Take Adam Smith’s advice on low-priced clean-tech: Buy it

Chinese mills increased steel production capacity in the second half of the 2000s, more than doubling potential output to 1.06 billion tonnes from 489 million tonnes between 2006 and 2010.  (Photo: Company Website)
Chinese mills increased steel production capacity in the second half of the 2000s, more than doubling potential output to 1.06 billion tonnes from 489 million tonnes between 2006 and 2010. (Photo: Company Website)

Summary

  • If China is making tools to avert global warming more cheaply than the US, that’s good for everyone. America should not bar Chinese imports on flaky dumping charges.

Bad economic ideas don’t die. Instead they just return a decade later to haunt another generation. That seems to be the situation with China’s steel industry. US Treasury Secretary Janet Yellen plans to cite the example of steel over-capacity on a trip to China as justification for what looks like a pending crackdown on imports of Chinese clean-tech products. “In the past, in industries like steel and aluminium, Chinese government support led to substantial overinvestment and excess capacity," she said in a speech. “Now, we see excess capacity building in ‘new’ industries like solar, EVs and lithium-ion batteries."

That example harks back to a panic from 2016. “China’s steel industry is actively and deliberately flooding the international market," United Steelworkers, a US union, said then. Its [mill output] growth was “far faster than domestic and international demand would dictate." This theory led to anti-dumping tariffs on some steel products as high as 256.44% under President Barack Obama in 2015, before President Donald Trump followed up three years later with 25% tariffs on all Chinese steel products.

None of it was true. China wasn’t seeking to make more steel than long-run demand would dictate. It wasn’t responsible for weak prices in the US and tariffs didn’t halt a job decline in US metals manufacturing. It’s bad enough that misguided steel protectionism has served only to raise costs and reduce competitiveness for the rest of the US economy. Worse still is the way the same failed policy is now being dragged out in support of far more damaging barriers on clean-tech, slowing our ability to fight climate change.

Look at steel production. Chinese mills did increase capacity in the second half of the 2000s, more than doubling potential output to 1.06 billion tonnes from 489 million tonnes between 2006 and 2010, before rising to a peak 1.22 billion tonnes in 2014. With construction and factory demand lagging, capacity utilization fell to 67% in 2015, well below the 75% or more seen as consistent with sustainable profits.

Note that China’s steel output did not peak then. Instead, a boom in construction and manufacturing raised demand by 249 million tonnes over the subsequent five years. Contrary to the perception of a crisis around 2015, China wasn’t over-supplied. It pretty much had the right number of mills to satisfy projected needs. Capacity utilization since 2018 has consistently been at healthy levels north of 80%.

You could make quite as strong an argument that the US and Europe, whose utilization has frequently been well below 75%, have overcapacity. The better argument, though, is to accept that there are often dislocations between industrial capacity and demand, and that this need not be evidence of malign geopolitical intent.

Perhaps, though, China was flooding the US market to escape the consequences of its bad investment decisions? Wrong again. As a share of total production, China has always been a rather small-scale exporter. It only seems so weighty because it produces more than half of the world’s steel, so any shortfall between capacity and output seems hulk-sized. At the height of the overcapacity panic in 2015, exports to North America came to just 4.4 million tonnes, about 8% of the 55.5 million tonnes total.

The best explanation for weak US prices was simply that US steel consumption had peaked and was in decline, as the country moved to a post-industrial, service-oriented phase of its development. No amount of protectionism has been able to change the fact that US steel output now is about 80% of its level in 2008.

Chinese steelmakers, furthermore, have not only grown into the capacity that they built, but made money doing it. That’s a sign that there never was a long-term excess of supply over demand. When your rival is making sustainable profits, accusing it of overcapacity is just another way of complaining that their better productivity is taking away your market share.

There’s one big difference when it comes to clean technology. Unlike steel, electric vehicles, solar panels and lithium-ion batteries really are easily traded on a global scale, and the scale and technological accomplishments of Chinese companies make them formidable competitors. That doesn’t mean that they have been beneficiaries of unfair advantages, though, as we [in the US] have argued.

Instead, what is being built in China is not overcapacity, but merely the basic capacity the world needs if it’s to build the low-emissions economy needed to get the planet to net-zero emissions.

If China is producing tools to avert global warming more cheaply than we can do ourselves, we should follow the advice of Adam Smith: “Buy it." ©bloomberg

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