016-20 are likely to feature mixed ownership, corporate governance changes and asset restructuring rather than full-scale privatisation. China is opting for gradual SOE reforms, as many other nations before from Europe to Asia.

If current overcapacity is reduced by 30 percent in steel, coal mining and cement, up to 3 million workers will be laid off in China in the next two to three years. In the coal and steel sectors, Beijing is allocating $15.4 billion in the next two years to help laid-off workers find new jobs.

Four decades ago, the leading industrial nations opted for costly protectionist policies in the steel sector. In contrast, China is more eager not just to sustain globalisation but to accelerate world trade and investment, as evidenced by the Hangzhou-hosted G20 Summit, the One Belt One Road (OBOR) initiative and the creation of the Asian Infrastructure Investment Bank and the BRICS New Development Bank.

Internationally, these initiatives can render some support to China and its industrialising regional trade partners. It is a way to facilitate China’s economic rise and industrialisation and thus steel expansion in India and other emerging economies in the future.

Dr Dan Steinbock is guest fellow of Shanghai Institutes for International Studies (SIIS), a leading global think-tank in China. This commentary is based on his SIIS project on “China and the multipolar world economy.”

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

EU still divided on Chinese steel

Despite growing political pressure, trade ministers at a meeting Friday are not expected to reinforce EU trade defense against Chinese dumping.

News in Brief

  1. 'No objection in principle' on Huawei cooperation, EU says
  2. French aircraft carrier goes to Middle East amid tensions
  3. EU suggests temporary ban on facial recognition
  4. EU industry cries foul on Chinese restrictions
  5. 'Devil in detail', EU warns on US-China trade deal
  6. Trump threatened EU-tariffs over Iran, Germany confirms
  7. EU trade commissioner warns UK of 'brinkmanship'
  8. Germany strikes coal phase-out deal

Column

Why nations are egomaniacs

A nation, Reinhold Niebuhr wrote, is not capable of altruism. Even less so, if such a group has formed on the basis of strong emotions and casts itself as the "saviour of the nation".

Maltese murder - the next rule-of-law crisis in EU?

While Poland's government is escalating its rule of law crisis by introducing even more drastic measures against the country's judges, another problem is looming over the EU's commitment to upholding the rule of law: Malta.

Stakeholders' Highlights

  1. Nordic Council of Ministers40 years of experience have proven its point: Sustainable financing actually works
  2. Nordic Council of MinistersNordic and Baltic ministers paving the way for 5G in the region
  3. Nordic Council of MinistersEarmarked paternity leave – an effective way to change norms
  4. Nordic Council of MinistersNordic Climate Action Weeks in December
  5. UNESDAUNESDA welcomes Nicholas Hodac as new Director General
  6. Nordic Council of MinistersBrussels welcomes Nordic culture

Stakeholders' Highlights

  1. UNESDAUNESDA appoints Nicholas Hodac as Director General
  2. UNESDASoft drinks industry co-signs Circular Plastics Alliance Declaration
  3. FEANIEngineers Europe Advisory Group: Building the engineers of the future
  4. Nordic Council of MinistersNew programme studies infectious diseases and antibiotic resistance
  5. UNESDAUNESDA reduces added sugars 11.9% between 2015-2017
  6. International Partnership for Human RightsEU-Uzbekistan Human Rights Dialogue: EU to raise key fundamental rights issues

Join EUobserver

Support quality EU news

Join us