Trade Cases

Leibowitz on Trade: The Search for Solutions to ‘Non-market Overcapacity’

Written by Lewis Leibowitz

By Trade Attorney Lewis Leibowitz

At last week’s Tampa Steel Conference, I participated with three colleagues in a broad-ranging discussion on international trade issues affecting steel producers and users. We covered quite a few issues. One of these was related to so-called “overcapacity” in steel production around the world. As those who have read my columns know, I am skeptical of the term “overcapacity” because it suggests there is a clear definition of “capacity” to make steel. For now, suffice it to say that overcapacity may not be the best or most objective way to address the problems of oversupply of steel.

balanceSteel producers have complained for many years about oversupply of steel in the market. Oversupply is driven, they say, by government subsidies. That is true to some extent, but I believe the reality is much more complex. Oversupply is a problem that is usually exaggerated by sellers, and under-appreciated by buyers, of any product; steel is no different. Producers’ claims of oversupply ring a bit hollow these days, as supply chains are choked and steel products are near the all-time highs of just a few months ago. But oversupply can be a long-term problem.

In negotiating new agreements with the European Union and Japan, the Biden administration focused on replacing tariffs with a tariff-rate quota. In exchange, the U.S. and the EU agreed to work together to address global oversupply of steel and aluminum.

In the Feb. 7 Joint Statement of Japan and the United States, global overcapacity was limited to cover “non-market overcapacity.” That term certainly does not refer to Japan, which is not a non-market country. It plainly refers to China, and perhaps a few other countries. Using the term “non-market economy” as applied in antidumping cases, it would include China and 10 other countries (former Soviet Republics of Belarus, Georgia, Turkmenistan, Uzbekistan, Tajikistan, Kyrgyzstan, Moldova, Armenia, Azerbaijan, and Vietnam). China represents 90% of all steel imports into the United States from NME countries. And, because China produces over one billion tons of steel (more than 10 times the United States), a small percentage of oversupply by Chinese producers could flood global markets.

As noted above, the amount of oversupply in China has been the subject of many estimates. China itself admits that it has inefficient capacity and has announced plans to take it down. But these claims have not been verified.

Estimates of China’s “overcapacity” range from 300 million to 500 million metric tons, based on resources I have seen. The range of estimates is probably broader. One estimate, by a group funded in large part by domestic steel producers, has estimated global excess capacity at 800 million tons, not all of which is in China.

Domestic steel producers, of course, do not want to stop with cutting the alleged overcapacity only from China. They have cited Japan, Brazil, South Korea and others. It’s unclear what the emphasis with Japan means. Perhaps they insisted on not getting into cutting Japanese capacity; perhaps, in return, the U.S. permitted a lower level of imports from Japan (2018-19 shipments, restricted by Section 232, rather than 2015-17 shipments used as the basis for the quota from the EU). We don’t know.

Now that oversupply is, at least in part, on the table, how much oversupply is there? Put another way, how can we tell whether capacity is “excessive?” Again, there are no generally accepted benchmarks.

Several arguments have been put forward. Closing old and inefficient capacity is one point. However, relatively new capacity can be inefficient if it relies on labor that is out of the picture for the time being.

Another point is that cleaner steel should be favored over dirty steel, as in low pollution vs. high pollution. We discussed this at length in Tampa. There are many uncertainties even in this area, including what to do about “dirty” steel. Given that the U.S., UK, EU and Japan are less than 20% of the global market, a lot of work on defining this as a legitimate benchmark clearly lies ahead.

The U.S. industry argues that a country producing more steel than is needed in its domestic market has excess capacity. This is a self-serving view. Japan is a net exporter of steel, but Japanese producers export to several countries that don’t make enough steel to meet domestic demand (for example, the U.S.). That cannot be a test for whether a country has excess steel-producing capacity.

The Organization for Economic Cooperation and Development (OECD) defines “capacity” in a way that does not really get at the problem of efficient capacity or “clean” capacity. OECD defines capacity as “rated capacity” of the steelmaking equipment, which is an upper limit. OECD admits that this measure of capacity exceeds “effective” capacity, which is constrained by outages for maintenance, labor shortages and stoppages, supply-chain constraints, etc. And “effective” capacity is what really should be addressed.

I think a better measure is actual production of steel (oversupply rather than overcapacity). We can get a good idea of what countries actually do rather than some theory based on what they could do under certain conditions. By that measure, global production is not that far out of line with global demand. So the problem may be smaller than many fear, especially if China makes good on its promises to cut production.

The urgency of addressing oversupply, however it may be defined, is not as urgent as a matter of economics. Steel prices around the world are at or near historic highs in most global markets. Perhaps the environmental issues will occupy the front burner, along with “non-market overcapacity.”

Stating the problem is only the beginning. Can the world actually solve the problem, once it has been identified. It is difficult to see much opportunity for progress.

First, denying or restricting countries’ access to those markets will not cause over-producing countries to change their ways. Other strategies will be needed to do that. Have we got those other strategies, and are they practical? That is far from clear.

Second, if capacity or, more likely, production is to be cut, which companies will be tapped to do it? Clearly, each country will claim to be better than others. U.S. producers are not likely to volunteer; but who will and what will encourage them to do so? That is not clear either.

It could well be that the pursuit of the Holy Grail of capacity reduction is a quixotic quest that will not be attained unless there is a game-changing, unforeseen event. In the meantime, while negotiations sputter, protectionists will argue against “unilateral disarmament” and for perpetual trade restrictions. That is a prescription for Section 232 tariffs and other trade restraints to continue as far into the future as we can see.

I believe we have to do better than this in order to prevent significant harm to the U.S. economy. If we want to make U.S. manufacturing grow (and who doesn’t?), we need to make the U.S. economy more competitive and dynamic. Protective tariffs are not the way to do it because they don’t work. Lifting productivity and keeping the regulatory burdens on manufacturing as low as possible are much harder to do, but much more important to a prosperous future for us. That requires that we all work together. Right now, the policies we have in place don’t appear to be working toward that end.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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