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Rolf J. Langhammer

The EU’s efforts to defend its steel industry against cheap imports from China are as misguided as China’s continuing overproduction of primary steel. Both sides will have to move away from traditional steel production and into higher value products to stay competitive.

Former Redcar steel plant blast furnace in Dormanstown, UK

European Commission president Jean-Claude Juncker has all but declared a trade war on China. “The EU will defend its steel industry,” he said after the EU-China summit in Beijing in mid-July 2016. “We will use all the means at our disposal.” China should stop dumping steel on European markets, he 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.

The recent sharp increase in China’s cheap steel imports has been blamed for the crisis in the industry in Europe. As the Chinese economy started slowing down, the country started 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.

China commands nearly half of the world’s steel production, so it obviously has to be a part of the solution. Yet steel overcapacities are a global, not just a Chinese problem. 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.

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.

Protecting steel jobs is not the right response

Defending jobs in primary steel production is not the right response to the current crisis, neither for Europe nor for China. European policy-makers should resist the temptation to re-activate the ill-fated trade policies of the 1970s when developing countries began to outcompete industrialised 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.

Even worse, these measures prolonged the suffering by discouraging product innovation and the shift of human and physical resources into more promising areas like the manufacturing of industrial textiles. The steel industry today faces the same dilemma: rather than focusing on upstream primary production, it would be better to pour resources into more specialised 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.

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.