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Overcapacity in Steel: China's Role in a Global Problem

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 SEPTEMBER 2016

Overcapacity in Steel
China’s Role in a Global Problem
 SEPTEMBER 2016

Overcapacity in Steel
China’s Role in a Global Problem

Author:
Lukas Brun
Copyright © 2016 Center on Globalization, Governance & Competitiveness, Duke University

All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not
be reproduced in any form without permission in writing from the publisher.
For information, address:
Alliance for American Manufacturing
711 D Street NW, 3rd Floor
Washington, D.C. 20004
202-393-3430
[Link]

First published August 2016 by the Alliance for American Manufacturing

Photos by Getty Images & Shutterstock

Printed in the United States of America.

Table of Contents
EXECUTIVE SUMMARY............................................................................................................1
What is overcapacity?............................................................................................... 2
Why is it a problem?................................................................................................. 2
What causes overcapacity?...................................................................................... 2
What can be done to address overcapacity?........................................................... 3

1. INTRODUCTION....................................................................................................................5

2. DEFINING OVERCAPACITY..................................................................................................7
2.1 What is overcapacity?......................................................................................... 7
2.2 Measures of overcapacity in steel...................................................................... 8
2.3 Future steel capacity additions......................................................................... 12
2.4 The effects of overcapacity............................................................................... 16
2.5 Conclusion........................................................................................................ 19

3. THE CAUSES OF OVERCAPACITY.....................................................................................20

3.1 Overcapacity caused by variable demand (“cyclical overcapacity”)................ 20
3.2 Overcapacity caused by excessive supply (“structural overcapacity”)............ 22
3.3 China................................................................................................................. 23
3.3.1 Subsidies and loose lending policies......................................................... 26
3.3.2 National-local dynamics............................................................................ 29
3.3.3 High exit barriers....................................................................................... 30
3.4 Conclusion........................................................................................................ 31

4. POLICY ACTIONS................................................................................................................33
4.1 China’s commitments in bilateral dialogues..................................................... 33
4.2 China’s domestic policy commitments to address overcapacity..................... 36
4.2.1 Macro policies........................................................................................... 37
4.2.2 Forced closures......................................................................................... 38
4.3.3 Improving environmental quality................................................................. 39
4.2.4 Encouraging M&A activity ......................................................................... 40
4.2.5 FDI............................................................................................................ 42
4.2.6 “One Belt, One Road”............................................................................... 42
4.2.7 Concluding thoughts................................................................................. 44
4.3 U.S. efforts........................................................................................................ 45

ENDNOTES...............................................................................................................................47

Overcapacity in Steel: China’s Role in a Global Problem iii

 Figures
Figure 1: Global crude steel production, capacity, and overcapacity, 1980-2017(f)........................8
Figure 2: Regional production, capacity, and overcapacity, 2000-2015.......................................10
Figure 3: Crude steel capacity additions by region, 2000-2014...................................................11
Figure 4: Regional contribution to steel overcapacity, 2015.........................................................11
Figure 5: Underway and planned steel capacity additions, by region, 2014-2017.......................12
Figure 6: Historical and projected capacity utilization rates in the global
steel industry, 1980-2017(f)........................................................................................................16
Figure 7: 2015 Steel capacity utilization, by region......................................................................17
Figure 8: Profitability and capacity utilization rate in the steel industry, 1992-2014.......................18
Figure 9: The effect of state subsidies on steel production capacity............................................22
Figure 10: Crude steel production and capacity utilization rates in China, 2000-2015.................24
Figure 11: 2009 survey results regarding causes for overcapacity in China.................................25
Figure 12: Central government actions to curb overcapacity (2006-2015)...................................36
Figure 13: Output of the top 10 steel groups in China, as percentage of total production............41

Tables
Table 1: 2015 crude steel production, top 30 countries................................................................9
Table 2: Underway and planned capacity additions by 2017, by country....................................13
Table 3: Major importers and exporters of steel...........................................................................14
Table 4: 2015 steel imports and exports, by region.....................................................................15
Table 5: Energy subsidies to Chinese steel, 2000-2007 (US$).....................................................27
Table 6: Chinese steel capacity, closures, and net capacity additions (in MT), 2010-2014...........38

iv Overcapacity in Steel: China’s Role in a Global Problem

Abbreviations
BRIC Brazil. Russia, India, China
CIS Commonwealth of Independent States
CISA China Iron and Steel Association
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization
ECU European Currency Unit
EPB Environmental Protection Board
EU European Union
FDI Foreign Direct Investment
FSU Former Soviet Union
GDP Gross Domestic Product
M&A Mergers and Acquisitions
MIIT Ministry of Industry and Information Technology (China)
MT Million metric tons
NDRC National Development and Reform Commission (China)
NME Non-Market Economy
OECD Organization for Economic Coordination and Development
RMB Renminbi (China’s currency)
S&ED Strategic and Economic Dialogue (US-China)
SASAC State Assets Supervision and Administration Commission (China)
SOE State Owned Enterprises
USITC United States International Trade Commission
USTR United States Trade Representative
VAT Value Added Tax
WTO World Trade Organization

Overcapacity in Steel: China’s Role in a Global Problem v

 Acknowledgments
Duke CGGC gratefully acknowledges the Alliance for American Manufacturing (AAM) for
sponsoring the research for this report. We also thank 10 anonymous reviewers for their
extensive comments and suggestions. The opinions expressed or conclusions made in this
study are those of the author, and are not necessarily shared or endorsed by the project
sponsor. The author holds exclusive responsibility for errors of fact or interpretation. Duke
CGGC welcomes comments and suggestions. The author may be contacted at [Link]@
[Link].

About the Author

Lukas Brun is a Senior Research Analyst at Duke CGGC and project manager for the study.
His research at CGGC uses global value chain analysis to understand the competitiveness of
firms and regions. Lukas holds master’s degrees with concentrations in economic development
and international political economy from the University of North Carolina at Chapel Hill
and bachelor’s degrees in economics and political science from Texas Christian University.
Lukas has more than 10 years of experience in economic analysis and managing economic
development research projects.

About the Duke Center on Globalization,

Governance & Competitiveness
The Duke University Center on Globalization, Governance & Competitiveness (Duke
CGGC) undertakes client-sponsored research that addresses economic and social
development issues for governments, foundations, and international organizations. As a
university-based research center, we address clients’ real world questions with transparency
and rigor. Learn more about us at [Link].

About the Alliance for American Manufacturing

The Alliance for American Manufacturing (AAM) is a non-profit, non-partisan partnership
formed in 2007 by some of America’s leading manufacturers and the United Steelworkers.
Our mission is to strengthen American manufacturing and create new private-sector jobs
through smart public policies. We believe that an innovative and growing manufacturing base
is vital to America’s economic and national security, as well as to providing good jobs for
future generations. AAM achieves its mission through research, public education, advocacy,
strategic communications, and coalition building around the issues that matter most to
America’s manufacturers and workers. More information about AAM is available at www.
[Link].

vi Overcapacity in Steel: China’s Role in a Global Problem

Overcapacity in Steel:
China’s Role in a Global Problem
E X E C U T I V E S U M M A RY

The global steel sector is once again in a state The last time significant overcapacity existed
of overcapacity. The sector, predominantly in the global steel sector in the 1970s and
fueled by China’s expansion since 2000, has 1980s, European countries made hard choices
grown to over 2,300 million metric tons (MT) about reducing subsidies, addressing resulting
while only needing 1,500 MT to meet global unemployment, and finding a way for market-
demand. The result is a global steel sector at based competition to flourish. The current
unviable profit levels and an influx of cheap status quo — which has resulted in lost profits
steel in the global trading system adversely for companies, lost jobs for workers, and an
affecting companies, workers, and the global increasingly contentious trading relationship
trading regime. among countries — is untenable for the future
of a global trading regime presumed to be
The reaction of countries to overcapacity is based on the comparative and competitive
predictable: trading partners with domestic advantages of nations, not state-based
steelmaking capacity seek commitments subsidies. Rising trade frictions have led to
from China to reduce its excess capacity and trade cases, which, even if successful, occur
eliminate further subsidies to the sector, while after damage has already been done. The
filing trade cases and taking other necessary companies that file the cases end up with
actions to protect their domestic industry. diminished power, as they must file and pay
China’s response has been to acknowledge for the lengthy litigation, suffer the effects of
the overcapacity problem in its steel sector reduced profits, and idle production lines.
and make repeated commitments to reduce
capacity, yet due to either an unwillingness or China’s “state capitalism” model, still heavily
inability to honor its commitments, it struggles influenced and controlled by Beijing, is at
to address overcapacity in its steel sector. the core of the current overcapacity problem
Since 2007, when overcapacity in the Chinese in the steel sector. To address overcapacity,
steel sector became apparent in its own China must reform to reduce the systemic
planning documents, China has added 552 nature of state-led development in the country
MT of new capacity, equivalent to seven times and become more aligned with market
total U.S. steel production in 2015. economy principles as generally practiced.

Overcapacity in Steel: China’s Role in a Global Problem 1

 What is government subsidies and access to cheap
finance incentivizes production to cover bond
overcapacity? payments and the fixed costs necessary
to maintain productive capacity. The result
Overcapacity is industrial capacity not utilized is cheap steel flooding the international
by production. Although a certain amount of trading system, whose price is determined
unutilized capacity in capital-intensive sectors, by the amount of government subsidies and
like steel, over the short-term is normal the requirement to make bond payments.
due to fluctuations in demand, persistent This runs counter to the comparative or
overcapacity indicates overinvestment in competitive advantage of nations serving
the stock of facilities constituting aggregate as the basic assumption of the international
supply in a sector. This is where we are today. trading regime. Long-term overcapacity, in
short, affects companies, their workers, and
the stability of the international trading system
Why is it a problem? developed since World War Two.
Overcapacity affects the profitability of
companies in the sector because mills
cannot produce at economically sustainable What causes
levels, which for many steel mills is around
80 percent capacity utilization. Reduced overcapacity?
company profitability affects the incentives Cyclical overcapacity is caused by variability
of companies to invest in their facilities in demand. When economic downturns occur,
and workers, which ultimately reduces factories have more productive capacity than
the competitiveness of the sector in the existing demand for a product can support.
national economy, leading to sectoral
unemployment. In the United States, 14,500 Structural overcapacity is caused by
steel workers have been unemployed due overinvestment in industrial steelmaking
to the current economic condition of the facilities. Overinvestment in the most recent
industry. In addition, overcapacity caused by era has been created by China’s “state
Price

S
S1
State subsidies shift the
P1 supply curve from S to S1,
increasing quantity
supplied from Q1 to Q2, and
P2 reducing price from
P1 to P2.
D

Q1 Q2 Quantity

2 Overcapacity in Steel: China’s Role in a Global Problem

capitalism” model, which designates “pillar”
and “strategic” industries for special growth
targets and financial incentives that are
received largely independent of market
conditions. The result of this overinvestment is “Excess capacity has a distorting
a rightward shift in the supply curve, whereby
more units of a good are supplied than what
and damaging effect on global
the market alone would provide. In particular, markets and implementing policies
overcapacity in China’s steel sector is caused to substantially reduce production
by subsidized energy and other inputs,
access to cheap finance, and national versus
in a range of sectors suffering from
subnational government dynamics, notably overcapacity – including steel and
the financial and tax incentives of provincial aluminum – is critical to the function
and local government to increase steelmaking
capacity independent of market prices and
and stability of international markets.”
the mandates of China’s central government. – U.S. Treasury Secretary Jack Lew, 2016 Strategic
and Economic Dialogue, June 5-7, 2016

What can be
done to address sector, and stricter environmental controls
in China may be part of the solution in

overcapacity? placing the national government in a stronger

bargaining position vis-à-vis subnational
In a market economy, cyclical overcapacity governments. Until the reforms promised by
can be managed through the actions of China show tangible results in addressing
private actors reducing capacity in their oversupply in steelmaking facilities, its
production facilities as a result of market trading partners should pursue traditional
signals, and macroeconomic policies trade remedies when specific instances of
supporting economic growth. Structural harm can be substantiated, fully pursue the
overcapacity is a more intractable problem. rights of domestic producers, and postpone
At the heart of the solution is reducing the decision to grant market economy
incentives for growing the industrial stock status for purposes of the World Trade
in steelmaking facilities, and removing exit Organization (WTO). At the same time, net
barriers to allow unprofitable capacity to capacity additions in steelmaking facilities by
permanently close. To achieve these goals, developing countries other than China should
China should implement announced reforms be seriously reconsidered in light of extremely
regarding its tax structure, the career- low profitability levels in the industry. The path
advancement criteria of local and provincial forward requires addressing both demand
officials, and the role of subsidies and cheap and supply imbalances in the steel sector
finance in the economy to make the steel to return it to profitability, and to develop an
industry more subject to market signals. international trading system recognizing that
Ongoing consolidation of large steelmaking market and nonmarket economies follow
state-owned enterprises (SOEs) should be different incentives and goals, and to find
matched with permanent net reductions in a basis for mutually beneficial exchange
steelmaking capacity, government funding despite them.
should focus on reducing the negative social
effects of widespread unemployment in the

Overcapacity in Steel: China’s Role in a Global Problem 3

“The steel market is in a state of
crisis, resulting primarily from
massive global excess capacity,
much of which has stemmed from
the trade-distortive government
policies and actions.... Unless
China starts to take timely and
concrete actions to reduce its
excess production and capacity
in industries including steel, and
works with others to ensure
that future government actions
do not once again contribute to
excess capacity, the fundamental
structural problems in the
industry will remain and affected
governments – including the United
States – will have no alternatives
other than trade action to avoid
harm to their domestic industry
and workers.”
– U.S. Commerce Secretary Penny Pritzker,
April 18, 2016
Introduction
The global steel sector is once again in a state
of overcapacity. China’s expansion of its steel
sector since 2000 has grown capacity in the
global steel sector to over 2,300 million metric
tons (MT) while only 1,500 MT is needed to
meet global demand. The result is a global
steel sector with record low profits and an
influx of cheap steel in the global trading
1
in the steel sector, may be harder to reform
because of the systemic nature of state-led
development in the country. But the current
status quo, in which the result is lost profits
for companies, lost jobs for workers, and an
increasingly contentious trading relationship
among countries, is untenable for the future
of a global trading regime presumed to be
system affecting companies, workers, and the based on the comparative and competitive
global trading regime. advantages of nations, not state-based
subsidies. Rising trade frictions have led to
The reaction of countries to overcapacity is to trade cases, which, even if successful, lead
be expected: trading partners with domestic to the diminished power of companies that
steelmaking capacity seek commitments must file and pay for the lengthy litigation,
from China to reduce its capacity and suffer the effects of reduced profits, and idle
eliminate further subsidies to the sector. production lines.
China’s response has been to acknowledge
the overcapacity problem in its steel sector Industrial overcapacity — the difference
and make repeated commitments to reduce between potential output and current
capacity, yet due to either an unwillingness production — is caused by multiple factors,
or inability to honor its commitments, it including overinvestment and insufficient
continues to add capacity in its steel sector. demand. Industrial overcapacity occurs in
Since 2007, when overcapacity in the Chinese many sectors, particularly in capital-intensive
steel sector became apparent in its own industries in which investments are made
planning documents, China has added 552 with long-term planning horizons. The effects
MT, equivalent to seven times U.S. steel of overcapacity are to reduce or eliminate
production in 2015. profits in an industry, a condition currently
being experienced in the global steel industry.
The last time significant overcapacity existed Remedies to overcapacity are either to reduce
in the global steel sector was in the 1970s capacity — through mothballing capacity,
and 1980s, when European countries made consolidating capacity through mergers and
hard choices about reducing subsidies, acquisition, or exiting the market — or to
addressing unemployment, and finding a way increase demand for the industry’s product
for market-based competition to flourish. until price recovers to profitable levels.
China’s “state capitalism” model, which is at
the core of the current overcapacity problem

Overcapacity in Steel: China’s Role in a Global Problem 5

 The purpose of this report is to investigate Finally, the fourth goal of the report is to
the concept of industrial overcapacity by first discuss the effectiveness of policies seeking
defining what is meant by the term. The term to address the issue of overcapacity at the
has been discussed in academic articles and international and national level. Industrial
consultant reports for a number of years, often overcapacity is recognized as contributing to
used interchangeably with the term “excess trade frictions among nations. What policy
capacity.” We shed light on what is meant by levers exist within current WTO rules to help
overcapacity to have a more precise debate on address the issue? What can be done within
its causes, effects, and public policy solutions. the bilateral trading relationships between
countries to reduce trade frictions related to
The second goal of this report is to quantify industrial overcapacity?
global industrial overcapacity in the steel
industry. What measures exist regarding the The answers to these questions are complex,
amount of global overcapacity in the steel and their solutions require coordination
industry, and what are future expectations between sovereign actors. At the outset, we
regarding the growth or decline of posit that legitimate concerns regarding the
overcapacity in the steel industry? fairness of the international trade system
can be explored without coloring the
The third goal of the report is to investigate conversation with appeals to protectionism
the causes of global industrial overcapacity. and xenophobia. We seek a better functioning
The rise of state capitalism, in which SOEs international trade system, and the analysis
rather than private corporations are dominant covered herein should be read with that goal
actors, is often mentioned in the literature as in mind.
a cause for global industrial overcapacity. We
investigate the support for the claim within
the steel industry.

A crane operator looks onto a floor filled with steel products in a warehouse in Shanghai, China, on April 10, 2009.

6 Overcapacity in Steel: China’s Role in a Global Problem

Defining overcapacity

2.1 What is
overcapacity?
The term overcapacity is commonly used
to describe a situation in which productive
capacity is greater than current production.
Stated simply, overcapacity is capacity
The second part of the overcapacity
2
calculation is a production measure. The World
Steel Association and World Steel Dynamics
maintain data on steel production widely used
by industry. We use annual production data
provided by the World Steel Association to
calculate crude steel production. Capacity and
production measures allow the calculation of
unutilized by current production. Industrial overcapacity, which is the difference between
overcapacity can be measured at the firm, productive capacity and its utilization in current
national, and international level, and is the production, i.e., residual capacity.3
difference between production capacity and
actual production, meaning overcapacity
is the complementary proportion of the
capacity utilization rate.
“We recognize that global excess
To quantify overcapacity, one needs measures capacity in industrial sectors,
of capacity and production. Capacity can
be measured as nameplate capacity, which
especially steel, is a pressing
is the intended full-load sustained output of structural challenge with global
a facility. Alternatively, it can be measured implications and this issue needs
as “effective capacity,” which is nameplate
capacity minus some standard percentage
to be urgently addressed through
allowed for maintenance and other scheduled elimination of market distorting
downtimes.1 We use nameplate capacity measures and, thereby, enhancement
reported by the Organization for Economic
Co-operation and Development (OECD) and
of market function.”
the German Steel Federation as the basis for – G-7 meeting, May 26-27, 2016
our overcapacity calculations.2

Overcapacity in Steel: China’s Role in a Global Problem 7

 Figure 1: Global crude steel production, capacity, and overcapacity,
1980-2017(f)

2,500
nominal capacity

2,000
Millions of Metric Tons

production

1,500

1,000

overcapacity
2008–2017 (est) avg: 540MT
500
1980–2007 avg: 242MT

0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Duke CGGC, capacity from OECD (2000-2017) and German Steel Federation (1980-1999); production from World
Steel Association. Forecasted production for 2016-2017 from World Steel Dynamics.

2.2 Measures of steelmaking capacity, most of it centered in

China.5 Production generally kept up with
overcapacity in steel the rise in global capacity until 2009, when
the financial crisis affected global demand
Figure 1 provides a time series of global crude for steel, and overcapacity for the first time
steelmaking capacity, production, and nominal exceeded 500 MT. Nominal overcapacity
overcapacity from 1980-2014, and forecasts averaged 242 MT from 1980-2007; estimates
for 2015-2017. for 2015 place overcapacity at 750 MT. To put
that number in context, existing overcapacity
The figure illustrates that nominal steelmaking is equivalent to the combined 2015 crude
capacity averaged 1,000 MT from 1980- steel production of the top 30 nations
1994, grew gradually through 2000 to 1,056 (except China), including the United States,
MT, and then accelerated rapidly after 2001 European Union (EU), Japan, South Korea,
to reach 2,371 MT in 2015. From 2000- and Russia — the traditional powerhouses of
2015, nominal global steelmaking capacity global steel production. See Table 1
additions averaged 82MT per year, which is
roughly equivalent to total annual U.S. steel The rise in nominal global steel overcapacity
production.4 In other words, the world was parallels the 2008-2009 global economic crisis
adding steelmaking capacity equivalent to and China’s rapid development in steelmaking
U.S. annual steel production for more than capacity. Figure 2 illustrates the major steel
a decade, a remarkable rate of growth in producing regions in the world6 and their

8 Overcapacity in Steel: China’s Role in a Global Problem

Table 1: 2015 crude steel production, top 30 countries
Rank Country MT Rank Country MT Rank Country MT
1 China 803.3 11 Italy 22 21 Belgium 7.3
2 Japan 105.2 12 Taiwan, China 21.4 22 Netherlands 7
3 India 89.4 13 Mexico 18.2 23 South Africa 6.4
4 United States 78.8 14 Iran 16.1 24 Vietnam 6.1
5 Russia 70.9 15 France 15 25 Egypt 5.5
6 South Korea 69.7 16 Spain 14.8 26 Czech Republic 5.3
7 Germany 42.7 17 Canada 12.5 27 Saudi Arabia 5.2
8 Brazil 33.3 18 United Kingdom 10.9 28 Argentina 4.9
9 Turkey 31.5 19 Poland 9.2 29 Australia 5.0
10 Ukraine 23.0 20 Austria 7.7 30 Slovak Republic 4.6
Top 30 1,552.9
Top 30 (ex. China) 749.6
Source: World Steel Association, World Steel in Figures 2016

capacity, production and overcapacity from a significant amount of capacity (173 MT),
2000-2015, the most recent year for which while the United States and Japan slightly
regional data are available. Over the period, reduced crude steelmaking capacity since
the U.S., Japan and the former Soviet Union 2000.
(FSU) each averaged around 25 MT of
overcapacity, while the EU averaged 50 MT. In In 2015, 46 percent (336.2 MT) of nominal
contrast, China’s overcapacity grew steadily global overcapacity in steel was located in
from almost zero in 2000 to 336 MT in 2015.7 China, 9 percent (62.9 MT) was located in
Europe, 6 percent (37.8 MT) in the FSU, 5
China’s role in contributing to the global percent (35 MT) in the US, 3 percent (25.4 MT)
overcapacity problem in the steel sector is in Japan, and 31 percent in all other countries
reinforced by an examination of the source (see Figure 4).
of global capacity additions since 2000. As
shown in Figure 3, China exceeded all other
regions in adding capacity since 2000 with
990 MT, accounting for more than 75 percent
of steelmaking capacity additions in the world
since 2000. As a percentage of existing stock,
China added 662 percent to its existing crude
steelmaking capacity since 2000. Other Asian
countries (excluding Japan and China) added

Overcapacity in Steel: China’s Role in a Global Problem 9

 Figure 2: Regional production, capacity, and overcapacity, in MT,
2000-2015

EU (28) FSU
250 250

200 200

150 150

100 100

50 50

0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
USA Japan
250 250

200 200

150 150

100 100

50 50

0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
China
1,200

1,000

800 capacity
600 production

400
overcapacity

200

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: figures represent nominal raw steelmaking capacity, production and overcapacity in million metric tons (MT) across the
major steel producing regions in the world. Please note the difference in scale for China and all other regions.
Source: Duke CGGC, calculated from the German Steel Federation (capacity) and World Steel Association (production).

10 Overcapacity in Steel: China’s Role in a Global Problem

Figure 3: Crude steel capacity additions by region, 2000-2014

Nominal Capacity Additions (MT) Percent Capacity Additions

EU 4.1 EU 2%
W. Europe (non-EU) 29.2 W. Europe (non-EU) 105%
FSU 29.3 FSU 24%
USA (1.9) USA -2%
Canada 3.8 Canada 22%
Latin America 25.5 Latin America 56%
Africa 8.3 Africa 34%
Middle East 45.3 Middle East 296%
Japan (15.2) Japan -10%
990.4
China China 662%
Asia (ex. China & Japan) 172.8 Asia (ex. China & Japan) 132%
Australia 0.6 Australia 7%
Rest of World (ROW) 9.8 Rest of World (ROW) 49%

Source: Duke CGGC, calculated from the German Steel Federation, Statistische Jahrbuch der Stahlindustrie (2015)

Figure 4: Regional contribution to steel overcapacity, 2015

Nominal Overcapacity (MT) Share of Global Overcapacity (%)

ROW ROW
227.3 31%
China China
336.2 46%

EU (28) EU (28)
62.9 9%

FSU 37.8 FSU

Japan USA Japan USA 6%
25.4 35.0 4% 5%

Note: ROW is “rest of the world.” Data represents the calculated nominal overcapacity across major steel producing regions
for 2015. See also Note 7.
Source: Duke CGGC, based on German Steel Federation (capacity) and World Steel Association (production)

Overcapacity in Steel: China’s Role in a Global Problem 11

 2.3 Future steel The countries with the largest additions to
steelmaking capacity are listed in Table 2
capacity additions below. India leads with underway and planned
additional capacity, with 237.5 MT, consistent
Despite already high levels of existing global with its 2013 policy announcement that
steelmaking overcapacity, and continued steelmaking capacity would have to increase
forecasts for weak global steel demand, to 300 MT by 2025-2026 to meet expected
more than 100 MT of new capacity additions demand.9 Already expanding capacity at
are underway and a further 352 MT of new an annual rate of 9.5 percent, the OECD
capacity are planned to be completed by considers it likely that India will become the
2017.8 The largest sources for planned new second largest global producer of steel in the
capacity additions are in Asia, where 328 MT, medium term.10 “Other Asian” countries have
or 73 percent of expected world capacity 49.4 MT of underway and planned capacity,
additions, is expected to come into production of which Vietnam (8.7 MT), Indonesia (1.7
by 2017, most of it in India. The Middle East is MT), and the Philippines (1.4 MT) makeup
expected to add 52 MT of additional capacity the largest share of underway capacity
by 2017 to its existing 58.1 MT steelmaking additions.11 China plans to add 41 MT of
capacity, accounting for 12 percent of global steelmaking capacity by 2017, with 28 MT
underway and planned capacity additions. underway, and another 13 MT planned. Iran
(See Figure 5. Note that the specific countries also plans significant capacity additions, with
contributing to the capacity additions are 12 MT underway and 23 MT planned.
discussed immediately below.)

Figure 5: Underway and planned steel capacity additions,

by region, 2014-2017

Nominal Capacity Additions (MT) Percent Capacity Additions

Africa 16.6 Africa 3.7%

327.6 72.5%
Asia Asia

FSU 13.6 FSU 3.0%

Europe 4.4 Europe 1.0%

Latin America 21.4 Latin America 4.7%

Middle East 52.1 Middle East 11.5%

NAFTA 11.3 NAFTA 2.5%

Oceana 5.0 Oceana 1.1%

Total capacity additions from 2014: 452MT Total capacity additions from 2014: 19%

Note: Projects include projects underway and investments planned. As such, there is significant uncertainty as to how many
projects will come on stream; some planned projects may not be realized due to market pressures in the current period of
economic weakness.
Source: OECD (2015) “Capacity Developments in the World Steel Industry (December).”

12 Overcapacity in Steel: China’s Role in a Global Problem

Table 2: Underway and planned capacity additions by 2017,
by country
Country 2017 (underway) 2017 (planned) Total
India 30.8 206.7 237.5
Other Asia* 13.0 36.4 49.4
China 27.7 13.3 41.0
Iran 11.8 22.9 34.7
Brazil 2.0 12.8 14.8
Russia 4.1 7.0 11.1
Saudi Arabia 4.7 6.2 10.9
Australia - 5.0 5.0
Other Europe - 4.4 4.4
Turkey - 4.4 4.4
Egypt 2.0 2.0 4.0
Korea 0.9 0.8 1.7
Ukraine - 1.5 1.5
Japan (2.0) - (2.0)
Others 5.2 28.4 33.6
Total 100.2 351.8 452.0

* “Other Asia” includes Taiwan, Indonesia, Malaysia, Pakistan, Philippines, Thailand, and Vietnam
Note: Projects include projects underway and investments planned. As such, there is significant uncertainty as to how many
planned projects will come on stream due to market pressures in the current period of economic weakness.
Source: OECD 2015 (updated December 2015)

The global capacity additions are indicative As shown in Table 4, Asian countries other
of a trend wherein net importers of steel in than China and Japan (India, Thailand,
the developing world are creating domestic Vietnam, Philippines, Indonesia, and Malaysia)
steelmaking capacity to supply their export- are the largest net importers of steel in the
oriented product markets and domestic world, representing almost 64 MT of net
development objectives.12 Just as China imports into the region. China and Japan
changed from being a net importer before are the largest suppliers of steel imports to
December 2004 to being the world’s largest these Asian countries, but new domestic
net exporter since the first half of 2006 (see steelmaking capacity is rapidly increasing in
Table 3), countries are seeking to substitute these countries and could replace Chinese
steel imports with domestic production and imports of commodity grade steel in these
achieve self-sufficiency in steel demand.13 markets, while higher grade steel imports from
However, self-sufficiency in steel production Japan could rise due to increased automobile
has already been reached for many of the production in the region.15 Vietnam’s Master
countries with the largest capacity additions Plan targets the steel sector to grow to 40
planned or underway, notably India and MT by 2025, up from 12 MT in 2014. The
China.14 strategic plan in the Philippines targets the
steel sector to grow to 20 MT by 2030, up

Overcapacity in Steel: China’s Role in a Global Problem 13

 Table 3: Major importers and exporters of steel
Net Imports Net Exports
Rank (imports - exports) MT Rank (exports - imports) MT
1 United States 26.5 1 China 98.4
2 Viet Nam 14.9 2 Japan 34.9
3 Thailand 13.4 3 Russia 25.3
4 Indonesia 9.4 4 Ukraine 16.9
5 Mexico 8.6 5 Brazil 10.5
6 Egypt 7.7 6 South Korea 9.5
7 Saudi Arabia 6.4 7 Netherlands (2)
3.8
8 Algeria 6.4 8 Taiwan, China 3.7
9 United Arab Emirates 6.0 9 Austria (2) 3.2
10 India 5.7 10 Belgium (2)
3.1
11 Poland (2)
4.1 11 Slovakia (2)
2.2
12 Bangladesh 4.0 12 Luxembourg 1.8
13 European Union (28) (1)
3.9 13 Singapore 1.7
14 Iran 3.8 14 Kazakhstan 1.2
15 Turkey 3.7 15 Finland (2) 0.9

Excluding intra-regional trade

(1)

Data for individual European Union (28) countries include intra-European trade
(2)

Source: World Steel Association, World Steel in Figures 2016

from 2 MT in 2014.16 Countries in the Middle imports, especially in commodity grade steel.
East, particularly Iran and Saudi Arabia, have Second, global overcapacity in steel will
some of the fastest annual rates of growth likely remain at historic levels if net increases
in steelmaking capacity in the world (14.6 in steel production capacity are not paired
percent and 12.6 percent, respectively).17 with even greater increases in steel demand.
Iran announced plans to increase its However, to date, the likelihood of a global
domestic production to 55 MT by 2025 with recovery in demand necessitating further net
intentions to become a net steel exporter increases in steelmaking capacity is extremely
after it achieves self-sufficiency in steel.18 low.19 The OECD forecasts that GDP growth
Currently, China is the largest steel exporter will be 3.3 percent in 2016 and 3.6 percent in
to the Middle East. As in Asia, it could 2017.20 Instead, increases in steel production
face increased competition from domestic capacity will further exacerbate an already
steelmaking capacity in the region. historic level of overcapacity in the sector.
Third, and perhaps most importantly, the goal
The implications of these trends are three- of achieving self-sufficiency in steelmaking
fold. First (and somewhat less related to the is anathema to a global trading system in
topic of this paper), some export markets will which factors of production are presumably
be increasingly tough for foreign companies exchanged based on the comparative and
to penetrate and maintain market share as competitive advantage of nations. The
domestic production replaces some steel opportunity costs for developing indigenous

14 Overcapacity in Steel: China’s Role in a Global Problem

 Table 4: 2015 steel imports and exports, by region
Exporting Region / Country

of which:
Africa & extra-
European Other Other Middle Other Total regional
Union Europe CIS NAFTA America East China Japan Asia Oceana Imports imports

European Union 106.4 5.5 14.5 0.4 2.0 1.4 8.5 0.3 4.9 0.1 144.1 37.7

Other Europe 10.3 0.7 8.8 0.0 1.0 0.1 3.2 0.4 1.3 0.0 25.8 25.2

CIS 1.3 0.4 8.7 0.0 0.0 0.0 1.6 0.1 0.3 0.0 12.5 3.7

NAFTA 7.3 2.5 3.1 17.4 6.4 0.6 4.4 4.3 9.1 0.4 55.5 38.1

Other America 1.4 1.1 0.6 1.3 2.9 0.0 8.4 1.4 1.3 0.0 18.3 15.5

Africa 7.3 3.2 6.8 0.2 0.4 1.6 9.2 1.3 1.4 0.0 31.3 29.7

Middle East 1.8 4.9 4.7 0.1 0.2 0.0 10.7 1.7 4.9 0.0 29.1 29.1

China 1.3 0.2 0.0 0.1 0.1 0.0 0.0 5.2 6.1 0.1 13.2 13.2

Importing Region / Country

Japan 0.1 0.0 0.0 0.0 0.0 0.0 1.3 0.0 4.5 0.0 5.9 5.9

Other Asia 2.9 0.1 4.4 0.4 1.7 0.8 63.5 25.9 23.0 0.3 122.9 99.9

Oceana 0.2 0.0 0.0 0.0 0.0 0.1 0.8 0.2 2.2 0.3 3.8 3.5

Total Exports 140.2 18.5 51.7 19.9 14.8 4.7 111.6 40.8 59.0 1.2 462.4 301.4

of which: extra- 33.8 17.8 43.0 2.5 11.9 3.1 111.6 40.8 36.0 0.9 301.4
regional exports

Net Exports -3.9 -7.3 39.2 -35.6 -3.5 -55.7 98.4 34.9 -63.9 -2.6
(exports - imports)

Note: Totals may not add due to rounding.

Source: World Steel Association, World Steel in Figures 2016

Overcapacity in Steel: China’s Role in a Global Problem

15
 steelmaking capacity are likely to be much what economic grounds these investments
greater than if nations simply traded for are being made, what development goals
required inputs like steel. they are trying to achieve, and especially,
what the opportunity costs are for additional
Clearly, additional investment leading to net investments.
capacity additions in industries like steel
that have existing overcapacity is a choice
driven by considerations other than economic
return, since the return on investment in these 2.4 The effects
industries is already extremely low. In China,
for example, the average return on iron and of overcapacity
steel companies is typically below 3 percent, At the firm and industry level, low capacity
the lowest level in the industrial sector21, utilization (high overcapacity) affects
leading observers to comment that the profit profitability, with effective capacity utilization
of a ton of steel is not sufficient to buy an ice rates of around 80 percent generally
cream cone.22 The Chinese model may have considered necessary for steel plants to
worked for China due to its great domestic remain profitable.23 As illustrated in Figure
demand for steel during an unprecedented 6, the average nominal capacity utilization
time of economic growth from 2000 to rate from 1980-2014 averaged 76 percent,
2008. But in the post-boom era, countries ranging from 65 percent in 1982 to a high
developing indigenous capacity in industries of 86 percent in 2006. The World Steel
experiencing overcapacity should consider on Association estimates that global capacity

Figure 6: Historical and projected capacity utilization rates in the

global steel industry, 1980-2017(f)

100.0%

I II III IV V VI

90.0%

80.0%
35-year average: 76%

70.0%

60.0%

50.0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015f
2016f
2017f

Note: I: 1980’s steel crisis; 2: recovery; 3: Soviet collapse; 4: China boom; 5: financial crisis; 6: current overcapacity
Source: Duke CGGC, capacity from OECD (2000-2017) and German Steel Federation (1980-1999); production from World
Steel Association. Forecasted production for 2016-2017 from World Steel Dynamics.

16 Overcapacity in Steel: China’s Role in a Global Problem

utilization averaged 69.4 percent in June financial crisis dramatically reduced capacity
2016, well below the 80 percent necessary utilization in steel (period 5), from which full
for long-term viability.24 recovery has not occurred in the current
period (period 6). Global capacity utilization
Six periods of fluctuating capacity levels rates in the steel industry are now slightly
have occurred since 1980. The first period below what they were during the worst years
is the 1980s steel crisis, resulting from the of the global financial crisis.
effect of the 1970s oil crises, high inflation
and low growth in the mid- to late-1970s.25 Capacity utilization rates vary across regions.
Recovery from the 1980s steel crisis (period In 2015, capacity utilization rates ranged from
2) increased capacity utilization rates 69 percent in the United States to almost
throughout the 1980s until the end of the 81 percent in Japan. Capacity utilization in
Cold War, and the Soviet collapse left former China averaged 70.5 percent. (see Figure 7).
Soviet Union steel producing countries with Future expectations about capacity utilization
unutilized capacity throughout much of the are consistent with these averages. Morgan
1990s (period 3). The period also included the Stanley expects that global capacity utilization
Asian financial crisis beginning in 1997, which will remain low through 2017.
deepened the crisis in the steel sector, and
resulted in the some of the worst financial Low capacity utilization affects company
conditions the steel industry had seen until profitability. At the firm level, the relationship
the current period.26 The period ended with between capacity utilization and steel industry
the rapid growth of Chinese steel demand, profitability was examined by the OECD. Its
which increased global capacity utilization preliminary study estimates that the effect
rates from 2000 to 2008 (period 4). The global of a 1 percent increase in capacity utilization

Figure 7: 2015 Steel capacity utilization, by region

80.6%

72.9%

71.0%
70.5%
69.2%
World average: 68.9%

EU (28) FSU USA Japan China

Source: Duke CGGC, based on German Steel Federation (capacity) and World Steel Association (production)

Overcapacity in Steel: China’s Role in a Global Problem 17

 is around a 0.3 percentage point increase 2002, and that “recent trends in key financial
in the Earnings before Interest, Taxes, indicators raise serious concerns and suggest
Depreciation and Amortization EBITDA/sales that the global industry is in a very difficult
ratio, a common measure of profitability.27 economic and financial situation.”31 It further
Overcapacity affects industry profits because states that “[s]teel market developments
plant-level efficiencies are not maximized, during 2015 suggest that the financial
leading to higher production costs, and situation is rapidly deteriorating, leading
because steel prices tend to be lower during to bankruptcy events, closures of steel
periods of low capacity utilization, leading to plants across the world and mounting trade
lower per unit revenues.28 The OECD noted disputes.”32
that world steel prices have declined since
2011, and in 2015 declined by 20 percent.29 The impacts of overcapacity extend beyond
The result of declining prices is declining firm-level profitability, as weak profitability
profitability, which have resulted in “… the can lead to bankruptcies and job losses. In
financial performance of the industry is the current period, steel plant closures have
perhaps worse now than it was during the already been announced. From January
global steel crisis of the late 1990’s, in large 2015 – June 2016, the U.S. steel industry lost
part due to the significant excess capacity 14,500 jobs due to significant increases in
that exists today.”30 Indeed, a recent report steel imports and decreases in steel exports.33
by the OECD states that the overall financial Similar effects regarding job losses are being
health of steelmaking companies is now experienced by steel companies in the United
worse than during the steel crisis of 1997 to Kingdom and Japan.34

Figure 8: Profitability and capacity utilization rate in the steel

industry, 1992-2014
EBITDA/SALES (left scale) CUR (right scale)

25% 100

95
20%
90

85
15%

80

10%
75

70
5%
65

0% 60
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL

18 Overcapacity in Steel: China’s Role in a Global Problem

In addition, excess capacity contributes to
trade friction, as export surges can develop,
leading to lower prices and the loss of “The G-20 has added to the chorus
market share for import-competing domestic
producers.35 Steel exports from China to the of voices calling for tackling the
world have quadrupled since 2005, from 27.4 root causes of excess capacity for
MT to 111.6 MT in 2015; and doubled just the benefit of both developing and
since 2012.36 The displaced production creates
incentives for governments to undertake developed countries.”
trade action and government intervention to – U.S. Trade Representative Michael Froman,
protect domestic industries.37 For example, July 10, 2016
during the 1997 to 2002 steel crisis, trade
actions escalated against East Asian and FSU
countries, with the United States, EU, Canada, from 2000 to 2015, and Japan and the
and Mexico filing the majority of antidumping United States even reduced overall capacity,
and countervailing duty cases. President China’s capacity grew steadily from 150 MT
George W. Bush also announced in 2002 a 30 to 1,140 MT in 2015.41 Today, China has the
percent tariff on certain steel imports based largest nominal share in steel overcapacity,
upon a determination by the United States accounting for about 336 MT, or 46 percent,
International Trade Commission (USITC) that of global steel overcapacity. Third, we find
the domestic industry was seriously injured that future global steel overcapacity levels
from imports, permitting Section 201 trade will be exacerbated by planned steel capacity
actions.38 In the current period, from January additions in China and other developing
to mid-May 2015, the WTO announced that countries in Asia, notably India, Vietnam, and
G-20 economies had applied 145 new trade Indonesia. Fourth, we find that overcapacity
restrictive measures, a record average of 20 per reduces profitability in the global steel
month, with many in the metals industry.39 U.S. industry, with each percentage point decrease
Commerce Secretary Penny Pritzker stated in capacity utilization associated with around a
in August 2016 that 161 anti-dumping and 0.3 percentage point decrease in the EBITDA/
countervailing duty cases on steel products sales ratio. Thus, we agree with the summary
are currently being enforced.40 In short, the assessment of industry observers that
effects of overcapacity in the steel industry are overcapacity is the biggest threat to the steel
low prices, weak profitability, bankruptcies, job sector because it leads to low profit margins,
losses, and increased trade frictions. subsequent plant closures and job losses,
and increased friction in the global trading
2.5 Conclusion system.42 The next two sections summarize
what we found about the causes for steel
It is important to take note of some summary overcapacity (section 3), and the policies
findings. First, we find that global nominal undertaken to address industrial overcapacity
overcapacity has grown from an average in the steel sector (section 4).
of 250 MT from 1980 to 2007 to 750 MT in
2015. Second, we find that the increase in
nominal global steel overcapacity parallels
China’s development of crude steelmaking
capacity. While other major steel producing
regions maintained excess capacity levels

Overcapacity in Steel: China’s Role in a Global Problem 19

 The Causes
of Overcapacity
The causes of overcapacity can be discussed
at the firm, national, and international levels
and can be divided into two major categories:
1) cyclical overcapacity caused by variable
demand and other industry specific factors
occurring over the short term; and 2) structural
overcapacity caused by excessive supply,
which includes factors such as government
3
In practice, however, economic downturns
cause overcapacity because capacity is
price insensitive in the short-term; that is, the
physical plant has limited, if any, ability to
rapidly reduce its total capacity in response
to changes in price. High exit barriers in the
steel industry prevent rapid adjustments to
capacity. The costs of reducing capacity
interventions in the steel sector, particularly include the dismantling and demolition of
subsidies and other forms of government mills, environmental clean-up and remediation,
support occurring over the longer term. We and legacy pension or other labor-related
discuss each category of causes below. costs. Expectations about increases in
future demand and the cyclical nature of
the industry also limit the incentives of steel
3.1 Overcapacity producers to reduce plant capacity in the
face of economic downturns. Many countries
caused by variable seek to preserve steelmaking capacity during

demand (“cyclical economic downturns in order to mitigate

increases in unemployment. Public subsidies

overcapacity”) or tax rebates are rationalized as preserving

a strategic industry and reducing the effects
In theory, overcapacity ought to be a short- of social problems caused by unemployment.
term phenomenon. When demand and prices Therefore, many steel producers find that
fall, profit-maximizing firms should reduce the marginal cost of reducing capacity
production and idle capacity. If the situation exceeds the marginal benefit, and prefer to
persists, firms will seek to permanently continue production at lower levels to cover
reduce capacity because the costs of fixed costs, while either holding inventory or
maintaining capacity, notably maintaining shipping the excess tonnage to spot markets
furnaces and rolling facilities, decrease where it is sold at lower prices.43 The result is
profits. Firms not maximizing profits will exit overcapacity.44
the market, while more efficient producers will
capture market share, effectively eliminating
excess capacity in the industry.

20 Overcapacity in Steel: China’s Role in a Global Problem

Global overcapacity caused by variable
demand was most recently experienced
during the 2008 financial crisis, although
periodic sharp increases in global
“Both sides recognize that excess
overcapacity (decreases in capacity utilization) capacity in steel and other sectors is
occurred globally in the early 1980s (see a global issue.”
Figure 6). In addition to global industrial
– China Vice Premier Wang Yang, 2016 Strategic and
overcapacity is regional overcapacity. Economic Dialogue, June 5-7, 2016
Regional crises, such as the collapse of
the Soviet Union in 1991, the Asian and
Russian financial crises in 1997 to 1998 and
design, build, and place into operation new
intermittent Latin America debt and financial
capacity. The tendency in many capital-
crises [1981, 1994 (Mexico), 1999 (Brazil),
intensive industries is to wait to make
2001 to 2002 (Argentina)]45 can affect regional
investment decisions until the capacity in
capacity utilization ratios sharply. At times,
place is stressed by current demand. When
the effects of these regional crises manifest
capacity is tight, multiple actors in the industry
themselves in the United States as steel
perceive the same investment opportunity
import crises, in which rapid declines in steel
and make simultaneous investment decisions.
consumption abroad make export markets
This leads to a situation characteristic of
attractive for foreign producers, at almost
capital-intensive industries in which capacity
any price, in order to shed inventory and
investments are “lumpy”, and capacity
cover portions of their fixed costs. Imports
is either a constraint or a burden for the
become attractive in the United States when
industry.48 Other capital-intensive industries
their price is $100 per ton less than the price
with perennial over- or undercapacity issues
of equivalent domestic production.46 These
are airlines, shipping, and automobile
periodic, sharp reductions in consumption
manufacturing.49
result in surplus production, which is then
exported to eliminate inventory. The flood of
At the plant level, overcapacity is quite
imports reduces the domestic price of steel
common. The nameplate capacity rating on a
and affects domestic producers and workers,
plant is often greater than effective capacity
sometimes quite significantly. For example,
due to normal maintenance requirements and
in the immediate aftermath of the 1998 Asian
seasonal production fluctuations. In addition,
financial crisis and the resulting steel import
marginal improvements to the production
crisis in the United States, more than 40
process and the introduction of new
domestic steel companies filed for bankruptcy
technology may increase operational capacity
protection, with at least six stopping business
above nameplate capacity, referred to in the
operations entirely, laying off at least
industry as “capacity creep.” Overcapacity
6,600 workers and risking the pension and
may also be used to meet increased
healthcare benefits of another 100,000 current
demand for the firm’s products, which it
and retired steelworkers.47 From 2000 to
can supply with production from unused
2014, the United States reduced capacity by
capacity. Academic investigations have also
1.9 MT.
hypothesized that excess capacity at the firm
level may deter new entrants into a market.
Among other traditional causes for excess
However, the balance of the evidence shows
capacity, the investment time-horizon of
that firms hold excess capacity because of
industries is an important factor. Investment
variable demand or because of the lumpy
decisions about capacity additions in capital-
investment horizon in the industry.50
intensive industries are made with much
longer time horizons than in labor-intensive
industries because of the time it takes to

Overcapacity in Steel: China’s Role in a Global Problem 21

 3.2 Overcapacity Subsidies and other financial incentives
caused by excessive offered by governments to increase capacity
contribute to structural overcapacity because
supply (“structural steel producers seek to capture the financial
rewards offered by the state, which are
overcapacity”) independent of the profits derived from market
exchange. Examples of financial incentives
Understanding the structural causes for provided by governments contributing to
overcapacity requires an investigation into the overcapacity are production subsidies, in
difference between the production capacity which each unit of output receives a fixed
needed to meet market demand, which financial bonus; and input subsidies, in which
is determined by price, and the additional factors of production needed by an industry
capacity supplied due to non-price factors. are subsidized by the government resulting in
The OECD finds that three general categories reduced input costs. The result of these non-
of non-price factors are creating global price factors is a rightward shift in the supply
overcapacity in steel: curve whereby more units of a good (in this
■■ over-investment due to government case, steel production capacity) are supplied
actions, specifically incentives, subsidies, than what the market alone would provide.
rebates, and other preferential treatment of See Figure 9.
the industry
Exit barriers contribute to overcapacity
■■ exit barriers because more sellers remain in the market
than an efficient market would allow.
■■ investment barriers51 Examples of exit barriers include economic

Figure 9: The effect of state subsidies on steel production capacity

Price

S
S1
State subsidies shift the
P1 supply curve from S to S1,
increasing quantity
supplied from Q1 to Q2, and
P2 reducing price from
P1 to P2.
D

Q1 Q2 Quantity
Source: Duke CGGC

22 Overcapacity in Steel: China’s Role in a Global Problem

barriers, such as demolition, environmental, of overcapacity in China before addressing
pension and labor costs associated with policy responses in Section 4.
plant closures; and noneconomic barriers,
such as governmental policies (anti-closing
laws) or state ownership intended to maintain
employment levels. Firms also face exit
3.3 China
barriers when their liabilities, such as the China’s remarkable growth in steelmaking
burden of servicing debt, exceed assets, capacity has occurred since the early 1990s,
and markets for selling assets are weak due when the sector became a “strategic” industry
to unfavorable industry-wide price-to-book in national planning documents. As a targeted
ratios.52 Exit barriers keep companies in an industry for growth, the industry received
industry despite low or even negative returns subsidies and other special incentives from
on investment, hindering consolidations the national government to encourage its
necessary for economically-sized assets, development.57 The policies encouraged
adopting new technologies, and/or shifting self-sufficiency in steelmaking capacity and
a firm’s strategic position to more profitable resulted in turning China from a net importer
areas. Industries with exit barriers are into the largest steel exporter in the world.58
characterized by high levels of excess State direction, supplemented by state
capacity that is not retired because distressed subsidies, incentives, and strong internal
firms do not exit the market, and price cutting demand for steel, had an important role in
becomes the dominant competitive behavior developing China’s steelmaking capacity.59
in the industry as firms try to fill their plants to
achieve breakeven levels.53 Observers of the Chinese demand for steel for domestic
steel industry comment that the overcapacity infrastructure, commercial, and residential
problems experienced in the global industry construction was strong, as was demand
are characteristic of high exit barriers.54 for steel from manufacturing industries,
particularly for machinery and automotive
In addition, investment policies such as manufacturing. Existing demand (and future
restrictions on foreign direct investment demand expectations) led to high capacity
reduce the ability of foreign firms to create utilization rates and steel prices, which
firms with competitive economies of scale led both SOEs to expand steel production
and scope, the introduction of new more capacity and smaller steel companies to enter
efficient production technologies, and the the market. However, as growth in domestic
elimination of smaller, local firms possessing demand stabilized and export market demand
old assets.55 The investment climate in the reduced after the 2008 global financial crisis,
industry, however, must be favorable to allow overinvestment in Chinese steelmaking
foreign direct investment to be an effective capacity became apparent. Nominal capacity
mechanism for upgrading an industry and utilization ratios declined from their high of 95
reducing structural overcapacity. percent in 2002 to approximately 70.5 percent
in 2015.60 See Figure 10.
Although structural overcapacity has
occurred over the years in different regions, A report for the EU Chamber of Commerce
including Europe and Japan, overcapacity in in China found that the main causes of
the steel industry is today most significant overcapacity in the Chinese steel industry are:
in China, where we estimate that 336 ■■ The desire on the part of regions to be self-
MT — approximately half of global nominal sufficient, leading to capacity duplication at
overcapacity — existed in 2015.56 In the the national level;61
next section, we discuss the development of
China’s steel sector and analyze the causes

Overcapacity in Steel: China’s Role in a Global Problem 23

 Figure 10: Crude steel production and capacity utilization rates in
China, 2000-2015
production (MT) capacity utilization
1,000 94.8% 95.4%
100.0%

900 85.9% 86.2% 90.0%

84.0% 83.2%
81.3% 822 823
80.2% 79.5% 80.4% 79.8% 804
800 76.2% 80.0%
79.9%
702
700 731 74.3% 70.0%
639 72.2%
70.5%
600 577 60.0%
512
500 490 50.0%
421
400 356 40.0%

300 273 30.0%

222
200 182 20.0%
152
129
100 10.0%

0 0.0%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Note: figure illustrates production volumes and nominal capacity utilization in China from 2000-2015.
Source: Duke CGGC, based on World Steel Association (production) and the German Steel Federation (capacity)

■■ Rising demand predictions based on overly reasons they perceived as contributing to

optimistic forecasts to support China’s overcapacity in their industry. (See Figure 11).
development and construction boom; Macroeconomic causes of overcapacity were
most strongly attributed to local government
■■ A combination of SOEs being insensitive policies seeking to attract investments (56
to profit/loss and small, dirty, or inefficient percent) and loose lending policies of the
steel mills that suspend activity when price government (31 percent). Other financial-
dips and re-open when the market is more related causes were directed lending (19
favorable; percent), a tolerance for non-performing loans
■■ Adverse effects of stimulus that encourages (19 percent), and low interest rates (6 percent).
large mills to add capacity and makes the At the microeconomic (firm) level, the survey
small- and medium-sized mills, which the respondents associated the high growth
national government wants to shutdown, expectations of companies (38 percent) as the
profitable; most important cause of overcapacity across
industries. Lax enforcement of environmental
■■ The provision of subsidized energy by (25 percent), safety (19 percent), and health
regional governments.62 regulations (6 percent) were also seen as
important. The market share philosophy
The report included a survey of its members, (in contrast to return on investment) of
which are European businesses operating in Chinese companies (25 percent) and easy
China, about what macro- and microeconomic technological availability/low barriers to entry

24 Overcapacity in Steel: China’s Role in a Global Problem

Figure 11: 2009 survey results regarding causes for overcapacity
in China
“Which of the following macroeconomic reasons have “Which of the following microeconomic reasons have
strong impact on overcapacity in your industry?” strong impact on overcapacity in your industry?”
56% Local government policies aiming to attract investments 38% High growth expectations of companies
31% Loose lending policies of government 25% Lax enforcement of environment regulations
19% Directed lending (e.g. to SOEs) 25% Market share philosophy of Chinese companies
19% Tolerance for non-performing loans
25% Easy technological availability and low barriers to entry
19% Export-driven development model
21% Lax IPR enforcement on businesses
6% RMB 4 trillion stimulus package of 1008/2009
20% Lack of strong industry associations
6% Lack of dividend policy at many companies
6% Need for “full emploment” to stave off social pressures 19% Lax enforcement of safety regulations

6% Low interest rates 13% Subsidized costs to producers

6% High level of foreign exchange reserves 6% Lax enforcement of health regulations

0% Export tariffs (raw materials) 6% Chinese consumer tendencies to save rather than spend
0% Slow wage growth

Source: EU Chamber of Commerce in China (2009)

(25 percent) also were associated with causes ■■ Preferential loans and directed credit;
for overcapacity.
■■ Equity infusions and/or debt-to-equity
China’s state capitalism model at times sits swaps for Chinese steel companies;
uneasily with the liberal market economies
■■ Use of land at little or no cost;
of Western developed countries. State
capitalism is the “widespread influence of ■■ Government-mandated mergers, permitting
the government in the economy, either by acquisitions at little or no cost;
owning majority or minority equity positions
in companies and/or through the provision ■■ Slow movement closure of uneconomic
of subsidized credit and/or other privileges plants, with closure often just a
to private companies.”63 Concerns regarding reorganization of assets rather than an
the nature of political influence on the actual reduction in industry size; and
management of China’s SOEs, industry
■■ Direct cash grants for specific steel
subsidies, and compliance with global trading
construction projects.”64
rules are routinely raised. For example, in
response to the 2007 USITC investigation into
China’s practices and policies in the economy,
the American Iron and Steel Institute and
the Steel Manufacturers Association stated
that “the following government policies
and practices in China encourage steel
production:

■■ Central, provincial, and local government

involvement in decision making in steel
industries;

Overcapacity in Steel: China’s Role in a Global Problem 25

 Similarly, a 2014 article (Du 2014) listed the ■■ Preferential access to raw materials
following common practices by the Chinese and other inputs — the government
government providing financial and regulatory ensures that SOEs and other domestic
advantages to SOEs that are not available manufacturers have access to low-priced
to other companies. The practices in effect raw materials, often below market prices.
summarize China’s state capitalism model: This preferential access of raw materials
results in Chinese companies having an
■■ Tax reductions and exemptions — unfair competitive advantage over non-
lower tax rates to incentivize SOEs and SOEs and foreign firms, which Du (2014)
subsidiaries to invest and procure goods notes is particularly true in the state
and services. dominated steel industry.68
■■ Direct subsidization — direct transfer of ■■ Government procurement — the large
funds in the form of grants and other capital state procurement market is used by the
injections. Chinese government to support SOEs
and creates “national champions” in key
■■ Low cost capital from state-controlled
industries. The government procurement
banks— state-owned commercial banks
market, which is 20 percent of GDP (~ U.S.
provide loans to SOEs at preferential
$1 trillion) is closed to foreign firms by law.69
terms and rates65, writing off loans, or
continuously rolling over the principal, ■■ Informational benefits — Chinese SOEs
a practice that appears independent of have access to government information and
creditworthiness. data, which are not available to non-SOE
companies or available to a limited extent.
■■ Monopolies — businesses within
“strategic” and “pillar” industries are
Our review of subsequent publications and
protected from anti-trust enforcement, and
reports identifies three main categories of
limitations exist on the degree of foreign
causes for persistent overcapacity in China’s
investment in these industries.
steel industry: subsidies and loose lending
■■ Captive equity — transfers of shares in policies leading to overinvestment, national-
state-owned firms are not enforceable or local dynamics, and high exit barriers. We
valid unless previous approval is received discuss each of these findings below.
by the State Assets Supervision and
Administration Commission (SASAC),
even if it does not have veto power as a 3.3.1 Subsidies and loose
shareholder under Chinese Company Law.
The inability to transfer ownership results
lending policies
in the ability of SOEs to generate losses for The Chinese steel industry receives input
a long period without fear of bankruptcy, subsidies in the form of cheap energy,
including the ability to engage in anti- land, and financial capital from national and
competitive practices such as below-cost provincial governments. These subsidies
pricing without fear of falling equity prices contribute to the oversupply of steel
or bankruptcy.66 production facilities in China and reduce the
ability of the industry to reduce overcapacity.
■■ Favorable dividend policy — China’s State
Council in 1994 exempted its SOEs from Energy subsidies: A 2009 study on industrial
paying dividends during the 1990s and overcapacity found that China’s gasoline,
2000s. Low dividend requirements keep the water, and industrial electricity rates are
cost of capital for SOEs low.67 between 50 to 66 percent lower than world
average prices and lower than in many

26 Overcapacity in Steel: China’s Role in a Global Problem

Table 5: Energy subsidies to Chinese steel, 2000-2007 (US$)
Coking coal Thermal coal Electricity Natural gas Total
2000 551,246,600 (151,500,000) 1,638,432 - 401,385,032
2001 855,538,270 796,180,000 1,778,568 (12,635,220) 1,640,861,618
2002 1,147,718,590 (604,240,000) 2,024,079 (31,604,300) 513,898,369
2003 963,957,200 (991,200,000) 2,415,480 (984,520) (25,811,840)
2004 1,358,887,600 3,423,090,000 3,021,990 9,794,480 4,794,794,070
2005 3,932,915,270 1,772,030,000 304,193,760 91,783,920 6,100,922,950
2006 4,702,413,750 731,250,000 385,436,992 25,271,520 5,844,372,262
2007* 1,774,456,060 5,878,100,000 215,875,881 (27,510,200) 7,840,921,741
Total 15,287,133,340 10,853,710,000 916,385,182 54,115,680 27,111,344,202
Grand Total

Source: Haley and Haley (2013) Subsidies to Chinese industry: state capitalism, business strategy, and trade policy.

developing countries. It finds that although Steel Ltd, a privately owned firm, found that
coal prices in China are somewhat sensitive it bought land from the local government
to market dynamics, other energy prices, at 28 percent of the prevailing market rate,
including prices for electric power, natural gas, equating to a RMB 2 billion ($322M) subsidy.72
and refined petroleum products are priced by The case is not an individual incident, but
the government, not the market.70 characteristic of a practice used by local
governments to generate revenue. The sale
A 2013 study determined that subsidies for of land by local governments displaced rural
energy from 2000 to midyear 2007 reached population, which has led to “significant
$27.1 billion, $25 billion of which were unrest,” according to the study. The central
provided after China’s WTO entry. (See Table government responded by putting in place
5). Subsidies for coal to the Chinese steel new regulations limiting land use rights sales
industry from 2000 to midyear 2007 reached by local governments. The restrictions were
$10.9 billion for thermal coal and $15.3 effective, but local governments lost a major
billion for coking coal. Electricity subsidies stream of income.73 The authors of the study
amounted to $916 million, and natural gas recommended that local officials be evaluated
subsidies totaled $54 million. The authors on a more diverse set of indicators than
note that subsidies for coal-fired electric simply local GDP growth, which led them to
power generation by the national government, attract investment and business development
which began in 2005 to mitigate the effects at almost any cost.
of increased coal prices, are not included
in this calculation and “dwarf” the recorded Access to capital: The Chinese steel industry
provincial subsidies. 71 has received access to financial capital
at extremely favorable terms. State credit
Land subsidies: A 2010 study conducted subsidies have historically incentivized building
by two Chinese scholars found that land was added capacity in the steel industry. The RMB
being provided to Chinese steel companies 4 trillion (~USD $600 billion) stimulus package
by provincial governments at below market in 2008 to 2009, coupled with increased
prices. Their case study of Jiangsu Tieben demand for steel used in construction in 2009,

Overcapacity in Steel: China’s Role in a Global Problem 27

 led large SOE steel producers in China to banks,” avoiding the recognition of bad
construct new lines, especially for new steel debts and allowing companies to save on
sheet production.74 The stimulus package interest expenses. The move is largely seen
also led smaller, privately owned mills to as motivated by the desire of the national
resume production after being idled during and provincial governments to protect tax
the dramatic reduction in demand during revenues, which are based on the value of
the third quarter of 2008. The EU Chamber companies.81
of Commerce in China report covering the
stimulus and its effects noted that pouring Consistent with long-term practices, support
credit into the sector increased direct and to SOEs also includes cash, subsided
indirect subsidies to the industry. electricity, access to free or cheap land,
among other benefits. A Wall Street Journal
In addition, the ability of SOEs to finance report noted that a court filing by U.S. Steel
capacity expansions from retained earnings “found 44 separate subsidy programs,
rather than borrowing due to the historical including seven that give Chinese steelmakers
prohibition of dividend payments to investors cheap or free land, iron ore, coal, and power,
has made access to capital easy for state- eight that offer discount loans [including
owned steel companies. To the extent that subsidized export loans], 15 tax breaks, and
borrowing from commercial banks occurs, 11 programs that give companies money
major state-owned steelmakers have their directly.” 82 Similar findings of pervasive
loans rolled over or refinanced regardless of subsidies and access to cheap finance
their financial health.75 Today, the Chinese steel are reported by the 2016 EU Chamber of
industry has $480 billion in outstanding loans, Commerce in China report on overcapacity
half of which is held by banks.76 In addition, it and official U.S. documents, including the
is common practice for local officials to provide Commerce Department and USTR’s Subsidies
implicit lending guarantees to companies as Enforcement Annual Report to the Congress,
a mechanism to attract investment without which states:
consideration for the existing overcapacity
problem within the industry.77 China maintains a largely opaque
industrial support system and appears to
In 2015 and 2016, a number of reports on have employed numerous subsidies —
“zombie companies” captured the dynamic some of which may be prohibited — as
of unprofitable and debt-laden enterprises an integral part of industrial policies
continuing operations despite defaults on designed to promote or protect its SOEs
bond payments because of support by and favored domestic industries. … It
regional governments and investors. Mills is clear, for example, that provincial and
with high debt levels continue to operate local governments play a key role in
because they are allowed loan payments implementing many of China’s industrial
and rollovers.78 Despite statements that “we policies, including subsidies policies. The
won’t let ‘zombie enterprises’ survive for magnitude of governmental support in
long,”79 steel companies have remained intact pursuit of industrial policies at all levels
rather than declaring bankruptcy because of government can be seen in the funds
of efforts by China’s provincial and national allocated for implementation of China’s
authorities. The efforts include pressing Twelfth Five-Year Plan, a blueprint for
creditors to accept a fraction of what they China’s industrial development which, by
are owed, pressuring bondholders to accept some accounts, amounts to over RMB
larger equity stakes in the business, and 1.2 trillion (roughly $200 billion at the
allowing the remainder of the debt to remain.80 current exchange rate) [pp.13-14].
Debt-to-equity swaps, however, raise the
risk that “zombie companies become zombie

28 Overcapacity in Steel: China’s Role in a Global Problem

3.3.2 National-local quickly lose interest in capital investments,
that M&As in China might flourish after a
dynamics shift from VAT on production to one on
The national government and the provinces consumption, and it would help to further
differ on steel policies and goals, largely accelerate restructuring the economy and
due to the incentive structure for local reduce overcapacity.87
governments and local government officials.
As pointed out by Pieter B. Bottelier in Incentives of local officials: Haley and Haley
testimony before the USITC, “China is not (2013) find “extensive anecdotal evidence” 88
controlled by Beijing, it’s controlled by to support the provincial drive behind excess
provincial governments, county governments, capacity in Chinese steel. Chinese steel mills
municipal governments who may have an across all provinces have aimed to increase
incentive framework and a set of objectives their size and thereby increase their chances
that doesn’t exactly coincide with the Beijing of survival. Aside from cost efficiencies and
set of objectives.”83 We explore below two economies of scale, local governments have
causes for industrial overcapacity in the steel supported these expansions as they support
sector due to the misalignment of objectives provincial officials’ career advancements and
between the national and local government: perquisites, as large-scale steel operations
the local government tax system and the can translate to higher employment and tax
career development incentives for local revenues for local authorities. As explained by
government officials. Zhang and Zhang (2013):

Local tax system: The local tax system The root cause of the excess capacity
in China encourages companies to keep is the institutional structure and its
operating even if they are not creating profits. governance. GDP-oriented performance
As explained by the 2009 and 2016 reports assessment [of local officials] and slow
on overcapacity in China, local government fiscal decentralization have made local
revenues are much more dependent on a governments a major driving force for
production-based value-added tax (VAT) and excess capacity…[Local governments]
other business taxes generated than local act like investment companies. These
governments in OECD countries because local governments manage capital on
most of other tax revenues must be passed local financing platforms where the
on to Beijing.84 Local governments receive the government is organized just like an
majority of their business tax revenues from enterprise and government officials are
a factory’s production, not on profit.85 Their like executives in the enterprise. Their
reliance on these industrial taxes for revenue major task is to increase investment by
results in the encouragement of investments any means to create higher GDP and
that maximize fiscal income regardless of more income for the government. It is in
overall market conditions.86 this way that governments get involved
in microeconomic activities and become
The present tax system also makes local the main entity of market competition
governments reluctant to agree to mergers without bearing the consequences of this
and acquisitions (M&As) as VAT revenues are competition. … In the name of attracting
based on the manufacturer’s location. When investment, and by offering preferential
a company takes over a local player, the VAT treatment regarding land, taxes and
income stream benefits another jurisdiction. resource allocation, local governments
The EU Chamber of Commerce in China distort the market, facilitate unfair
report concludes that if the consumption tax competition and exacerbate the problem
were not the only source of fiscal income of excess capacity.89
for local governments, they would probably

Overcapacity in Steel: China’s Role in a Global Problem 29

 Haley and Haley note that future policy development, but should instead create a
initiatives from both the United States and comprehensive evaluation system that takes
China regarding China’s steel exports and into consideration local citizens’ overall
compliance with WTO standards may need satisfaction with local government services.
to accommodate these provincial realities to
enhance effectiveness (62).
3.3.3 High exit barriers
A 2009 EU Chamber of Commerce in China High exit barriers exist in the Chinese steel
report on industrial overcapacity identified industry, which are likely to make reducing
similar dynamics regarding the incentives net capacity difficult. The exit barriers are not
for local government officials and industrial only the costs of eliminating capacity, which
overcapacity. It wrote that: include the financial costs of abandoning
investments and the demolition costs of
[L]ocal protectionism is a widespread physically dismantling mills, but the political
problem in a continent-sized country and social effects of closing steel mills.
like China, where the performance of
local government officials is measured Morgan Stanley estimated in 2013 that the
almost entirely on local GDP growth. global steel industry employs approximately
… For a long time, an official’s career 6.9 million people, of which 4 million are in
development was boosted by positive China. It estimates that removing an estimated
local GDP growth data. Top local 200 MT of overcapacity in China would result
officials were evaluated based on GDP in job losses of 800,000 and a negative
growth, industrial production, and economic impact of U.S. $153 billion. It notes
visible physical changes in cities. This that given the state ownership of the largest
manifests itself in many ways. Local steel producers such capacity reductions are
government officials try to attract as unlikely.91
much investment as possible and then
they regulate local economic activities Privatization and Chinese state-mandated
in ways that put non-local entities at a mergers and acquisitions to consolidate
disadvantage. Company bankruptcies steelmaking capacity, if advanced too quickly,
are avoided using local subsidies. can lead to social unrest. China observers
Non-local competitors face additional say “it is ‘likely’ that local governments would
fees for products that are produced in intervene to prevent any major closures
other regions of China. The VAT system even by privately owned steel companies
certainly makes M&As difficult, but their in China.”92 The 2009 Tonggang incident
popularity is also limited because of is emblematic of social unrest caused
the ensuing loss of influence among by closing steel mills in China.93 In 2009,
local officials. Chinese provinces, under Jianlong — one of China’s largest steel
pressure to help out local firms, issued producers — was authorized by SASAC to
a series of “Buy Local” policies in 2009, acquire a 67 percent share in Tonggang, an
and the 2008 stimulus package, which SOE steelmaker. Tonggang workers were
gave local governments huge amounts concerned about losing jobs and SOE-
of money in early 2009 in an attempt to related benefits, and responded by rioting,
kick-start the economy, has probably eventually killing Jianlong’s general manager.
worsened this trend at the local level.90 In a similar incident in 2014, hundreds of
workers at Sichuan’s Pangang Group Xichang
The authors argue that in order to reduce New Steel staged a strike after a Beijing-
the incentive for local governments to offer mandated closure contained an inadequate
subsidies, the central government should stop plan to compensate 3,000 workers at the
solely relying on GDP to evaluate economic state-owned steel mill.94 These incidents,

30 Overcapacity in Steel: China’s Role in a Global Problem

particularly Tonggang, are widely regarded SOEs, provided funding to provincial and
as a setback for overcapacity reductions by local governments as well as benefits for an
the national government95 and an example estimated 28 million workers laid off between
of how high exit barriers, especially the 1998 to 2003 — serve as potential models
social costs, in the industry limit the ability to facilitate the exit of firms with excess steel
of consolidations and M&As to solve the capacity.99 Observers of the steel industry
overcapacity problem in the Chinese steel indicate that to address the overcapacity
industry. As nicely summarized by an asset in China today would likely require more
management expert in a recent article, “We substantial funding to local governments
believe the steel sector ‘playbook’ for the to offset reduced tax revenues from SOE
Chinese government is simple: curtail enough bankruptcies and increased unemployment
inefficient capacity to reduce pollution and benefits to workers to mitigate the social
prevent social unrest, yet allow enough steel costs of reducing capacity in China’s steel
mills to continue operating close to break- sector.100
even to keep people employed.”96

Successfully addressing high exit barriers

in China’s steel industry are essential to 3.4 Conclusion
reducing overcapacity, yet industry observers The purpose of this section was to better
note that current and announced policies understand the causes for overcapacity in the
likely do not go far enough in addressing steel sector. We divided the causes of steel
them, even if implemented.97 Overcoming overcapacity into two areas: overcapacity
exit barriers requires policies permitting caused by short-term variable demand,
efficient reorganization and bankruptcies which we called “cyclical” overcapacity, and
of companies, encouraging competitors of overcapacity caused by excessive supply,
distressed companies to purchase excess which we called “structural” overcapacity.
capacity and destroy it, revaluing persistent Variable demand causes overcapacity
excess capacity by a firm as holding only because capacity is price insensitive in the
salvage value and taking the resulting periodic short term due to high exit barriers in the
reductions in earnings on the company’s steel industry. These sharp, periodic drops
balance sheet, investing in employee training in demand cause ripple effects throughout
programs to facilitate employee transition out the global economy as steel producers
of the industry, and/ or using governmental seek markets, almost at any price, for their
agencies to assist firms with labor-related inventory and can be particularly acute when
exit costs. Governmental assistance is coupled with existing structural overcapacity.
particularly appropriate when an entire Recently, this dynamic has manifested
industry is affected, and national policies itself in the United States as a steel import
for addressing exit barriers can lead to crisis, dramatically reducing steel prices
programs increasing the competiveness of and affecting employment and the profits of
leading firms in the industry, while facilitating domestic steel producers.
the exit of other firms trapped in distressed
industries.98 Europe’s experience during 1977 The second category of overcapacity is
to 1980 (Davignon phase 1) and 1980 to 1985 excessive supply in steelmaking capacity
(Davignon phase 2), Japan’s experience in caused by overinvestment. Overinvestment
more private sector-led structural adjustment can be caused by various mechanisms,
in the steel sector from 1978 to 1983 and including production subsidies and other
again in 1987 to 1996, and even China’s public policies, which lead to a greater amount
own experience during the Asian Financial of capacity available for production than what
Crisis of the late 1990s — in which it closed price alone would support. We called these
down or privatized the worst performing “structural” causes of overcapacity because

Overcapacity in Steel: China’s Role in a Global Problem 31

 they are more enduring than overcapacity for crude steel reduced due to the global
caused by temporary downturns in demand financial crisis, excess capacity in China’s
caused by regional or global economic crises. steel industry has become increasingly
We then identified China as contributing the apparent. The section recounts how national-
most to global overcapacity, and sought to local dynamics, particularly the local tax
better understand the causes of overcapacity system and the incentives of local officials,
in the country. and high exit barriers, particularly the social
costs of closures, make capacity reductions
China’s overcapacity was identified as to address industrial overcapacity and
occurring due to its rapid development of pollution difficult.101 As industry observers
the steel sector after 2000. Investment in have pointed out, addressing exit barriers in
steelmaking capacity throughout the first China’s steel industry are essential to reducing
decade of the millennium, incentivized by overcapacity, yet policies to date have not
production incentives, land and energy provided sufficient mechanisms for distressed
subsidies, and loose lending policies by firms to exit the market.
both national and provincial governments
led to massive increases in China’s steel In the next section, we turn to the policy
production capacity throughout the decade. actions that China and the United States have
As domestic demand for steel slowed as a undertaken to address overcapacity in the
result of a moderation in China’s economic steel sector.
growth after 2009, and as foreign demand

Large amounts of steel pipes are gathered together for exporting at a container terminal on December 8, 2015 in Lianyungang,
Jiangsu Province of China. China’s steel overcapacity has created a global problem, despite repeated promises from Chinese
leaders to reduce steel production. There are a variety of reasons for this, from local government dynamics to high exit barriers
that make it difficult to address net capacity.

32 Overcapacity in Steel: China’s Role in a Global Problem

Policy Actions
In the previous sections, we identified that
overcapacity in the global steel sector grew
from an average of 250 MT from 1980 to
2007 to 750 MT in 2015, and that China
was the largest contributor to the growth in
overcapacity after 2000. We identified the
causes of overcapacity in China as due to
subsidies and loose lending policies, national-
4.1 China’s
commitments in
bilateral dialogues
4
Bilateral efforts to address overcapacity and
its underlying causes have been raised in
local dynamics — particularly the local tax the eight U.S.-China S&EDs. Most notably,
system and incentives of local officials — and during 2016’s eighth S&ED meeting China
high exit barriers in the steel industry. stated that it would “adopt measures to
strictly contain steel capacity expansion,
In this section, we examine what policies reduce net steel capacity, eliminate outdated
China and the United States have committed steel capacity, and urge the exit of steel
to undertake to address overcapacity. While production capacity that fall short of
China has made several commitments in environment, energy consumption, quality or
bilateral dialogues to address overcapacity, safety requirement standards…China is to
there has been limited progress in actively and appropriate dispose of ’zombie
implementing those commitments. To frame enterprises’ through restructuring, debt
the section on policy response, we will first restructuring, bankruptcy and liquidation.”102
discuss the commitments China has made The commitments reflect those made in
through the bilateral U.S-China Strategic 2014’s sixth S&ED meeting, in which China
and Economic Dialogue (S&ED), examine agreed “to establish mechanisms that strictly
the efforts China has made internally, and prevent the expansion of crude steelmaking
conclude with an analysis of the efforts and capacity and that are designed to achieve,
challenges facing the United States. over the next five years, major progress in
addressing excess production capacity in the
steel sector.”103 Other commitments made
during the S&ED meetings address equitable
access to inputs, SOE reform, and financial
reforms. We provide a summary of the most
relevant commitments below.

Overcapacity in Steel: China’s Role in a Global Problem 33

 Access to inputs, land and energy dividend payout ratio of SOEs and increasing
subsidies — At the fifth S&ED meeting the number of both central and provincial
in 2013, China stated that it “[…] remains SOEs that pay dividends to the government,
committed to ensuring that economic entities and uniformly incorporating the state-owned
under all forms of ownership have equal capital management budget into the national
access to factors of production in accordance budget system. China encourages all listed
with the law, compete on a level playing field, companies, including listed companies with
and are treated equally by the law. China the state as the controlling shareholder, to
is to develop a mechanism for determining increase their dividend payouts. In addition,
the prices of factors of production mainly by China encourages the increase of the average
the market.” At the sixth S&ED meeting in dividend payout levels of listed companies
2014, China committed to “deepen economic with the state as the controlling shareholder to
system reform by allowing the market to play be in line with average market levels of other
a decisive role in the allocation of resources… publicly listed domestic companies.” At the
China is to accelerate the process of market- fifth S&ED meeting in 2013 China reaffirmed
based price reforms in petroleum, electricity, its commitment to increase dividend payouts
and natural gas, to promote competition in and to use dividend revenue to be spent on
energy markets, and to realize market-based “social security and people’s welfare.” During
prices in competitive sectors as soon as the sixth meeting in 2014, China committed to
possible.” At the seventh S&ED meeting in “further deepen the reform of SOEs (including
2015, China reaffirmed its commitment to State-Invested Enterprises), improve and
“ensure that all economic entities under all standardize modern corporate governance
forms of ownership have equal access to structure, and reasonably increase the
factors of production according to law.” The proportion of market-based recruitment of
factors of production specifically mentioned management personnel for SOEs. In mixed
are fuel and land. In regards to fuel, both ownership enterprises, China is to improve
the United States and China committed the process for nominating and selecting
to “rationalize” and “phase out” fossil fuel personnel to serve on Boards of Directors
subsidies. Regarding land, China committed in accordance with the Company Law and
to establish a central real estate registration corporate governance principles.”
system by 2017 to create a “unified urban-
rural construction land market.” The Foreign Direct Investment (FDI) — China
registration system will allow “rural collectively has committed gradually to increase foreign
owned profit-oriented construction land to be investor access to industries, including the
sold, leased and appraised as shares, on the steel industry. Some key commitments made
premise that it conforms to planning and land by China during the fourth, fifth, and sixth
use control, and ensure that it can enter the S&ED meetings regarded FDI. During the
market with the same rights and at the same fourth meeting in 2012, China committed “to
prices as state-owned land.” provide fair treatment to foreign investors in
China. China is to focus its security review
SOE reform — At the second S&ED meeting over mergers and acquisitions by foreign
in 2010, China stated that it “[…] will continue capital solely on national security concerns
to reform its SOEs, and promote further and adhere to specific timelines and review
investor diversification, including by issuing standards. China is to continue to simplify
publicly traded shares and inviting strategic its foreign investment approval system and
investors, including non-public and foreign enhance transparency on a step-by-step
investors, to take equity stakes.” At the basis. During the 12th Five Year Plan period,
fourth S&ED meeting in 2012, “China further China is to implement a more proactive
improves the state-owned capital returns opening-up strategy and expand the areas
collection system, by steadily increasing the open to foreign investment and the degree

34 Overcapacity in Steel: China’s Role in a Global Problem

of openness.” During the fifth meeting in international best practices, and to deepen
2013 China reaffirmed its “commitment communication with the United States on
made in S&ED IV (2012) to implement a more this matter, including regarding its impact on
proactive opening up strategy for foreign trade.” During the seventh meeting in 2015,
investment. … China is to gradually decrease China stated that it is “actively studying
and decentralize its foreign investment further opening up of the banking sector
reviews and approvals as an important part (including equity participation by foreign
of the reform. China is to minimize the scope investors) and securities sector, based on
for such reviews and approvals, promote ongoing assessment and improvement of
independent investment decision making the prudential regulatory framework.” Of
by enterprises and individuals, and further special note is the creation in Shanghai of the
improve the level of investment facilitation.” “Shanghai Free Trade Zone pilot, which is to
During the sixth meeting in 2014, China implement a new foreign capital administrative
committed that “[i]n any area open to foreign model on a trial basis, and create a market
investment, consistent with Chinese law, environment that provides equal access for all
China is to continue to improve procedures for types of enterprises, domestic and foreign.”
foreign investment approval and record-filing (2013 SE&D). It was authorized in 2014.104
by unifying domestic and foreign investment
laws and regulations. To make it easier to In our view, the S&EDs have established
invest, China is shifting from an approach a productive dialogue in which China and
of approval or verification to one based on the United States are able to approach joint
record filing.” problems such as industrial overcapacity.
The commitments by China to prevent further
Financial reforms — China has committed expansion of crude steelmaking capacity,
to increasing the openness of its financial address unequal access to inputs, land and
sector to foreign investors and introducing energy subsidies, reform SOEs, FDI policies,
market-based financial reforms. During the and its financial sector are important steps to
fifth S&ED meeting in 2013, China committed reducing trade frictions. However, the value of
to “… assessing the outcome of opening China’s commitments must be judged on the
up policies of its financial sector, and is to progress in achieving its stated goals, which
continue to improve the related regulations to date, have not led to a significant reduction
and prudential supervisory standards. Under in steel overcapacity. In the next section, we
these circumstances, China is to continue to examine the commitments China has made
further open up its financial sector to foreign internally to address overcapacity in steel and
participation.” During the sixth meeting in reach a similar conclusion: commitments are
2014, China committed to “… continue to welcome, but to date, they have not had an
advance market-based interest rate reform observable effect on the overcapacity problem
and to let the market play a decisive role in in the steel sector.
the allocation of financial resources. China
is to promote the issuance of certificates
of deposit to enterprises and individuals
to gradually expand the range of liability
products of financial institutions priced by
the market, and to improve its market-based
benchmark interest rate system … China is to
complete the business tax to Value-Added Tax
reform, in order to eliminate double taxation
and promote economic transformation. …
China commits to improve its Value Added
Tax rebate system, including actively studying

Overcapacity in Steel: China’s Role in a Global Problem 35

 Figure 12: China’s central government actions to curb overcapacity
in steel, 2006-2015

2006-2009 2009-2013 2014 2015

Steel
Dec. Apr. Oct. Apr. July
Mar.2009 Oct.2009 Oct.2013
Structural adjustment Outdated capacity Capacity control Supply-side
elimination reform
Guidance Policies from State Council Policies from Ministries under State 12th Five-year plan Guidance policy
Council (e.g. MIIT, NDRC, etc.)

400
Overcapacity (MT) 317.2 336.2
300 284.0
228.9
200 161.6 161.3
132.0 140.9
100 98.8
67.5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Abbreviations: MIT: Ministry of Industry an Information technology; NDRC: National Development and Reform Commission
Source: EU Chamber of Commerce in China (2016), OVERCAPACITY IN CHINA: An Impediment to the Party’s Reform Agenda

4.2 China’s domestic would, in turn, affect the transformation of the

growth model and the improvement of people’s
policy commitments livelihoods. It could even destabilize society.”105

to address Below, we discuss five categories of policies

developed by China to address industrial
overcapacity overcapacity in its steel sector: 1) goals
announced in its Five Year Plans and policies
China has repeatedly stated publicly that
announced by China’s Ministry of Industry and
it recognizes the problem of industrial
Information Technology (MIIT), which we call
overcapacity, and has announced policies
“macro policies” to address overcapacity; 2)
designed to address industrial overcapacity,
forced closures; 3) mergers and acquisitions;
including in its steel industry. The most
4) foreign direct investment; and 5) its
succinct statement about the dangers of
“going out” and new “One Belt, One Road”
China’s overcapacity problem across industrial
policy supported by the Asian Infrastructure
sectors is perhaps made by He Yafei, former
Investment Bank (AIIB) and the multi-billion
vice minister of the Overseas Chinese Affairs
dollar Silk Road Fund. We conclude with
Office of the State Council and former vice
remarks by China observers that, to date, the
minister at the Chinese Ministry of Foreign
policies have not been effective in reducing
Affairs. In a recent article he writes that
overcapacity, nor are they likely to do so in the
“[overcapacity] has resulted in a steep drop
short term because they do not address land,
in profits, the accumulation of debt and
energy, and water subsidies, access to cheap
near bankruptcy for many companies. If left
credit, and exit barriers prohibiting the closure
unchecked, it could lead to bad loans piling
of poorly functioning businesses.
up for banks, harming the ecosystem, and
bankruptcy for whole sectors of industries that

36 Overcapacity in Steel: China’s Role in a Global Problem

4.2.1 Macro policies removing excess capacity, among other goals.
The main points of the revised policy are:
China’s 11th, 12th, and 13th Five-Year
Economic Plans include targets for reducing ■■ Establish world-class steel companies by
overcapacity in the steel sector. The Eleventh raising the combined crude steel output
Five Year Plan (2004-2009) for National of the top 10 steel companies to over 60
Economic and Social Development of the percent of total output and establish three to
People’s Republic of China stated the five ultra-large steel conglomerates by 2025.
principle of using central control to eliminate
obsolete mills, to restructure, to upgrade ■■ Support those competent steel companies
industrial products, and to lower consumption to pursue mergers and acquisitions of steel
of raw materials.106 The National Development businesses across nations in the world.
and Reform Commission’s (NDRC) director Support steel companies to consolidate
in April 2007 announced that 10 provinces with upstream and downstream players.
and municipalities had signed a first round
■■ Support the product development of new
of written commitments to shut down and to
alloy material and high quality special steel.
eliminate outdated iron-making capacity and
Promote applications of high-grade steel
obsolete steelmaking capacity of 40 million
products, including high strength rebar,
and 42 million tons respectively in the next
shipbuilding and ocean engineering steel,
five years; more than 20 million tons by the
and steel for bridge, energy, automotive,
end of 2007. Five out of these steelmaking
and rail transit.
provinces — Hebei, Shanxi, Henan, Jiangsu,
and Shandong — were responsible for ■■ Remove restrictions on foreign investment
70 percent of the nation’s outdated iron- in the Chinese steel industry.
making capacity and 50 percent of obsolete
steelmaking capacity.107 During the Twelfth ■■ Reduction of excess production capacity —
Five Year Plan (2010 to 2015), MIIT issued alleviate the degree of overcapacity and
a document in July 2011 requiring 154 iron increase capacity utilization ratio to 80
and steel companies nationwide to eliminate percent by 2017.111
combined outdated iron-making capacity
of 31 million tons within the year. The 154 The recent policy announcement is consistent
companies included 58 companies with with previous announcements by China’s
28 million tons of outdated steelmaking central government to address overcapacity.
capacity.108 During the 13th five-year (2016 to In 2013, China released the “State Council
2020) economic development planning cycle, Guiding Opinions on Resolving the Serious
an official at MIIT stated that addressing Excess Capacity Contradictions,” which
overcapacity will be one of the key tasks of included the steel industry.112 The State
China’s next Five Year Plan.109 Council document outlined “supply-side,”
“demand-side,” and other steps to curb
In March 2015, MIIT released its “Policy overcapacity. Supply side policies to reduce
for the Restructuring of the Steel Industry,” overcapacity include “strict prohibitions” of
which is an update to the “Steel Industry new steel plants, and forcing “backward”
Development Policy” issued in 2005. The enterprises to phase out production by
objectives of the policy are to restructure the raising the price of inputs such as power
industry and to help Chinese steel companies and water. Financial support to mitigate
become more “environmentally friendly, “difficulties” caused by capacity shutdowns
innovative and internationally competitive by and unemployment would be provided as
2025.”110 The policy seeks increased domestic part of supply side steps. Demand side
consolidation in the steel industry, allowing policies include supporting the consumption
FDI into the Chinese steel industry, and of structural steel by the construction industry

Overcapacity in Steel: China’s Role in a Global Problem 37

 and encouraging companies to increase The central government has had limited
overseas projects.113 In addition, the “Guiding success in closing steel mills because of
Opinion” seeks a greater role for markets the national-local dynamic referenced in
to allocate resources and to create fair, the third section of this report, namely that
competitive markets over the longer term.114 provincial governments and government
officials have interests in keeping steel
production in the local area due to three
4.2.2 Forced closures factors: maintaining local government
In February 2016, China announced that it revenue, maintaining local employment,
would cut crude steel capacity by 100 to 150 and staff evaluations which are based on
MT within the next five years, ban new steel their contribution to GDP. This dynamic is
projects, and eliminate “zombie” mills by especially strong in the interior provinces
2020.115 It pledged a portion of a 100 billion where few other major industrial employers
yuan (about $15.4 billion) fund set aside for exist to offset closures of steel mills.119
employee compensation, social security
payments, and plant closure incentives in the Still, provinces have made apparent efforts
coal and steel sectors. Shortly after, Hebei to comply with Beijing’s mandates to
Province announced in March 2016, that it reduce capacity. In Henan Province, one of
would reduce 130 MT, or 60 percent, of its China’s largest steel producing regions, the
steelmaking capacity by 2020.116 provincial government ordered the closure
in 2013 of blast furnaces by eight firms to
The announcements, though welcome, should reduce production capacity.120 In neighboring
be understood in light of previous statements Hebei Province, which surrounds Beijing,
and results. In October 2013, the Chinese the province staged in late 2013 “Operation
government issued a guideline requiring that Sunday” in which it demolished 6.8 MT of
steel capacity in China be reduced by 80 MT steelmaking capacity owned by 15 mills.121
by 2018, about 10 percent of China’s 2013
production, and retire or upgrade another Yet even in these apparent achievements,
15 MT.117 Similarly, in January 2009, MIIT’s all is not what it seems. In a fascinating
“Steel Industry Adjustment and Revitalization article in The Wall Street Journal detailing
Plan” sought to control steel production and the dynamics between Beijing mandates and
eliminate obsolete capacity. According to the local resistance, it points out that the Hebei
plan, about 150 MT of capacity was ‘illegal’, furnaces destroyed were so obsolete that the
particularly in the thousand or so smaller mills companies owning them didn’t consider them
in the country.118 spare capacity. Thus, destroying them didn’t

Table 6: Chinese steel capacity, closures, and net capacity

additions (in MT), 2010-2014
Year Crude Steel Capacity Capacity Closures Net Gain (loss)
2010 800.3 41.0 82.3
2011 863.3 32.0 63.0
2012 959.9 11.0 96.6
2013 1,106.0 10.0 146.1
2014 1,140.0 20.0 34.0

Source: Duke CGGC, calculated from German Steel Federation (crude steel capacity 2010-2014); Ernst and Young Global
Steel 2014 (capacity closures 2010-2014)

38 Overcapacity in Steel: China’s Role in a Global Problem

affect the province’s productive capacity at environmental pollution problems also face the
all, but rather, was staged to appear compliant challenging dynamic between subnational and
with Beijing’s rules.122 The 2013 ruse was only national authorities, which we discuss below.
the latest in the game between local politics
and national policies. The article details
how, since 2000, Beijing has pressed Hebei 4.3.3 Improving
Province to reduce capacity in its steel sector,
which were rebuffed by local officials. In 2009, environmental quality
when China’s planning agency ordered several Recent changes in environmental
blast furnaces to be closed, Hebei Tianzhu legislation and enforcement offer some
Iron and Steel Group received a U.S. $750,000 hope for additional leverage by the national
bonus for dismantling four furnaces, which it government vis-à-vis provincial governments
then used to build a larger blast furnace and and locally owned steel mills. The industry
expand production capacity. is increasingly interested in reducing
the environmental externalities of steel
Thus despite apparent achievements, regional production, due to new regulations put in
governments in China have been slow to place as of January 1, 2015 that hold officials
close steel mills, as it would remove sources “accountable for the entirety of their lives
of employment and other fiscal benefits. As for pollution problems that occur on their
an illustration of the problem, the national watch. Officials who fail to prevent problems
mandate to reduce 80 MT by 2018 requires such as pollution of waterways or soil
that three-fourths of the capacity reductions contamination cannot be promoted or hold
come from Hebei Province. If it meets its other positions.”126 Twelve noncompliant steel
target, it would eliminate 200,000 jobs and mills were closed in March 2015 in Shandong
reduce tax receipts by 10 percent in Hebei.123 Province, accounting for an estimated
While some capacity has been closed, the capacity reduction of 7 to 8 MT and affecting
overall net effect to date has been an increase 100,000 workers.127 In July 2016, the Ministry
in steelmaking capacity in China through of Environmental Protection announced
2014; 2015 could be the first year for net that it would inspect and install monitoring
capacity reductions, if crude steel capacity equipment in major steel enterprises to
estimates for China bear out.124 (See Table ensure that they are complying with pollution
6). However, whether capacity closures regulations.128 Hebei Province in March 2016
announced in 2015 will remain permanently re-announced plans to reduce capacity to 200
offline remains uncertain, as a 2016 Chinese MT, or 60 percent of its capacity, by 2020.
language report citing China’s National Bureau It first announced the plan in 2014 when it
of Statistics found that crude steel production came under increased scrutiny to reduce air
in Hebei, Jiangsu, and Shandong provinces pollution from its industrial activities.129
increased because “steel profits were so high
that many of the companies that were forced However, shutting down obsolete or polluting
to shut down last year actually reopened and plants falls under the jurisdiction of local
resumed production.”125 governments, which are reluctant to close
plants because of the ensuing unemployment.
Put simply, China’s central government has Environmental protection rests with some
to date not been successful in reducing 2,500 Environmental Protection Boards (EPBs)
capacity from steel mills, in part, due to responsible for monitoring and enforcing
resistance from local and provincial authorities environmental laws and regulations within
seeking to maintain employment and revenue. their jurisdiction. However, real decision-
Publicly released statements by the national making power lies with the provincial
government indicating a desire to reduce governments, which fund the EPBs. A report
industrial overcapacity as a way to address noted that “[l]ocal EPBs, instead of being an

Overcapacity in Steel: China’s Role in a Global Problem 39

 independent body to hold local government equally important is that the interests of the
accountable for reaching environmental provincial authority do not align with the
standards, have become a ‘sub’ organization national government’s stated goals. Until
of local government. …This creates a the tax system and remunerations system is
structural disconnect between provincial and changed in China, the structure of the industry
national environmental protection agencies. is unlikely to change much. The difference
The structural disconnect between national between the policies announced to encourage
and local level reduces the efficiency of M&A and FDI activity and the implementation
environmental protection efforts at the local reality on the ground reinforce the point, which
level, too. The prevailing local implementation we discuss below.
of environmental and labor laws keeps
sub-standard companies in business to the
detriment of the local environment.”130 4.2.4 Encouraging
Although the national Bureau of M&A activity
Environmental Protection was recently A 2015 draft of a new MIIT policy “proposed to
elevated in status to the ministerial level, it speed up the merger and acquisition process
still lacks adequate enforcement power, which to create three to five major steel producers by
rests with the NDRC, the Ministry of Water 2025 and will ensure the 10 largest companies
Resources, the State Forestry Administration, account for no less than 60 percent of total
and the State Oceanic Administration. output.”133 In 2011, the chairman of CISA and
Without consolidated administrative and president of Shougang Group, China’s sixth
enforcement power, environmental protection largest steel producer, Zhu Jimin, foresaw
in China will remain piecemeal and largely this new policy and stated he believes the
driven by local preferences in which the steel government will encourage domestic firms
sector played a central role in regional GDP to initiate mergers and acquisitions under
contributions and employment.131 China’s the joint-stock system to push forward
national government recent attempts to industrial reform. “Low centralization, wasting
use environmental rules to reduce steel of resources, rising costs of energy and
overcapacity will face these dynamics. raw materials, environmental pollution and
frequent accidents are challenging China’s
The national government also is limited in industries, particularly the heavy industries
its ability to effectively limit such behavior, in like mining, steel and construction. Through
part because it has interests in maintaining mergers and acquisitions, enterprises can
employment and reducing social unrest become stronger and have more resources to
caused by unemployment and rural resolve these problems,” Zhu said. “Mergers
displacement. A 2015 report by the China Iron and acquisitions is an efficient way to reach
and Steel Association (CISA) outlining steps to these aims.”134
increase the competitiveness of the Chinese
steel industry is revealing on this point: Mergers and acquisitions have been on the
after outlining the “strict implementation” of Chinese policy agenda since at least mid-
policies to reduce overcapacity, it notes that 2005, when its “Development Policies for the
“at the same time, production capacity [may Iron and Steel Industry” sought to consolidate
be] increased due to the policy underpinning the steel sector so that by 2010, its top 10
efforts to preserve social stability.”132 The producers would account for more than
identity of the Chinese Communist Party as 50 percent of domestic production, and by
perceiving its legitimacy to rule deriving from 2020, for more than 70 percent. Of these 10
its ability to improve living conditions of its companies, it wanted two with production
population is important in understanding capacities of 30 million tons and several
its hesitation to intervene locally. But others with capacities of 10 million tons. It

40 Overcapacity in Steel: China’s Role in a Global Problem

 Figure 13: Output of the top 10 steel groups in China,
as percentage of total production
70% 70%

60% 60%

50% 50%

41% 41%
39% 40% 39% 40% 39% 39%
40% 40% 37% 37%
37% 37%
35% 35% 35% 35% 34% 34%

30% 30%

20% 20%

10% 10%

NA NA NA NA
0% 0%
2005 2006 2005
2007 2006
2008 2007
2009* 2008
2010* 2009*
2011 2010*
2012 2011
2013 2012
2014 2013
2015 2014 2015

Note: 2009 and 2010 are unavailable due to differences in reporting by the World Steel Association during these years.
Source: Duke CGGC, calculated from World Steel Association, World Steel in Figures 2007-2016

designated Baosteel, Anben, and Wugang to steel companies existed in 2014.136 The
lead the development of a more consolidated market share of the top 10 steel producers
steel sector.135 The 2015 announcement by in the country increased from 35 percent in
the MIIT (Policy for Restructuring of the Steel 2005 to 41 percent in 2010, but fell again to
Industry) updated this policy to “raise the 34 percent in 2015 (see Figure 13). China’s top
combined crude steel output of the top 10 three producers in 2013 accounted for only
steel companies to over 60 percent of total 18 percent of the Chinese market, compared
output and establish three to five ultra-large to 66 percent for Japan and 42 percent for
steel conglomerates by 2025, and to … Europe.137 So, in comparative terms, the
support those competent steel companies Chinese steel market is still quite fragmented.
to pursue mergers and acquisitions of steel
businesses across nations in the world. Further consolidation of the market must
Support steel companies to consolidate with overcome both economic and political
upstream and downstream players.” Thus the realities. On the economic front, mergers and
new policy reduces the market consolidation acquisitions can remove overcapacity by
target by 10 percent five years later than closing inefficient facilities only if there are net
previously announced. positive gains between both companies that
make the company significantly more efficient
The reality of M&As in the Chinese steel and profitable than its predecessors.138 Steel
sector is that they are having little effect on industry observers of the merger of Baosteel
industry consolidation. An estimated 1,200 and Wuhan Iron and Steel announced in

Overcapacity in Steel: China’s Role in a Global Problem 41

 late June 2016 note that while consolidation
may reduce the number of manufacturers it
4.2.5 FDI
will not necessarily result in reduced steel China sees FDI in the steel industry as
capacity.139 Boston Consulting Group in 2014 one way to reduce overcapacity. Foreign
noted that mergers that merely creating larger investment in its steel sector had been banned
low-profit businesses could have a limited since 2005.144 However, China has committed
impact on profitability and overcapacity.140 gradually to increase access to industries,
Morgan Stanley in 2013 was less than including the steel industry, by foreign
optimistic about capacity reduction occurring investors. The Wall Street Journal reported
as a result of market consolidation in China’s in January 2015 that “steel will be among
steel sector. “We see three major reasons industries opened to foreign ownership, the
why capacity reduction via consolidation will country’s National Development & Reform
be difficult in China: 1) long transportation Commission, said. … The group’s officials
distances result in low incentive to consolidate have said allowing foreign investment could
regionally, 2) local governments are unlikely help calm external criticism of the industry.”145
to shut down capacity after consolidation Further discussion of China’s commitments on
due to high employment in the steel industry FDI is provided in section 4.1, but generally, it
(4 million people directly employed – we is too early to note any significant progress on
estimate a multiplier effect of 27x on the reductions of China’s steel overcapacity due
overall economy), and 3) weak profits since to FDI.
2011 have resulted in cash constraints, so
few players in the sector have the financial
support to consolidate” (p. 8). The political 4.2.6 “One Belt,
realities are noted by a previous report on
industrial overcapacity in China by the EU
One Road”
Chamber of Commerce in China. They point China’s “One Belt, One Road” policy seeks
out that the VAT tax system makes local to develop a transportation infrastructure
governments hesitant to endorse M&As, since network of road, rail, pipelines, and ports
local government revenues were based on the stretching from Xi’an in central China, to
manufacturer’s location. M&A policies may Central Asia, and may ultimately reach
work to incentivize local governments to fund Moscow, Rotterdam, and Venice.146 Although
the expansion and upgrading of provincial details of the policy are still emerging, it is
and locally owned steel mills to prevent their clear from initial pronouncements that China
closure or consolidation by firms from other sees expansion abroad as a way to manage
cities or provinces, and result in increased domestic industrial overcapacity, including
capacity rather than the rapid reductions in the steel sector. The new AIIB and the $40
intended.141 Until the VAT changes to a tax Billion Silk Road Fund will provide funds for
system based on consumption, the incentives the policy.147 He Yafei, former vice minister
of local governments to endorse M&A are of the Overseas Chinese Affairs Office of the
unlikely to change.142 As noted by two Hong- State Council and former vice minister at the
Kong based economists, “Local governments Chinese Ministry of Foreign Affairs, wrote in
have traditionally hindered administrative a recent article that during the Communist
attempts to reduce overcapacity. It remains Party’s third plenum it was agreed that the
to be seen whether the central government’s solution to the industrial overcapacity problem
current attempts will be more successful.”143 in China is to implement the “going out”
strategy for Chinese enterprises, thus “moving
out” the overcapacity and providing a basis for
its development strategy and foreign policy.148
In regards to steel, Yafei writes that the glut
of steel capacity in China contrasts starkly

42 Overcapacity in Steel: China’s Role in a Global Problem

 U.S. President
Barack Obama
(L) and Chinese
President Xi
Jinping (R)
hold a press
conference at
the Great Hall
of the People in
Beijing, China,
on November
12, 2014.

with the market needs and potential in Africa asset manager in South Africa has called
and Southeast and Central Asia. “Chinese the venture “crazy” given that the size of the
companies must seize the opportunities plant equates to two-thirds of South Africa’s
created by China’s policy to build a ‘new silk production and a third of Africa’s output,152
road on the sea’ and ‘economic belt of the silk the company sees it as a “rational choice”
road’ by joining the China-Africa cooperation to adapt to changing market conditions.153
initiative and upgrading the China-ASEAN Shougang, another Chinese steelmaker,
free trade agreement by providing assistance began steel production in Malaysia at a
and setting up joint ventures, process and 3 MT capacity mill in February 2015.154
distribution zones.”149 An official at China’s Other “going out” ventures have not been
MIIT stated in another article that “for us there successful. Both Baosteel Group and Wuhan
is overcapacity, but for the countries along the Iron and Steel dropped plans to build plants
‘One Road One Belt’ route, or for other BRIC in Brazil due to high costs, and analysts
nations, they don’t have enough and if we have expressed doubt that developing steel
shift it out it will be a win-win situation.”150 production abroad by China’s SOEs would
ease domestic overcapacity.155 “China would
The “shifting out” of production capacity to need $60 billion per year of extra demand to
Africa and other Asian countries has already absorb excess capacity. … The economies of
begun. Hebei Iron and Steel Group, one of Central Asia are not that large.”156 In addition,
China’s largest steel producers, has signed lending from the AIIB may be sensitive for
an agreement to develop 5 MT of steelmaking countries with geopolitical disputes with
capacity in South Africa by 2019.151 The China, especially India, Vietnam, and the
company will take a 51 percent ownership Philippines, but acceptable to other countries
stake in the South African venture, with the — who are also more likely to default on
Industrial Development Corp of South Africa their loans including Cambodia, Laos, or
and the China-Africa Development Fund as Pakistan.157 Another analyst concluded that
the minor investors. Although a domestic “transferring production abroad can’t be

Overcapacity in Steel: China’s Role in a Global Problem 43

 the main solution to tackle overcapacity Other China observers put the matter more
and would conflict with the government pointedly: “The Chinese government has
pledge to maintain social stability by keeping shown interest in stepping up its efforts to
employment; success would “depend on how rein in steel overcapacity and to consolidate
much capital is eventually engaged in helping and restructure the steel industry. However, it
Chinese firms go abroad.”158 remains to be seen if the government’s efforts
and measures are to produce sufficient or
meaningful results.”161 In addition to needed
4.2.7 Concluding tax and remuneration reforms, we agree with
these perspectives that a core challenge to
thoughts addressing industrial overcapacity in China’s
In our analysis, any reasonable review of steel sector is effective implementation of its
China’s stated policy objectives and policy stated policies and commitments.
goals would conclude that China recognizes
that it has a problem with industrial In addition, over the past year, a number of
overcapacity generally, and in the steel sector industry experts have expressed concern
in particular.159 However, implementation has that China’s plan to reduce 100-150 MT of
lagged behind these stated objectives and capacity will not be enough to address the
goals, and industry observers are increasingly overcapacity overhang characterizing the
concerned that the policies do not go far steel industry. “The plans are relatively timid
enough to address the overcapacity problems and overcapacity is unlikely to be reduced
affecting the steel industry. sufficiently in the coming two years,” “stated
one expert.162 A recent Wall Street Journal
China has repeatedly announced policies from article reported that industry experts in China,
its highest levels to address overcapacity in the United States, and Europe state that 200
steel and other sectors, including policies MT of capacity — about 20 percent of current
seeking to reduce additional domestic capacity — should be removed to improve
investment in steelmaking capacity, create conditions.163 Presentations to the April
consolidated steel production by encouraging 2016 OECD meeting by Etienne Davignon,
mergers and acquisitions, modifying the the architect of Europe’s restructuring plan
foreign investment law to permit foreign direct of the 1970s, recounted capacity in Europe
investment in steel, and to shift overcapacity was reduced by almost 20 percent over five
abroad by increasing demand through its years, resulting in significant improvements
“going out” and “One Belt, One Road” of capacity utilization rates and company
policy. China is also aware of other countries’ profitability. The planned capacity reductions
frustration with the lack of progress in China announced by China risk being “insufficient
to address overcapacity in the steel industry, and/or too slow … especially if demand
that China is perceived as “not doing enough” continues to decline.”164 Without similar rapid
to curb production levels, and that anti- cuts, the likelihood that overcapacity will
dumping duties set by other nations will affect remain an issue for China’s steel industry for
China’s domestic producers.160 a number of years is increased. “Reducing
China’s industrial overcapacity is going to be a
One difficulty has been effective process, not an event. Chinese policymakers
implementation of its stated goals and feel they have the fiscal wherewithal to draw
policies. As Zhang and Zhang (2013) write out and avoid short-term pain”, stated one
with reference to the 2013 State Council industry observer.165 “They will find ways
Guiding Opinion on Resolving the Serious to smooth it out over time. We’re talking a
Excess Capacity Contradictions, “this strategy minimum 10 years,” stated another.166
in essence is correct, but the key remains
in its practice and implementation” (p.5).

44 Overcapacity in Steel: China’s Role in a Global Problem

4.3 U.S. efforts U.S.-China Economic and Security Review
Commission.169
The USTR and the U.S. Department of
Commerce released in February 2016 their So what to do about overcapacity?
annual joint report detailing U.S. trade Overcapacity clearly has an impact on the
subsidies enforcement.167 The report details profitability of the global steel sector. Yet
the challenges faced by these organizations to within existing global trade rules, action
encourage countries — especially China and on overcapacity has not occurred. This
to a lesser extent India — to comply with the is because overcapacity, which, again, is
WTO Subsidies Agreement and to increase productive capacity not utilized by current
the transparency of WTO members’ reporting production, cannot be exported, and cases
obligations under the agreement. The report have only been brought to address production
details actions the U.S. government has that has entered into the international
taken to address the “market-distorting trade trading system. The rules to address the
practices in the steel industry” (pp. 8-9), production that has entered global markets
notably subsidies and overcapacity, and have traditionally come in three forms:170
provides details on the actions undertaken by anti-dumping, which requires establishing
the OECD, the North American Steel Trade that imports are sold at an unfair price171
Committee, the S&ED, the U.S.-China Joint and are harming or threatening to harm
Commission on Commerce and Trade, the U.S. industry; countervailing duties, which
USTR, and Department of Commerce to requires establishing that subsidies are being
address trade frictions between the United used to artificially promote the industry and
States and China. In a particularly revealing are harming or threatening to harm U.S.
section, titled “Chinese Government Subsidy industry; and “Section 201” cases, which
Practices” (pp. 9-14), it notes that “the requires establishing a surge of imports
Chinese government has emphasized the in the domestic economy and harming or
state’s role in China’s economy, diverging threatening to harm the competing U.S.
from the path of economic reform that drove industry.172 Enforcement of existing trade rules
China’s accession to the WTO … [and] is certainly an important step to ensuring that
pursued new and more expansive industrial overcapacity abroad does not harm U.S. steel
policies designed to limit market access producers. The joint report by the USTR and
for imported goods, foreign manufacturers Department of Commerce discussed above
and foreign service-suppliers, while offering (USTR/DOC 2016) provides details on the
substantial government guidance, regulatory enforcement of those rules and laws by the
support and resources, including subsidies, U.S. Government.
to Chinese industries, particularly industries
dominated by SOEs” (p. 9). The report notes However, one problem with the current
the designation of China as a non-market approach to trade rules is that, like torts,
economy (NME) and WTO’s affirmation of they are generally reactive: evidence of harm
Public Law 112-99 (commonly referred to must be established before remedy can be
as the GPX legislation) permitting the United undertaken.173 “We have to bleed before we
States to countervail Chinese subsidies.168 get any relief,” said a former executive at U. S.
The report summarizes the commitments Steel in a recent Wall Street Journal article on
undertaken by China in the S&ED dialogues, the topic of China’s exports.174 Trade actions
and the actions undertaken by the USTR to are not only reactive, but also expensive,
address subsidies and its non-compliance costing between $1.5-2 million each.175
with WTO Dispute Resolution rulings.
Similar reviews and findings about China’s The topic of industrial overcapacity is a
compliance with WTO rulings may be found frustrating policy issue because the global
in the annual reports to Congress by the trading system is premised on mutual gains

Overcapacity in Steel: China’s Role in a Global Problem 45

 from trade, and if harm is alleged, to show the To conclude, this report has investigated the
specific trade-related effects in the domestic topic of industrial overcapacity in the steel
industry. In an environment where industrial industry. Our summary assessment is that to
capacity is developed due to a foreign date, existing policies have been ineffective in
government’s goals other than profits, the reducing global industrial overcapacity in the
remedy to compensate domestic producers sector. The path forward requires addressing
upon finding specific evidence of harm may both demand and supply imbalances in
be inadequate because the existence of the steel sector to return it to profitability.
noneconomic capacity itself harms producers. Demand side policies supporting a recovery
The problem of overcapacity and its impact of global economic conditions are necessary,
on free market principles requires new yet regional solutions, specifically China’s
thinking. Existing concepts in international “New Silk Road” policy, may further stimulate
trade relating to “nullification and impairment” expansions of the sector due to a continuation
of trading rights and “serious prejudice” of government policies rather than core
need to be evaluated in terms of addressing profitability, and introduce other strategic
overcapacity and its impact.176 challenges for the United States and western
In addition, new tools might be appropriate, market economies. Supply reductions, as
including: illustrated in this report, are hampered by
misaligned incentives between state and
■■ changing the burden of proof upon a local government authorities in China, and a
finding by the WTO dispute settlement political economy that values jobs and stability
panel of a prohibited trade-related practice, over profitability. Chinese policies intending to
or non-compliance with previous rulings by reduce capacity have sometimes worked in
the WTO; the wrong way, as forced closures of furnaces
of a certain size or smaller have led firms
■■ greater support for multilateral
to increase investments in larger furnaces,
environmental agreements with strict
expansionary government policies have led
pollution limits with border adjustability
to overinvestment in many sectors related
mechanisms to ensure that those entities
to construction and real estate industries,
that comply are not at a disadvantage,
local government officials support capacity
which would expand the topic of debate
expansion to enhance their position in the
from the traditional thinking about
political system, and lenient energy efficiency
economic harm caused by overcapacity to
and environmental standards keep barriers
the broader environmental harm it causes.
to entry low and facilitate the maintenance
of inefficient or obsolete capacity. New goals
At the minimum, action on designating
to reduce environmental pollution in China
China as a market economy for purposes
offer some hope for reducing outdated and
of the WTO and U.S. law, which would
inefficient capacity in the steel sector, yet the
weaken current tools to combat structural
implementation of environmental pollution
overcapacity, should be delayed until China’s
efforts has to date been characteristically
“state capitalism” model is demonstrably
subject to national-local dynamics, resulting in
consistent with market principles as generally
a trial and error process. The core challenge,
practiced.177 U.S. law includes specific criteria
it appears to us, is to develop an international
to determine whether market forces in a
trading system recognizing that market
foreign country are sufficiently developed
and nonmarket economies follow different
to permit the use of prices and costs in that
incentives and goals, and to find a basis for
country for purposes of the Department of
mutually beneficial exchange despite these
Commerce’s antidumping analysis.178
differences.

46 Overcapacity in Steel: China’s Role in a Global Problem

Endnotes
1 Effective capacity typically is less than nameplate (or “nominal”) capacity, although operational capacity may exceed
nameplate capacity due to optimization processes and technology improvements that accumulate over time. Referred to as
“capacity creep”, it can mean that effective capacity can exceed nameplate capacity. OECD 2015 notes that measures of
excess capacity cannot be simply calculated as the gap between nominal capacity and production due to seasonal variability
and maintenance requirements in plants. Though true for monthly measures at the plant level, this objection to using nominal
capacity is not true for yearly measures at the national level.
2 Nameplate capacity is also known as “nominal capacity.”
3 We recognize that consumption (apparent steel use) at times is used instead of production to calculate overcapacity
measures, particularly at the regional level. However, at the global level, production and consumption are nearly identical. See
for example, Ernst and Young (2015) “Global Steel Report 2015-2016” p.13
4 U.S. crude steel production was 78.8MT in 2015, the most recently available data (World Steel Association, World Steel in
Figures 2016).
5 See also Figure 3 and Figure 4.
6 The five regions accounted for 78 percent of global crude steel production in 2015.
7 Estimates of overcapacity in China vary from 336 MT to 425 MT (see “Nine Steel Associations Release Statement on the
Question of China’s Treatment as a Non-Market Economy”), with the upper range attributed to the American Iron and Steel
Institute (see “AISI Chief Urges Action To Eliminate Global Steel Overcapacity
And Foreign Government Subsidies”). FSU countries are Russia, Ukraine, and Kazakhstan. Please note that the discussion
refers to nominal, not effective, capacity. Some percentage of nominal overcapacity is characteristic of the industry, and — as
in unemployment — expected due to factors discussed in Section 3 of the report.
8 OECD 2015 “Capacity Developments in the World Steel Industry” DSTI/SU/SC(2015)8/FINAL
9 OECD 2015 “Capacity Developments in the World Steel Industry” DSTI/SU/SC(2015)8/FINAL, 23
10 Ibid.
11 OECD 2015 “Capacity Developments in the World Steel Industry” Table 7. The table only details underway capacity.
12 OECD 2015 (p.9) notes that large steel importing countries are seeking greater self-sufficiency in order to reduce their
dependence on imports, and despite market conditions, a large number of steel mills are being planned and constructed,
contributing to increased global steelmaking capacity.
13 Readers in further information regarding this trend should see OECD 2015 “Capacity Developments in the World Steel
Industry” pp. 15-24.
14 See table 5 (p.16) of OECD 2015 “Capacity Developments in the World Steel Industry” DSTI/SU/SC(2-15)8/Final
15 Morgan Stanley (2013) shares a similar perspective at pg. 18.
16 OECD 2015 “Capacity Developments in the World Steel Industry,” p. 24-25.
17 Ibid, 25.
18 Ibid, 20.
19 OECD (2015) “Steel Market Developments Q4 2015,” pp.18-21.
20 OECD (2015) “Economic Outlook,” Nov. 9, 2015.
21 China Iron and Steel Association (2015) “The Thirteenth Five Year Plan: How to improve the competiveness of the steel
industry,” July 10.
22 Zhang Shuguang and Zhang Chi (2013) “Resolving Excess Capacity and Promoting Restructuring” Quarterly Economic Brief,
Oct. 21. Medium-sized and large steel mills tracked by the China Iron and Steel Association posted a net profit margin of 0.41
percent. Excluding non-core operations, they lost 660 million yuan (~U.S. $103 million), according to Eric Ng (2014) “China’s
Steel Industry burdened by overcapacity, workers baulk at shuttering plants” South China Morning Post, Aug. 11. Profit ratio
of sales in the steel sector is 0.4 percent and loss incurring enterprises in the sector has reached 30 percent, up from 10
percent in 2011, according to the December 2015 presentation of Zhaoyuan Xu, Development Research Center of the State
Council to the OECD Steel Committee.
23 See for example, Mark O’Hara (2015) “The Steel Industry’s Capacity Utilization Ratio Fell to A 3-Year Low” Market Realist, Feb
26.
24 Data from World Steel Association’s Crude Steel Production report, June 2016. Available at [Link]
media-centre/press-releases/2016/[Link]
25 See Tarr, D. G. (1988). The steel crisis in the United States and the European Community: causes and adjustments. In Issues
in US-EC trade relations (pp. 173-200). University of Chicago Press.
26 OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL, 18.

Overcapacity in Steel: China’s Role in a Global Problem 47

 27 OECD (2013) “Evaluating the current state of the steel industry: work in progress,” presentation to the OECD Steel
Committee, Paris, December 2013 DSTI/SU/SC (2013)19. We note the models reported do not include the price of steel
as an explanatory variable. In correspondence with the analysts, the OECD notes that price and capacity utilization is highly
correlated, and therefore would introduce multicollinearity if estimated in the same regression. Therefore, it is indeterminate
whether capacity utilization or the price of steel affect company profitability more. One industry analyst we interviewed about
the relationship stated that “overcapacity affects steel prices, and prices affect company profitability.”
28 OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL, 25.
29 OECD (2016) “Outcomes from the high level symposium on excess capacity and structural adjustment in the steel sector”
April 18, 2016.
30 OECD (2015b) “Excess Capacity in the Global Steel Industry: the current situation and ways forward”,
DSTI/SU/SC(2014)15/FINAL, 6.
31 OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL,26.
32 OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL,28 (note 5). For details on
how capacity utilization affects the European steel industry, consult BCG (2014) “Coping with Overcapacity: Navigating Steel’s
Capacity Conundrum”. For the U.S., two-thirds (64.3 percent) of the variation in the U.S. steel industry’s profits for the 50
quarters between Q4 2000 and Q1 2013 are correlated with changes in the industry’s capacity utilization rates; see AISI/SMA
(2013), Government Intervention and Overcapacity: Causes and Consequences for the Global Steel Industry, note 51.
33 U.S. Dept of Labor, Bureau of Labor Statistics, Current Employment Statistics, January 2015 - June 2016. Figures are
seasonally adjusted figures for NAICS 313311 and 313312. Please note that the figures do not include job losses in mining
operations that provide inputs to steel production. The United Steel Workers Union places the figure at 19,000 layoffs. See
“Ruling levels playing field for USW members, companies in steel industry” United Steel Workers press release, Aug 8, 2016.
34 Testimony from Leo Gerard at the April 12-14, 2016 Steel Hearings. [Link]
35 OECD (2015) “Evaluating the financial health of the steel industry” DSTI/SU/SC(2015)12/FINAL, 25
36 Calculated from “major imports and exporters of steel” tables found in World Steel Association’s “World Steel in Figures”,
2006-2016.
37 OECD (2015b), 6.
38 Section 201 of the Trade Act of 1974, commonly referred to as a “Section 201” case. In such actions, the ITC must determine
that the increased imports are a substantial cause of serious injury to a domestic industry. In the case of a finding of serious
injury, the president has the discretion to decide whether to grant relief and what remedy to impose. See USITC “Global Steel
Trade: Structural Problems and Future Solutions” July 2000, p 111. A concise history of the Section 201 of the Trade Act of
1974 action in 2001-2002 is provided here: [Link]
american-steel-industry. Original findings related to the case are available at the USITC website here: [Link]
trade_remedy/publications/safeguard_pubs.htm
39 “G-20 says industrial overcapacity has put a dent in global trade” WSJ July 10, 2016.
40 “Saving steel jobs in Cleveland and beyond: Penny Pritzker,” The Plain Dealer, Aug. 12, 2016 [Link]
opinion/[Link]/2016/08/saving_steel_jobs_in_cleveland.html
41 The final capacity figures for 2015 have not yet been released by the German Steel Federation as of report publication;
however, we estimate capacity levels in China to be the same as those published in 2014, 1,140MT.
42 Ernst & Young (2014), 1 (profit margins); OECD (2015) Evaluating the financial health of the steel industry (trade friction); USTR
(2016) “Fact Sheet: Addressing Steel Excess Capacity and Its Impacts” April 2016 (job losses).
43 Boston Consulting Group (2002)
44 The advent of electric arc furnace (EAF) mini-mills allows for more flexible production based on existing market demand.
Since EAFs can be simply started and stopped on a regular basis, mini-mills can more closely follow the market demand
for their products, operating on around-the-clock schedules when demand is high and cutting back production when sales
are lower (see also [Link] However,
the EAF mini-mill technology tends to be associated with newer steel production facilities, particularly in the United States.
Large-scale integrated mills with blast furnaces and basic oxygen furnaces are the dominant technology in many parts of the
world, particularly Asia (World Steel Association (2016) “World Steel in Figures 2015” p. 10.) These technologies exemplify the
economics of steel production identified in the previous paragraph wherein it may be more economical to produce at lower
levels than eliminate production capacity during recessions.
45 Damill, M., Frenkel, R., & Rapetti, M. (2013). Financial and currency crises in Latin America. The Handbook of the Political
Economy of Financial Crises, 296.
46 Morgan Stanley 2013, 7.
47 Stephen Cooney, “The American Steel Industry: A Changing Profile” Congressional Research Service, RL 3148 (Nov. 10,
2003), summary. Direct employment effects are from USITC (2000) “Global Steel Trade: Structural Problems and Future
Solutions” (July), note 6.
48 Lieberman, Marvin B. (1987) “Excess Capacity as a Barrier to Entry.” Journal of Industrial Economics 35, no.4: 607-627.
49 Boston Consulting Group (2014) “Coping with Overcapacity” draws lessons from overcapacity in the shipping, airline, paper,
and the automotive sector for the steel industry. They point to increasing the efficiency of production, joint use of upstream

48 Overcapacity in Steel: China’s Role in a Global Problem

 capacities, developing shared capacity, targeting profitable market niches, and avoiding commoditized markets as lessons
from these industries. Tire manufacturing, aluminum smelting, and oil refining are also often mentioned as having overcapacity
issues. For a recent article on the effects of overcapacity in the tire industry, see Linling Wei, Bob Davis and John Hilsenrath
(2015) “Glut of Chinese Goods Pinches Global Economy,” The Wall Street Journal, June 2. Overcapacity in the airline industry
is investigated by Wojahn, Oliver (2012) “Why does the airline industry over-invest?” Journal of Air Transport Management, 19:
1-8.
50 Lieberman (1987), “Excess Capacity as a Barrier to Entry”
51 As stated in a 2015 OECD report, “Specific concerns related to government steel policies include continued government
subsidies (notably subsidies for the creation of new capacity or the maintenance of inefficient capacities) and continued
approvals for new steel facilities. Governments have also noted that trade related measures, constraints on foreign
investment, and the activities of government financial agencies are also contributing to global excess capacity and creating
difficulties for the industry in addition to weak market conditions. And finally, policy measures which discourage ‘optimal’ exit
of the least productive plants may also contribute to excess capacity.” (9).
52 The price-to-book ratio indicates the investment opportunity for a firm. If the ratio is above 1, companies can and should
increase assets, while ratios below 1 indicate that liquidation would not meet the market value of the company. OECD 2015
estimates that price to book values for the steel industry are at very low levels and that companies are increasingly relying on
short-term debt to maintain operations.
53 Kathryn Harrigan (2013) “Overcoming Exit Barriers” in Palgrave Encyclopedia of Strategic Management, ed. D. Teece and M.
Augier, Palgrave Macmillan.
54 See for example, Ernst and Young (2015) “Global Steel 2015-2016: Globalize or customize” pp. 12-14.
55 Harrigan (2013).
56 Please refer to Figure 5 (p.9). The report discusses nominal overcapacity, which may be different than effective overcapacity.
Published 2015 estimates of overcapacity in China range from 336-425 MT. See references in note 7.
57 On favorable policies by China to encourage steel production, see Rachel Tang (2010) “China’s Steel Industry and Its Impact
on the United States: Issues for Congress” Congressional Research Service Report R4121, Sept. 21.
58 China’s crude steelmaking capacity grew from 150 MT in 2000 to 1,140 MT in 2015.
59 EU Chamber of Commerce in China (2009) “Overcapacity in China: Causes, Impacts and Recommendations,” 20.
60 EU Chamber of Commerce (2009) “Overcapacity in China: Causes, Impacts and Recommendations,” 20 notes that effective
capacity utilization ratios declined from their high of 92 percent in 2004 to approximately 72 percent in 2009.
61 The so-called “wave-phenomenon” theory of Chinese investment posits that entrepreneurs and investors collectively form
consensus about the next promising industry without knowledge of the total firms deciding to enter the industry. Thus,
investment in promising industries by entrepreneurs occurs in waves, leading to overcapacity. See Yifu, L. J., Ho-Mou, W., &
Yiqing, X. (2010). Wave Phenomena and Formation of Excess Capacity. Economic Research Journal, 10, p.2.
62 EU Chamber of Commerce in China (2009) “Overcapacity in China: Causes, Impacts and Recommendations”, 22-23.
See also update to 2009 report cited as EU Chamber of Commerce in China (2016) “Overcapacity in China: An
Impediment for the Party’s Reform Agenda.” Many of the issues identified in the 2009 report remain relevant in the
2016 update. It finds that overcapacity in the sectors covered are due to local protectionism and the fragmentation
of industries driven by regionalism; weak enforcement of regulations; low input prices due to government policies; a
fiscal system that encourages local government to attract excessive investment; widespread availability of inexpensive
technology; environmental, health, and safety standards and laws that are not fully implemented; and a philosophy
of market share v. profitability (4). For an accessible overview and discussion of the overcapacity problem in China,
consult “The March of the Zombies” The Economist Feb. 27, 2016. Available at [Link]
business/21693573-chinas-excess-industrial-capacity-harms-its-economy-and-riles-its-trading-partners-march
63 Musacchio and Lazzarini (2012) “Leviathan in Business: Varieties of State Capitalism and their implications for economic
performance.” For other definitions see Ming Du (2014) “China’s State Capitalism and World Trade Law” International and
Comparative Law Quarterly Vol. 63 (April), pp. 409-448.
64 USITC (2007) “China: Description of Selected Government Practices and Policies Affecting Decision-Making in the Economy”
USITC Publication397B (December), pp. 155-156.
65 As noted in Du 2014, a recent article [Wooldridge (2012) ‘The Visible Hand’ The Economist 4] found that Chinese SOEs
borrowed at 1.6 percent compared to 4.7 percent for other companies. 85 percent of the $1.4 trillion in 2009 bank stimulus
loans went to SOEs.
66 See TC Brightbill, Testimony before the US-China Economic and Security Review Commission (2012), as referenced in Du
(2014), note 109.
67 Du (2014), 424. In 2007, the State Council instituted a policy to collect dividends from national SOEs and put them into a
State Capital Management fund on an experimental basis.
68 See Du (2014), 424-425.
69 See Du (2014), 425.
70 EU Chamber of Commerce (2009)

Overcapacity in Steel: China’s Role in a Global Problem 49

 71 Haley, U. C., & Haley, G. T. (2013). Subsidies to Chinese industry: state capitalism, business strategy, and trade policy. Oxford
University Press. Ch. 3. An updated calculation of subsidies from the authors is not publicly available.
72 In 2002, Jiangsu Tieben Steel Ltd, a privately owned firm, was expanding production capacity and bought land from the local
government at a price of RMB 110,000 per Mu, compared to a market price of RMB 400,000 per Mu at the time. Wang,
Guoli and Rixu Zhang. “An Analysis of China’s Excess Capacity Problem Under Fiscal Decentralization – An Empirical Analysis
of China’s Steel Industry.”(财政分权背景下的产能过剩问题研究—基于钢铁行业的实证分析), Research on Financial and
Economic Issues, no.12, (December 2010).
73 EU Chamber of Commerce in China (2009).
74 EU Chamber of Commerce (2009)
75 Biman Mukherji, John W. Miller and Chuin-Wei Yap (2015) “Why Chinese Steel Exports Are Stirring Protests” Wall Street
Journal March 15 (available at [Link]
“While there has been some tightening of new lending to Chinese industries that face overcapacity, major state-owned steel
makers continue to have their loans rolled over or refinanced.”
76 Lingling Wei and Bob Davis (2014) “In China, Beijing Fights Losing Battle to Reign in Factory Production” WSJ, July 16.
Authors note that debt has doubled in the past five years.
77 EU Chamber of Commerce (2009), 10.
78 EU Chamber of Commerce (2016), 17.
79 China’s Zombie Companies Stay Alive Despite Defaults” WSJ July 12, 2016.
80 China’s Zombie Companies Stay Alive Despite Defaults” WSJ July 12, 2016.
81 “China may swap zombie companies for zombie banks” Marketwatch, March 14, 2016.
82 China’s Zombie Companies Stay Alive Despite Defaults” The Wall Street Journal, July 12, 2016.
83 USITC (2007)“China: Description of Selected Government Practices and Policies Affecting Decision-making in the Economy”
Publication 3978 (December), 154-155. Pieter Bottelier is a China expert at the Johns Hopkins School of Advanced
International Studies.
84 EU Chamber of Commerce in China (2009), 11; EU Chamber of Commerce in China (2016), 4.
85 Lingling Wei and Bob Davis (2015) “In China, Beijing Fights Losing Battle to Rein in Factory Production” The Wall Street
Journal, July 16.
86 Ibid. See also EU Chamber of Commerce in China (2009), 11.
87 EU Chamber of Commerce in China (2009), 11. Local government financing in China is a source of considerable concern
and attention due to current debt levels, estimated at more than $3 trillion. Local governments in China, since 1994, do not
have the authority to directly issue bonds, though companies set up by local governments, called local government financing
vehicles (LGFV), can raise funds through bank loans, issuing bonds, and initial public offerings, “as well as shadow banking
activities such as trust loans” Source: Zhang, Moran (2014) “China to allow deeply indebted local governments to issue new
bonds, repay maturing debt” International Business Times, Jan 2. It is the quantity of debt held by LGFV that is causing
significant concern among observers. See Moran Zhang (2013) “China Local Government Debt Soars to 3 Trillion, Financial
Risk Building” International Business Times, Dec 30; Lingling Wei (2015) “China Backtracks on Local Government Debt” The
Wall Street Journal, May 15.
88 Haley and Haley (2013), 63.
89 Zhang and Zhang, Quarterly Economic Brief, October 2013.
90 EU Chamber of Commerce in China (2009), 14.
91 Morgan Stanley (2013), 5-6. In 2016, China announced that its planned capacity cuts of between 100-150 MT in the steel
sector would result in 500,000 workers losing their jobs, and designated an estimated 27 billion yuan ($4.24 billion) to
compensate relocated workers laid off as a result of seeking to reduce overcapacity over the next two years. Source: “China
expects to lay off 1.8 million workers in coal, steel sector,” Reuters Feb. 29, 2016. Steel capacity reduction source: 2016
S&ED Factsheet.
92 Morgan Stanley (2013), Global Steel: steeling for oversupply, 16.
93 Tong, Y., & Lei, S. (2013). Social Protest in Contemporary China, 2003-2010: Transitional Pains and Regime Legitimacy (Vol.
35), p. 75. Routledge. See also pp. 76-77 in Yang, M., & Yu, H. (2011). China’s industrial development in the 21st century
(Vol. 27). World Scientific.
94 Ng, Eric (2014) “China’s Steel Industry burdened by overcapacity, workers baulk at shuttering plants,” South China Morning
Post, Aug. 11.
95 See Yang & Yu (2011), 77.
96 Eric Ng (2014), as cited in note 93.
97 See “Comments on China’s Steel Industry Adjustment Policy (2015 Revision)” Steel Industry Associations of North America,
Latin America, and Europe, April 20, 2015, 5.
98 Kathryn Harrigan (2013) “Overcoming Exit Barriers” in Palgrave Encyclopedia of Strategic Management, ed. D. Teece and M.
Augier, Palgrave Macmillan.

50 Overcapacity in Steel: China’s Role in a Global Problem

99 The Davignon plans and Japan’s experience with structural adjustment in the steel sector were recently discussed at the
OECD High Level Meeting in March, 2016. 28 million unemployment figure from “China expects to layoff 1.8 million workers in
coal, steel sectors” Reuters Feb. 29, 2016.
100 “The March of the Zombies” The Economist, Feb. 27, 2016.
101 EU Chamber of Commerce (2016) holds a similar perspective regarding why overcapacity remains: local protectionism, the
threat of social unrest, government’s current role in the Chinese economy (40).
102 2016 U.S.-China Strategic and Economic Dialogue Joint U.S.-China Fact Sheet – Economic Track. [Link]
press-center/press-releases/Pages/[Link]
103 Sixth Meeting of the U.S.-China Strategic and Economic Dialogue U.S. Fact Sheet – Economic Track [Link]
gov/press-center/press-releases/Pages/[Link]
104 2014 SE&D
105 He Yafei (2014) “China’s overcapacity crisis can spur growth through overseas expansion” South
China Morning Post, 7 Jan. [Link]
chinas-overcapacity-crisis-can-spur-growth-through-overseas
106 Haley and Haley (2013), ch. 3.
107 Haley and Haley, 2013.
108 Ibid.
109 Reuters (2015) “Solution to China’s industrial overcapacity setting more factories overseas” (July 22).
110 South East Asia Iron and Steel Institute (2015) “Message from Secretary General_June 2015” (July 3) [Link]
news/news_view.asp?news_id=4365
111 Ibid. A previous MIIT document (“Plan of Backward Capacity Elimination” May 2014) sought more definite overcapacity
reduction targets: 28.7 MT of steel capacity elimination, iron smelting reductions by 19 MT, and the elimination of “backward
equipment.” The new policies should be understood in light of objectives announced in previous policies.
112 The others were concrete, electrolytic aluminum, plate glass, and ships and vessels. (Zhang & Zhang 2013).
113 China’s “One Belt, One Road” policy seeks to develop a transportation network of road, rail, pipelines, and ports stretching
from Xi’an in central China, to Central Asia, which may ultimately reach Moscow, Rotterdam, and Venice (Scott Kennedy and
David Parker (2015) “Building China’s One Belt, One Road” Center for Strategic and International Studies, April 3.). Members
of China’s Central Party have opined that China’s overcapacity problems can be solved by overseas expansion and search
for foreign customers (See Ha Yafei (2014) “China’s overcapacity crisis can spur growth through overseas expansion” South
China Morning Post, Jan. 7, and (unauthored) 2015 “Solution to China’s industrial overcapacity setting up more factories
overseas, says official” South China Morning Post, July 22.).
114 China’s “Guideline to Resolve Serious Overcapacity”—Issued by The State Council, Oct. 2013. Interested readers may also
see also Zhang and Zhang 2013 for a description of the Guideline opinion.
115 China’s Hebei province aims to shut 60 per cent of steel mills by 2020. March 8, 2016 [Link]
east-asia/chinas-hebei-province-aims-to-shut-60-per-cent-of-steel-mills-by-2020
116 China’s Hebei province aims to shut 60 per cent of steel mills by 2020. March 8, 2016 [Link]
east-asia/chinas-hebei-province-aims-to-shut-60-per-cent-of-steel-mills-by-2020
117 OECD 2014.
118 The announced policy stated that there were about 1,200 registered steel companies in China, with the top 66 companies
holding 80 percent of total capacity (EU Chamber, 2009). The plan also called upon the top 10 producers to boost their
capacity, either through mergers and acquisitions or through organic capacity expansion. In August 2009, MIIT revealed that
it was currently drafting guidelines to speed up mergers and acquisitions in the iron and steel industry, including VAT policies
favoring SOEs.
119 Jarczyck (2010).
120 Economic Daily (Jingji ribao). “Li Yizhong: Establishing an Exit Mechanism to Solve the Excess Capacity Problem.” (李毅中：
化解过剩产能要建好退出机制), (March 2014).
121 Wei, Lingling and Bob Davis (2014) “In China, Beijing Fights Logins Battle to Reign in Factory Production” July 16. [Link]
[Link]/articles/in-china-beijing-fights-losing-battle-to-rein-in-factory-production-1405477804
122 Ibid.
123 Ibid.
124 Morgan Stanley 2016 “China Reforges Steel Industry.” Ernst and Young (2014) note that anecdotal evidence suggests that
some Chinese steel mills are upgrading to new technology thereby increasing the amount of investment at risk to avoid
shutdown. In addition, stipulations to close furnaces of a given size or smaller have led some firms to increase capacity to
remain within the threshold.
125 “Some companies actually resumed production,” July 5, 2016, [Link] See also
“A Steel Mill Lives Again, in a Setback for China,” The New York Times, June 9, 2016.
126 [Link] See also: [Link]
decides-big-steel-is-too-big. Jan 1 date from [Link]

Overcapacity in Steel: China’s Role in a Global Problem 51

 127 [Link]
128 “China sends environmental teams to inspect steel mill pollution” Reuters, July 25, 2016. [Link]
[Link]
129 China’s Hebei province aims to shut 60 per cent of steel mills by 2020. March 8, 2016 [Link]
east-asia/chinas-hebei-province-aims-to-shut-60-per-cent-of-steel-mills-by-2020
130 EU Chamber of Commerce in China (2009), 16.
131 EU Chamber of Commerce in China (2009), 16.
132 CISA 2015, “Thirteenth Five Year Plan: How to improve the competitiveness of the steel industry.”Available at [Link]
[Link]/translate?hl=en&sl=zh-CN&tl=en&u=http%3A%2F%[Link]%2Fgxportal%2FDispatchAction.
do%3FefFormEname%3DECTM40%26key%3DUDMKNVswUTADYgQzVTJWNwFlzNWMgcxBDFSYARnBjcFFloVW0BXZ
1FADklfSFY0&sandbox=1
133 [Link]
134 Zhu’s company, Shougang, has boosted its production capacity by launching new projects and acquiring smaller mills in other
provinces and autonomous regions, including Guizhou, Shanxi, Xinjiang, and Hebei to reach its target annual capacity of 30
million tons by 2012. “We plan to raise our core competitiveness by building new plants and merging regional companies. We
will concentrate on a number of strategically vital products such as high-strength sheet steel for engineering and auto sheet,”
Zhu added. Shougang’s latest acquisition of Shanxi-based Changzhi Iron & Steel is aimed at building the mill into a long steel
products base. The company paid 500 million yuan for a 90 percent stake in Changzhi Iron & Steel, which has an annual
production capacity of 3 million tons [Link]
135 Xinzhen, Lan. 2009a. “Pumping Iron.” Beijing Review 52(9), see also Xinzhen, Lan 2009b. “Steel’s New Structure.” Beijing
Review 52(16), p. 28.
136 Lingling Wei and Bob Davis (2014) “In China, Beijing Fights Losing Battle to Rein in Factory Production” The Wall Street
Journal, July 16.
137 Morgan Stanley 2013 Global Steel Report
138 BCG (2014) Baosteel Group Corp., and Wuhan Iron & Steel Group Corp. will be merged into Southern China Steel Group
139 “Arranged marriage in China’s steel industry troubled from the start,” Reuters, July 26, 2016. [Link]
com/articleshow/[Link]?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. Hebei Iron &
Steel Group and Shougang Group will be combined into Northern China Steel Group; Shanghai’s Baosteel Group Corp., and
Wuhan Iron & Steel Group Corp. will be merged into Southern China Steel Group, according to Bloomberg News.
140 BCG (2014)
141 Comments on China’s Steel Industry Adjustment Policy (2015 Revision). Steel Associations of North America, Latin America
and Europe, April 20, 2015.
142 EU Chamber of Commerce in China (2009), 11.
143 Roberts, Dexter (2014) “China Vows to Tackle Overcapacity as Industries Suffer” Business Week, March 27,
144 [Link]
pdf
145 Biman Mukherji (2015) “Ire Rises At China Over Glut Of Steel” The ll Street Journal, March 16.
146 Scott Kenedy and David Parker (2015) “Building China’s One Belt, One Road” Center for Strategic and International Studies,
April 3.
147 Simon Denyer, Paula Bronson, Gene Thorp, Robert Davis and Jason Aldag (2015) “The Push and Pull of China’s Orbit”
Washington Post, Sept. 5.
148 He Yafei (2014) “China’s overcapacity crisis can spur growth through overseas expansion” South
China Morning Post, Jan. 7 [Link]
chinas-overcapacity-crisis-can-spur-growth-through-overseas
149 Ibid.
150 Rueters (2015) “Solution to China’s industrial overcapacity setting up more factories overseas, says official” South China
Morning Post, July 22.
151 “Steelmaker looks abroad” China Daily, Oct. 21, 2014. [Link]
htm
152 Bloomberg (2014) “China steel capacity transfer is imaginary” Dec. 17 [Link]
china-steel-capacity-transfer-is-imaginary/
153 “Steelmaker looks abroad” China Daily, Oct. 21, 2014
154 Ruby Lian and David Stanway (2015) “China steel firms turn overseas as domestic woes mount” Reuters, March 25. http://
[Link]/article/2015/03/25/us-china-steel-investment-idUSKBN0MJ0SY20150325
155 Ibid.
156 David Dollar (July 2015) China’s rise as a regional and global power: The AIIB and the ‘one belt, one road’. Brookings
Institution. [Link]

52 Overcapacity in Steel: China’s Role in a Global Problem

157 EU Chamber (2016) “Overcapacity in China: An Impediment to the Party’s Reform Agenda.”
158 Bloomberg (2014) “China steel capacity transfer is imaginary” Dec. 17
159 A recent CISA document stated that China’s barely 70 percent capacity utilization rate in the sector over the past four years is
not sustainable, and that the 3 percent average profits in the industry are the lowest in China’s industrial sector [CISA (2015)
Thirteenth Five Year Plan: How to improve competitiveness in the steel industry.] This assessment might be generous, as
another account (Ng 2014) estimates profitability in the steel sector at less than half of 1 percent.
160 These conclusions are reached from reading over press releases and other announcements on the state-backed CISA
website. A western perspective on the current overcapacity challenge is offered by Mukherji, Miller, and Yap (2015) “Why
Chinese Steel Exports Are Stirring Protests” The Wall Street Journal, March 15.
161 Tang (2010) CRS 41421, Summary.
162 Fulco, Matthew (2016) “Solving the Prickly Problem of Overcapacity in China” June 14, 2016, pg.2.
163 “China Continues to Prop Up Its Ailing Factories, Adding to Global Glut” Wall Street Journal, May 9, 2016.
164 OECD (2016) “Reflections on restructuring of the Chinese steel industry” Presentation to the HIGH-LEVEL MEETIING: Excess
Capacity and Structural Adjustment in the Steel Sector, April 18, 2016.
165 Fulco, Matthew (2016) “Solving the Prickly Problem of Overcapacity in China” June 14, 2016, pg.7
166 “China’s Zombie Companies Stay Alive Despite Defaults” Wall Street Journal, July 12, 2016.
167 USTR/USDOC (2016) “Subsidies Enforcement Annual Report to the Congress” Joint Report of the Office of the United States
Trade Representative and the United States Department of Commerce, February.
168 In addition to the joint report cited above, readers interested in recent discussions about China-U.S. Trade issues should refer
to Morrison, Wayne M. (2015) “China-U.S. Trade Issues” Congressional Research Service RL 33536 (March 17).
169 U.S.-China Economic and Security Review Commission and their annual reports are available at [Link]
170 Other actions also exist within the trade rules to limit imports that harm U.S. industry. These could include enforcement of
Article 23 of the General Agreement on Tariffs and Trade (GATT), which allows for cases where there has been “nullification
and impairment” of trading rights (see [Link]/english/tratop_e/dispu_e/disp_settlement_cbt_e/c4s2p1_e.htm) , use of
NME methodologies to ensure that, in steel, China’s policies and the impact on world markets can be actionable, and action
on “downstream dumping” wherein steel produced with subsidies can be addressed when those inputs are used in other
products, as for example, steel used in cars and white goods.
171 Defined as the cost of imported goods sold is less than the cost of production plus transportation.
172 Section 201 of the Trade Act of 1974 (P.L. 93-618) permits the President to grant temporary import relief, by raising import
duties or imposing nontariff barriers on goods entering the United States that injure, or threaten to injure, domestic industries
producing like goods. This provision is the analog of the 1994 GATT Article XIX, which allows relief from injurious competition
when temporary protection (limited to 5 years) will enable the domestic industry to make adjustments to meet the competition
(source: [Link] The text of Article XIX is available here: [Link]
res_e/booksp_e/analytic_index_e/gatt1994_07_e.htm
173 Actionable subsidies must be “specific” (limited to a firm, industry, or group within a member state) and must be found to
cause adverse trade effects (material injury or serious prejudice to the domestic industry) to a member state (see USTR/DOC
(2015),1).
174 Mukherji, Miller, and Yap (2015) “Why Chinese Steel Exports Are Stirring Protests” The Wall Street Journal, March 15.
175 Leo Gerard, International President of USW, testimony in front of the 2016 steel hearings stated that $75 million to $100
million was spent in the 50 steel trade cases since 2011.
176 Under WTO rules, most subsidies, such as production subsidies, are not prohibited, but they are subject to challenge if they
cause adverse effects to the interests of another WTO member. There are three types of adverse effects. “First, there is injury
to a domestic industry caused by subsidized imports in the territory of the complaining Member. This is the sole basis for
countervailing action. Second, there is serious prejudice. Serious prejudice usually arises as a result of adverse effects (e.g.,
export displacement) in the market of the subsidizing Member or in a third country market. Thus, unlike injury, it can serve as
the basis for a complaint related to harm to a Member’s export interests. Finally, there is nullification or impairment of benefits
accruing under the GATT 1994. Nullification or impairment arises most typically where the improved market access presumed
to flow from a bound tariff reduction is undercut by subsidization. The creation of a system of multilateral remedies that allows
Members to challenge subsidies which give rise to adverse effects represents a major advance over the pre-WTO regime. The
difficulty, however, will remain the need in most cases for a complaining Member to demonstrate the adverse trade effects
arising from subsidization, a fact-intensive analysis that panels may find difficult in some cases.” -- [Link]
english/tratop_e/scm_e/subs_e.htm
177 Expiration of Section 15(a)(ii) of China’s Dec. 11, 2001 WTO accession agreement is currently under debate. The US states
that the section does not require countries to declare China a market economy automatically. China argues that regardless of
status, countries must calculate anti-dumping duties based on Chinese company prices and costs rather than those of third
countries. Source: “US, China clash over looping anti-dumping decision” July 14, 2016.
178 Section 771(18)(B) of the Tariff Act of 1930 (19 U.S.C. 1677(18)(B)) requires that a foreign country’s economy as a whole meet
specific criteria in order to be granted treatment as a market economy country.

Overcapacity in Steel: China’s Role in a Global Problem 53

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