Impact of excess capacity on global trade is overblown, study shows

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A new report has suggested that the current focus of tackling excess capacity as a means of addressing problems with the global trade system may be based on flawed logic.

In the last few years, the global trading system has been severely disrupted by a rapid rise in protectionist activities from major economies, most notably the US, which has backtracked on a number of free trade agreements under the populist presidency of Donald Trump.

Responding to this threat to liberalized trading norms, leading nations are looking for underlying factors that could explain why opposition to free trade is on the rise, with the aim of restoring a progressive consensus. The focus of many of these conversations has been the issue of global excess capacity, which is now being actively targeted as a systemic threat.

However, a new report from the Centre for Economic Policy Research's Global Trade Alert project has suggested that such efforts may be misguided. Entitled 'Going Spare: Steel, Excess Capacity, and Protectionism', the report offers evidence that cracking down on excess production capacity may not have the intended effect - and that there are better, more productive ways of improving the global trade system.

Why has excess capacity become a talking point?

The protectionist policies adopted by the US under President Trump have been motivated by concerns that free trade is creating damaging competition for domestic businesses, resulting in wealth leaving the country. This mode of thinking was behind the controversial new tariffs imposed by the US on steel and aluminum imports, among other decisions.

In order to engage the concerns raised by the US government directly, the international community has analyzed the situation and pointed to excess manufacturing production, largely from China, as a force that is flooding the market and driving down overall demand. A joint EU, Japanese, and US statement was signed during the December 2017 World Trade Organization Ministerial Conference pledging cooperation to tackle this problem.

Additionally, the issue has been officially acknowledged as a problem of global significance by the Chinese government and branded as "not sustainable" by the European Steel Association, while the United States Steelworkers Union has accused world leaders of "fiddling while Rome burns" due to the lack of immediate action taken.

Is the focus on excess capacity misguided?

Despite the emerging international consensus on the severity of this problem, the Global Trade Alert report has indicated that many of the concerns raised about overcapacity may be overstated or misplaced.

Although the study acknowledged that steel overcapacity is a real issue for the industry at present, it was observed that from 2005 onwards, no more than 21 per cent of world trade from China was in excess capacity sectors, a percentage that has been gradually falling. Overall, it was estimated that six-sevenths of Chinese exports come from sectors where excess capacity is not a problem - meaning China's status as a scapegoat for overcapacity may not be entirely fair.

The report also noted that less than two per cent of G20 manufacturing import totals are affected by import surges in sectors where China has excess capacity - and that only in one in 20 cases have G20 governments reacted to year-long import surges in Chinese excess capacity sectors by raising trade barriers, suggesting this may not be as much of a systemic concern as has been stated.

What is to be done?

Overall, the focus of the Global Trade Alert report was to offer evidence that current approaches to handling global excess manufacturing capacities may not be constructive, as focus is being placed on reducing overcapacity as an end in and of itself, rather than as a means to addressing its specific impact on trading partners.

The report concluded: "On examination, it turns out that the phrase excess capacity is slippery - rhetorically useful, but hard to pin down, even harder to operationalize, and at the same time woefully misleading. So, excess capacity joins the list of superficially appealing trade policy jargon, such as unfair trade and managed trade.

"A focus on excess capacity in some manufacturing sectors ignores the trade policy challenges building up in other sectors of the world economy. Framing future trade cooperation in terms of global excess capacity isn't the way forward; the focus should be on the altering policies that distort commerce, not targeting market outcomes, of which excess capacity is one."