Living Economics

Blocked Exit
Inefficient firms in mature industries often are preserved for political reasons long after they should have exited the market.

The world's steel industry is highly fragmented. The top 10 steel producers combined have 25 per cent of the world market. In contrast, the top five carmakers now account for half the car market (The independent). Last year, the $240 billion world steel industry churned out 847 million tons of steel, about 40 million tons more than users could consume, continuing a trend that has depressed the world's steel prices.

In a mature industry with a saturated market such as steel, demand comes largely from replacement of existing products and normal growth. Generally, existing capacity that was inherited from the phase of explosive growth is much more than is necessary for current demand. Ideally, market competition should eliminate higher-cost producers in favor of lower-cost producers. However, all steel-producing countries have tried to preserve their production capacity regardless of cost efficiency considerations. In the U.S., for example, many factors have helped to delay consolidation of its steel industry:

Thus, even after 20 years of restructuring and 64% fall in industry employment, two-thirds of steel production in the U.S., about 110 million tons, still come from 12 companies (WSJ 12/14/01). To be fair, the U.S. has opened up its domestic steel market to foreign imports more than other countries. Imports into the US climbed to 26.4% of 1998 US steel consumption. And exactly because it is the largest importer of steel products in the world, it is in a position to demand capacity cutback from foreign steel exporters. In the December 2001 Paris steel summit attended by 40 steel-producing countries, foreign steel producers agreed to reduce their steel capacity by 97 million tons in three steps by 2010 provided that the U.S. government would not unduly raise its steel import tariffs1. But this promised capacity reduction is less than half of what is necessary to eliminate current over-production.

By delaying the exit of inefficient steel producers, government relief of competitive pressure in the form of import tariff has thus prevented the redeployment of scarce resources for more productive use elsewhere.

Note:
  1. The U. S. announced on March 4, 2002 that it will impose tariffs of up to 30% on most imported steel as part of a broader plan to rescue its financially troubled steel industry. Under the plan, steel imported from Canada and Mexico would be exempt from the duties, as would imports from developing countries such as Argentina, Thailand and Turkey. Japan, China, South Korea, Russia, Ukraine and Brazil would be among the nations subject to the tariffs.
  2. The U. S. announced on March 4, 2002 that it will impose tariffs of up to 30% on most imported steel as part of a broader plan to rescue its financially troubled steel industry. Under the plan, steel imported from Canada and Mexico would be exempt from the duties, as would imports from developing countries such as Argentina, Thailand and Turkey. Japan, China, South Korea, Russia, Ukraine and Brazil would be among the nations subject to the tariffs.
References:
  • Dow Jones Newswire. "US Bush To Set Up To 30% Steel Imports Tariffs." 03/4/02.
  • Marsh, P. “Brussels Has 'Wrong View' on Reshape Of US Steel Import Controls.” Financial Times (London) 12/18/01.
  • March, P. “Structural Weakness Strains Steel Industry: President Bush's Suggestion that He Might Impose a Curb on US Imports Has Added to the Risk of a Damaging Trade War.” Financial Times (London) 06/12/01.
  • Matthews, R.G. “U.S. Bid to Cut Global Steel Capacity Comes With Threatened Tariff Boost.” WSJ 12/14/01.
  • Mathews, R.G. “World Steel Makers Agree to Cut Levels, But Amount Is Less Than U.S.'s Request.” WSJ 12/19/01.
  • Shah, S. “Time to Start Welding the Steel Industry Together.” The Independent (London) 02/20/01.
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