The United States and China have begun a “bilateral steel dialogue” to discuss curbing surplus global supplies. China is the world’s largest steel producer and exporter. The United States is the fourth largest producer and a leading importer, so a useful exchange of ideas ought to be possible. But don’t hold your breath.
This exercise is likely to amount to a dialogue of the deaf for the simple reason that neither side gives any indication of actually understanding the economics of the situation. Both sides should seek to resolve the dispute by reorienting their policies to align with their underlying economic interests.
Clumsy central planning has led to the greatest oversupply of steel-making capacity the world has ever seen. Chinese policymakers set their steel sector on a path of continual expansion, which led to an eight-fold increase in that country’s steel output over the past 15 years. However, Chinese leaders forgot to build an “off” switch into their steel-making leviathan, which now produces fully half the world’s output.
China should shut down a portion of its steel industry
Countries with market-oriented economies would have stopped building mills long before the expected return on investment became negative. China has not been constrained by such financial discipline. For China, bringing new mills on line actually subtracts value from the economy rather than adding it. New mills devalue all the mills built previously, so asset values of the country’s steel makers have plunged. Then, when China exports steel at bargain prices, it effectively transfers some of that lost wealth to other countries.
It would serve China’s economic interests to shut down a large portion of its steel industry. The country is believed to have in excess of 1,200 million metric tons (MMT) of steel capacity, and actually produced more than 800 million metric tons (MMT) in 2015. For starters, at least 200 MMT of useable capacity should be shuttered permanently. China should do this not because other countries want it to cut back, but because reducing capacity would strengthen the remaining portion of China’s own steel industry. Although more closures likely would be needed, this first step would help to staunch the bleeding and may allow much of the industry–in China and other countries–to return to profitability.
Since steel is a globally-traded commodity, China’s excesses are bedeviling steel producers around the world. The United States is no exception. In the face of rising imports, American production declined 11% over the past four years, dropping from 89 MMT in 2012 to 79 MMT in 2015. Some firms are losing money. U.S. steel producers are justifiably unhappy with the circumstances.
Source: forbes