Tuesday

24th Jan 2017

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

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.”

Opinion

A US dream, or nightmare, for Europeans?

Europeans often like the American people more than they like American foreign policy and US presidents. But the Trump presidency could win favour among Europe’s growing swell of populists.

Opinion

EU cannot copy Australia's offshore asylum model

European policy-makers are increasingly talking about emulating Australia's offshore asylum system, but that system is morally bankrupt, prohibitively expensive and politically disastrous.

News in Brief

  1. Greek island mayors plead for the transfer of migrants
  2. Tzipi Livni cancels Brussels trip amid war crimes probe
  3. Romania's president plans referendum on prisoner pardons
  4. Sweden to host EU social summit
  5. US Congress may Trump-proof Russia sanctions
  6. Fury over UK 'cover up' of failed missile test
  7. Theresa May: I will not be afraid to stand up to Trump
  8. Brexit will destroy NI peace deal, says Gerry Adams

Stakeholders' Highlights

  1. Dialogue PlatformThe Influence of Turkish Politics in Europe After the Coup Attempt
  2. World VisionEU Urged to do Better Ahead of Helsinki Conference on Syria
  3. Caritas EuropaEU States to Join Pope Francis’s Appeal to Care for Migrant Children
  4. UNICEFNumber of Unaccompanied Children Arriving by sea to Italy Doubles in 2016
  5. Nordic Council of Ministers"Nordic Matters" Help Forge Closer Bonds Between the UK and the Nordic Region
  6. Computers, Privacy & Data ProtectionThe age of Intelligent Machines: join the Conference on 25-27 January 2017
  7. Martens CentreNo Better way to Lift Your Monday Blues Than to Gloss Over our Political Cartoons
  8. Dialogue PlatformThe Gulen Movement: An Islamic Response to Terror as a Global Challenge
  9. European Free AllianceMinority Rights and Autonomy are a European Normality
  10. Swedish EnterprisesHow to Create EU Competitiveness Post-Brexit? Seminar on January 24th
  11. European Jewish CongressSchulz to be Awarded the European Medal for Tolerance for his Stand Against Populism
  12. Nordic Council of Ministers"Adventures in Moominland" Kick Off Nordic Matters Festival in London

Stakeholders' Highlights

  1. PLATO15 Fully-Funded PhDs Across Europe on the Post-Crisis Legitimacy of the EU - Apply Now!
  2. Dialogue PlatformInterview: Fethullah Gulen Condemns Assassination of Russian Ambassador to Turkey
  3. Zero Waste EuropePublic Support Needed to Promote Zero Waste in More Municipalities
  4. Belgrade Security ForumEU Cannot Afford to Ignore the Western Balkans as Populism Surges
  5. Dialogue PlatformFethullah Gulen Calls for an Investigation on the Assassination of Russian Ambassador to Turkey
  6. World VisionAmid EU Talks on Migration, Children on the Move Remain Forgotten and Unprotected
  7. Centre Maurits CoppietersAlex Salmond Receives Coppieters Award for His Service to Scotland and Europe
  8. International Partnership for Human RightsStrong Support for Hamburg Declaration on Human Rights Defenders
  9. Swedish EnterprisesHow to Use Bioenergy Coming From Forests in a Sustainable Way?
  10. Counter BalanceReport Reveals Corrupt but Legal Practices in Development Finance
  11. Swedish EnterprisesMEPs and Business Representatives Debate on the Future of the EU at Winter Mingle
  12. ACCAFifty Key Factors in the Public Sector Accountants Need to Prepare for