By Charles H. Blum[1]

Excess capacity, the constant villain in the sorry 50-year history of steel trade wars, is in truth a meaningless concept.

“Excess” compared to what? Historical demand? Current demand? Future demand? A certain amount of “excess” capacity, particularly in rolling capacity for particular products, is desirable, even necessary, for a smoothly functioning economy. Demand for automotive sheet may be declining while demand for line pipe is surging. A basic product like wire rod has hundreds of thousands of end uses, each with its own demand dynamics.

That’s true enough of each national market, large or small. When international traded steel is factored in, the calculation of excess capacity is hugely complicated and highly conjectural. One country’s “excess” can be the solution to another’s shortage.   Excess capacity is a potent political slogan but a poor guide for policymakers.

At the last G-20 meeting, Chancellor Merkel intrepidly promised to table “solutions” to steel excess capacity next month in Paris. The occasion is upcoming ministerial–level meeting of The Global Forum on Steel Excess Capacity. Forums, of course, are more designed to promote an exchange of views rather than decisive problem-solving.

Even if a communiqué can be fashioned that all parties will support as positive, it’s a safe bet no “solution” will be found. Real solutions require a) a redefinition of the problem, b) a frank admission of the almost universal weakness of political will and c) a search outside the box for a set of enforceable commitments that respect the shared interests of all steel-producing countries in a healthy market that rewards excellence with profits, permits continuous improvement and innovation, and as far as possible limits the role of governments in the steel business.

As a first step in that direction, I would urge all parties to consider:

  • redefining the problem as “uneconomic capacity.” Excess capacity by itself does not produce excess production and distress. The core of the issue is that governments around the world have interfered with market forces that ought to guide decisions to invest in, produce and trade steel. If all major steel producers were genuinely profitable over the course of a business cycle, there would be little rationale for government support.
  • prohibiting all practices that subvert and distort market forces: subsidies, price fixing and other anticompetitive behavior, intellectual property theft, and trade barriers of all kinds. In this way, a steel sector agreement could complement the proven inadequacies of existing multilateral rules in each of these areas.
  • enforcing WTO Plus disciplines through collective national enforcement, i.e. through appropriate and commensurate trade-restrictive measures applied by each member country. Thus, an offense against one country would be deemed an offense against all.   The threat of collective enforcement maximizes deterrence and bolsters political will to remedy violations.
  • negotiating enforceable transitional contracts to permit each nation the time it needs to step-by-step achieve and maintain full compliance with the new, higher legal obligations.

In the end, such a system could achieve the unthinkable – a reasonable facsimile of true free trade in steel, of all sectors! Governments would get out of the business of founding steel mills, subsidizing their losses, and repeatedly intervening against imports.   The winners would be all excellent steel companies, regardless of their location. Steel customers would be able to source steel from the most competitive source without government disruption of their supply chains. Taxpayers would win, too, as the incessant pressure to subsidize struggling steel mills would be progressively reduced and ultimately eliminated.

You may say that I’m dreaming, but the European Union has already gone halfway to this goal. In the 1990s, the member countries agreed to as set of anti-subsidy rules that ended Europe’s internal struggle between state-supported and truly private countries, facilitating rationalization (closure of uneconomic capacity), consolidation (domestic mergers) and internationalization (cross-border mergers and acquisitions). One key to success is a clear, strong prohibition – there are only four agreed exceptions to the no subsidy rule. Another key is enforceability through the European Court of Justice.

The positive results enjoyed by Europeans are limited to Europe. Global problems require global solutions. We’re halfway to a real answer to the real global steel problem. Next month in Paris provides an opportunity to go much farther. We should make the best use of it.

October 7, 2017

[1] Served as Assistant US Trade Representative for Industrial Trade from 1983 through 1985) and in other steel-related positions in the White House and the State Department from 1977 through 1983.   As an independent consultant, he advised steel clients in the US, Western Europe, Latin America and Asia from 1988 through 2012.