It’s Harder Than Steel – China and Europe Must Shake Off Old Policies
Last time we interviewed Prof. Rolf J. Langhammer on the middle-income-trap in China. He said that there “are no or not enough new more sophisticated industries including services to push the economy to a higher level, which is why the country is currently trapped with a middle income for many people.”
A good example of how hard it is to develop such more sophisticated industries is the current crisis in the steel industry. We asked Prof. Langhammer about the situation in China and Europe and how their administrations seem to make old mistakes again.
GESblog: Prof. Langhammer, European Commission president Jean-Claude Juncker said at the EU-China summit in Beijing in July, that “the EU will defend its steel industry.” Is it under attack?
Prof. Langhammer: Whenever there is a crisis, someone has got to get the blame. The European steel industry is in a crisis, but so are the Chinese and the global steel production. China should stop dumping steel on European markets, Juncker also said, or else the EU would not grant China the status of a market economy under WTO rules, which Beijing hopes to secure this year. That is a strong statement.
GESblog: Is this a valid blame by the Europeans?
Prof. Langhammer: China commands nearly half of the steel production worldwide. And this is for a good reason. When their economy was booming, they needed a lot of steel for new constructions. Yet, as the Chinese economy started slowing down, the country began shifting big parts of its production from domestic consumption to export. Between March 2015 and March 2016, China’s steel exports increased by almost one third, despite anti-dumping duties imposed by many importing countries.
GESblog: So they produce too much steel, which they export and thus harm for instance the European steel industry.
Prof. Langhammer: They do export a lot of their steel, but that is not the crucial point. Steel overcapacities are a global, not just a Chinese problem. And it is getting worse. Worldwide demand for steel is growing at an exceptionally slow pace – and the outlook for the industry looks even grimmer. In a recent report on future production capacity and demand for steel Julian Alwood, professor for engineering and the environment at the University of Cambridge, expects that future demand growth can be met by production from scrap steel.
GESblog: So the EU and China are fighting over an industry that has almost no positive future ahead?
Prof. Langhammer: That means that today’s primary steel capacity would be sufficient to cover future demand and that world steel prices will continue to fall. Mutual finger pointing and defensive or retaliatory trade measures between Brussels and Beijing miss the point that all producing countries contributed to the glut by wrongly extrapolating extraordinarily high growth rates during the so-called “commodity super cycle”, which ended about 2010.
GESblog: What should policy-makers in Brussels do instead of trying to defend jobs in the primary steel production industry?
Prof. Langhammer: European policy-makers should resist the temptation to re-activate the ill-fated trade policies of the 1970s when developing countries began to outcompete industrialized countries in the production of textiles, clothing and footwear. Export quotas and guarantees by producers to exercise self-restraint could not save the European textile industry back then, and they won’t save the steel industry now.
GESblog: What should happen to the steel industry?
Prof. Langhammer: The steel industry today faces the same dilemma: rather than focusing on upstream primary production, it would be better to pour resources into more specialized steel products of high value added. Policymakers will have to accept the inevitable job losses in a declining industry and help laid-off steel workers qualify for new jobs.
GESblog: What could China’s approach be to this dilemma? Is it similar to Europe’s?
Prof. Langhammer: China may still enjoy cost advantages vis-à-vis Europe, but as a rising middle-income country it will face the same problem in the mid-term. Its competitiveness in primary steel production will be threatened by locations in lower-income countries with high demand, including India and Sub-Saharan Africa. Defending jobs in primary steel production as China tries to do today would be an obstacle to the country’s much-needed structural change. It could, for instance, prevent the entry of new materials and leave China’s steel processing industries like the car industry with obsolete production techniques. If China wants to escape the much-debated middle-income trap, it will have to close down some of its steel plants and bid farewell to old industrial policies – just like European policy-makers should shake off the unrealistic demands by its old industry lobbies, something it should have already done a long time ago.
Prof. Rolf J. Langhammer is a Professor of Economics, former Vice President of the Kiel Institute for World Economy and expert on China’s economy. An opinion piece by the author on the same topic was first published on the Mercator Institute for China Studies’ blog “European Voices on China”.