Too much capacity in China’s steel industry is bad for everyone.
Originally published as commentary on CNBC.com.
Beijing pulled out all of the stops to ensure smooth and pleasant G20 proceedings in the eastern city of Huangzhou. Security was reportedly tight as a drum. The locals were given a “seven-day public holiday” and encouraged to clear out of town, and factories in the vicinity were temporarily shuttered to improve air quality during the summit.
Reportedly among those factories were a few dozen regional steel mills.
Oddly enough, permanently closing steel mills in China is exactly the thing many G20 states would welcome, particularly after a meeting that bore few significant policy developments. The massive Chinese steel industry has been the target of a lot of scrutiny in recent years. It has experienced a breakneck expansion since 2000 when it had an annual production capacity of 150 metric tons (MT). By 2015 it had grown to 1,140 MT.
That capacity expansion and China’s tendency to use it, regardless of market direction, has made it responsible for the lion’s share of the world’s steel overcapacity problem. A lot of bankruptcies and layoffs around the world have their roots in recent waves of artificially cheap steel from China.
The numbers are truly staggering. A new paper from the Duke University Center on Globalization, Governance & Competitiveness notes China’s production capacity increase since 2007 is equivalent to seven times the United States’ total steel production in 2015. Some of this Chinese production has fed into its massive infrastructure and construction projects.
But let’s get real; most of it has been led along by a system of state capitalism that provides mills with free land, low-cost loans, and sometimes outright subsidization, among other forms of financial support. Nearly all of the Chinese steel industry’s major players are state-owned enterprises.
It’s as if China is exporting unemployment along with its hefty steel surplus
That state-owned reality means production doesn’t slow down as much as it should when the economy cools, often despite financial losses. Mills continue to pay their taxes, and millions of Chinese workers stay employed, which is important for the country’s internal stability. But this has left the world awash in steel that no one asked for, and steelworkers everywhere out of jobs – nearly 15,000 of them in America alone.
It’s as if its exporting unemployment along with its hefty steel surplus. Hundreds of trade cases and tariffs targeting China have sprouted up in response, and many of them rightly originated here.
The Chinese leadership has made repeated promises to rein in production and shutter unneeded mills. But it has broken almost all of them, slow-walked the rest, and successfully lobbied to keep the G20’s official language on steel overcapacity weak and vague. The only binding commitment China made on steel was its pledge to participate in an annual forum that will monitor excess capacity.
It’s okay to roll your eyes. The world should manage expectations for success in that venue.
In the absence of a record that shows China can meet any binding commitments on capacity reduction, the Obama administration and whoever comes next should maintain a stiff posture on trade enforcement. They certainly shouldn’t bend on the issue of market economy status – that World Trade Organization designation that would make it more difficult to hold China accountable for selling such artificially cheap steel. It’s due for review this year, and it shouldn’t be changed.
That position is a point of rare agreement between the president, Hillary Clinton and Donald Trump, and quite remarkable in a campaign with such extraordinary political divisions.
But denying China that status obviously isn’t enough to fix its overcapacity problem. Beijing will have to take drastic action to cut back its national steel glut. Until it makes and adheres to binding commitments – with enforceable penalties attached to them – the bloated Chinese steel industry will remain the world’s problem.
China can clean its air and build a more sustainable economy and consumer class by following through on shuttering steel mills and decreasing production. America can recover some of its lost manufacturing jobs, and create more export opportunities. If this steel forum doesn’t help accomplish this transition, it will have been another wasted year.