Steel Overcapacity and the Global Trading System

Abstract

The steel sector is strategically important for supplying necessary inputs to many manufacturing industries in both domestic and overseas markets. Since the global financial crisis of 2008, steelmaking companies have been facing formidable challenges associated with “overcapacity” or “excess capacity,” that is underutilization of their productive capacity. Overcapacity in steel—created and maintained by certain government interventions and low demand—have downward pricing effects across international markets, which has given rise to trade frictions. The persistent sluggish demand worldwide and the current extent and lasting repercussions of steel overcapacity make it urgent for the world community to find long-term policy solutions. As a result, the Global Forum on Steel Excess Capacity (GFSEC), established by the Group of Twenty (G20) in 2016, and the World Trade Organization (WTO) have been discussing this matter in the context of state interference. This article examines recent trends in steel overcapacity as a global problem and related developments in China as the world’s largest steelmaking country, as well as international policy agendas and the ways forward in addressing trade-related aspects of this issue. In particular, Section II examines the status quo in steel overcapacity as a global problem. Section III assesses the work of the GFSEC in addressing this issue. Section IV looks into the applicable multilateral trade rules and explores potential improvements in the WTO that would contribute to better regulation of the governmental behaviour concerned. Section V concludes this analysis by highlighting complementarity between the GFSEC and the WTO.

Role of China
China is often considered as a key contributor to the present global steel overcapacity, with the Chinese steel market conditions acknowledged as playing an “important global role” today. China’s industrial overcapacity in the 1990s largely went unnoticed abroad because of the country’s relatively shallow integration into the global economy. But after its accession to the WTO in December 2001, China’s substantial share (55% on average) in global steel overcapacity in 2002-2019 cannot be neglected any longer. This article shows that China’s annual steel capacity (source: OECD data) and steel production (source: World Steel Association / Worldsteel data) in 2009-2019 vis-à-vis the pre-financial-crisis period (2000-2008) increased, on average, by 2.1 and 2.6 times respectively. China’s capacity and production levels in both the pre- and post-crisis periods were by far the highest. Given China’s significant share in world steel production (53%) and consumption (51%) today, these developments in China cannot be overlooked when addressing global steel overcapacity. Despite the sizeable extent of Chinese steel overcapacity over the last two decades, in 2018 and 2019 China was able to increase capacity utilization to above 80%.

Conclusion
Steel overcapacity is a firm-level phenomenon, but it is of concern to international policy-making to the extent that government interventions are involved. Because of its lasting effects and potentially recurring nature, this issue requires sustained solutions. This is recognized at the G20 level and beyond. The GFSEC’s “soft law” approach has the merit of explicitly drawing the attention of the world community to this problem and providing a topic-specific platform for state-to-state communication, monitoring, and voluntary commitments. By contrast, the WTO has established binding rules and enforcement mechanisms to address trade-affecting government measures that cover a broad range of economic sectors, including steel.

The GFSEC and the WTO are complementary and supportive in at least three ways. First, the GFSEC operates effective transparency mechanisms through stimulating information sharing among its members, discussions with steel industry stakeholders, and peer reviews of domestic measures. Thus, it may fill some information gaps in the WTO with respect to steel subsidies. Second, China and Saudi Arabia withdrew from the GFSEC, but the WTO provides an additional forum for cooperating with these and other non-GFSEC economies on the overcapacity issue. Third, preceded by the multilateral trading system, the GFSEC’s policy against certain market distortions that affect trade is naturally inspired by the WTO’s principles and rules. At the same time, the GFSEC process also inspires (some of) its members to discuss overcapacity at WTO meetings and propose updating the subsidy rulebook.

This article has analysed some ways of improving the WTO system with regard to transparency, state-owned enterprises (SOEs), and overcapacity subsidies. The suggested steps could help the WTO regime more effectively curtail state interference, which causes overcapacity in steel (and other) industries, and reinforce the relevant policy guidelines of the GFSEC. It is hoped that these reforms will contribute to the worldwide battle against steel overcapacity, enhance the durability of international solutions in this field, and eventually strengthen the overall relevance of the WTO in global governance.

Keywords: steel overcapacity, excess capacity, capacity utilization, statistics, trends, data, China, G20, GFSEC, WTO, OECD, Worldsteel, transparency, subsidies, SCM Agreement, SOEs, trade remedies, dumping, anti-dumping, safeguards, countervailing duties, WTO reform, regional trade agreement, FTA, CPTPP