Yellen’s Steel History Lesson Draws the Wrong Conclusion
No amount of protectionism can bring this sector back to its heyday. Now the argument is being used to push for more damaging barriers on clean technology.
More barriers on clean technology.
Photographer: Alyssa Pointer/BloombergBad economic ideas don’t die. Instead they just return a decade later to haunt another generation. That seems to be the situation with China’s steel industry.
Treasury Secretary Janet Yellen plans to cite the example of steel overcapacity during a trip to China this month as justification for what looks like a pending crackdown on imports of the country’s clean technology products.
“In the past, in industries like steel and aluminum, Chinese government support led to substantial overinvestment and excess capacity,” she said in a speech last week at a photovoltaic panel plant in Norcross, Georgia. “Now, we see excess capacity building in ‘new’ industries like solar, EVs and lithium-ion batteries.”
That example harks back to a panic from 2016. “China’s steel industry is actively and deliberately flooding the international market,” the United Steelworkers, a US union, wrote at the time. The growth rate of the country’s mills is “far faster than domestic and international demand would dictate.”
The theory was so compelling that it led to anti-dumping tariffs on some steel products as high as 256.44% under President Barack Obama in 2015, before President Donald Trump followed up three years later with 25% tariffs on all Chinese steel products.
The trouble is, none of it was true. China wasn’t seeking to produce more steel than long-run demand would dictate. It wasn’t even a particularly important exporter. It wasn’t responsible for weak prices in the US. The tariffs didn’t halt a jobs decline in US metals manufacturing.
It’s bad enough that misguided steel protectionism over the past decade has served only to raise costs and reduce competitiveness for the rest of the US economy. Worse still is the way the same failed policy is now being dragged out to support far more damaging barriers on clean technology, slowing our ability to halt the rise in global temperatures.
Look first at steel production. Chinese mills did indeed drastically increase capacity in the second half of the 2000s, more than doubling their potential output to 1.06 billion metric tons from 489 million metric tons between 2006 and 2010, before rising to a peak 1.22 billion tons in 2014. With construction and manufacturing demand struggling to catch up, capacity utilization — actual output as a share of the maximum level possible — fell to 67% in 2015, well below rates of 75% or more seen as consistent with sustainable profits.
Here’s the thing, though. China’s steel production didn’t peak back then. Instead, a boom in construction and manufacturing activity meant that consumption kept on rising, by 249 million tons over the subsequent five years. Contrary to the perception of a crisis around 2015, China hadn’t built too many steel mills: It constructed pretty much the right number for the level of demand that was coming down the pipe. Capacity utilization since 2018 has consistently been at healthy levels north of 80%.
You could make quite as strong an argument that the US and Europe, whose utilization has frequently been well below 75%, have been suffering from overcapacity. The better argument, though, is to accept that there are often dislocations between industrial capacity and demand, and that these are normal processes in a modern economy rather than evidence of malign geopolitical intent.
Perhaps, though, China was flooding the US market to escape the consequences of its bad investment decisions? Wrong again. As a share of total production, China has always been a rather small-scale exporter. It only seems so weighty because it produces more than half of the world’s steel, so any shortfall between capacity and output seems Hulk-sized. At the height of the overcapacity panic in 2015, exports to North America came to just 4.4 million tons, about 8% of the 55.5 million tons total.
The best explanation for weak US prices was simply that US steel consumption had peaked and was in decline, as the country moved to a post-industrial, service-oriented phase of its development. No amount of protectionism has been able to change the fact that US steel output now is about 80% of its level in 2008.
Chinese steelmakers, furthermore, have not only grown into the capacity that they built, but made money doing it. That’s a sign that there never was a long-term excess of supply over demand. When your rival is making sustainable profits, accusing them of overcapacity is just a way of complaining that their superior productivity is taking away your market share.
There’s one big difference when it comes to clean technology. Unlike steel, electric vehicles, solar panels and lithium-ion batteries really are easily traded on a global scale, and the scale and technological accomplishments of Chinese companies make them formidable competitors. That doesn’t mean they’ve been the beneficiaries of unfair advantages, though, as we’ve argued.
Instead, what’s being built isn’t overcapacity, but merely the basic capacity the world needs if it’s to build the low-emissions economy needed to get the planet to net zero. If China is producing the tools to avert global warming more cheaply than we can do it ourselves, we should follow the advice of Adam Smith: “Buy it.”
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David Fickling at dfickling@bloomberg.net
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Ruth Pollard at rpollard2@bloomberg.net