Why COVID-19 is likely to make industrial overcapacity worse (and what can be done about it).
We are beginning to see some of the economic consequences of the Coronavirus, with some arguing that the nosediving stock market is sending a signal that a recession is headed our way. Meanwhile, we still don't know what the impact of disrupted supply chains from China will be, or whether China's dominance of pharmaceutical manufacturing will lead to widespread shortages of key medications and medical supplies.
And while public leaders and health officials work round-the-clock to mitigate COVID-19 — which, let's be clear, must be the top priority right now — individual companies and sectors are bracing for some of the expected long-term fallout from the virus.
Take the steel industry. As we noted last week, there already was a global crisis in steel, driven in large part by China's massive overcapacity. For years, China's state-owned and heavily subsidized steel companies have made far more steel than China can use. So, China dumped all that excess steel into the global market at rock-bottom prices, leading to tens of thousands of U.S. layoffs and dozens of plant closures.
About two years ago, the Trump administration placed a 25 percent tariff on steel imports, which stablized the U.S. industry.
But China never actually tackled its overcapacity problem, and the Coronavirus could make the problem even worse, as AAM President Scott Paul writes in a new piece for Real Clear Markets:
The pace of the global steel market is set by the state-dominated Chinese steel industry, which accounts for 53 percent of the world’s output. And during the first months of a viral outbreak that caused an economic standstill in mainland China, the state-led steel sector only tapped its brakes.
While steel output slowed in China, but its steelmakers took no furnaces offline. The result: record stockpiles of products like rebar.
So what can be done to help U.S. steelworkers and companies weather this storm? Scott Paul has a couple of ideas:
First, we shouldn’t take the steel tariffs off and invite an import surge. Surges have proven disastrous for American steelworkers before. They must not be asked to drown in another one.
Second, we should boost demand on our own terms. We’ve starved our bridges, railroads, ports and highways of maintenance long enough; Washington should pass an infrastructure package. That means repairing what we have, like municipal water and electric infrastructure that can be made “smart” and more efficient; and building out the foundation for what we don’t, like a national 5G telecommunications network that will be necessary for the next decade of economic competitiveness.
Click here to read Scott Paul's full op-ed in Real Clear Markets.