Bruce A. BlonigenBruce A. Blonigen

University of Oregon and NBERUniversity of Oregon and NBERAndAnd

Wesley W. WilsonWesley W. WilsonUniversity of OregonUniversity of Oregon

European Association for Research in Industrial EconomicsEuropean Association for Research in Industrial Economics

This work was partially supported by the National Science This work was partially supported by the National Science Foundation.Foundation.

Foreign Subsidization Foreign Subsidization and and

Excess CapacityExcess Capacity

BackgroundBackground

► U.S. Steel industry holds that foreign subsidization U.S. Steel industry holds that foreign subsidization and excess capacity has to its long-run demise. and excess capacity has to its long-run demise. Howell et al. (1988) summarize:Howell et al. (1988) summarize: Foreign Subsidies cause foreign producers to Foreign Subsidies cause foreign producers to

have excess capacities.have excess capacities. Foreign barriers protect market power in foreign Foreign barriers protect market power in foreign

countries, and the excess is dumped on the U.S. countries, and the excess is dumped on the U.S. Market.Market.

The response of the US government is to erect The response of the US government is to erect antidumping and countervailing duties, antidumping and countervailing duties, safeguard actions, etc.safeguard actions, etc.

BackgroundBackground

► Other explanations:Other explanations: Slow adoption of new technologies by US firms Slow adoption of new technologies by US firms

(Oster 1982).(Oster 1982). The rise of minimills in the US (Crandall (1996), The rise of minimills in the US (Crandall (1996),

Moore (1996), Tornell (1996).Moore (1996), Tornell (1996). Rents extorted by labor unions and firms have Rents extorted by labor unions and firms have

disinvested over time (Tornell (1996)).disinvested over time (Tornell (1996)).

Purposes of PaperPurposes of Paper

► General Purpose: General Purpose: To consider the excess capacity effects and To consider the excess capacity effects and

whether data support that such effects occur. whether data support that such effects occur. ► Specific Purposes:Specific Purposes:

Distinguish between cyclical and structural Distinguish between cyclical and structural excess capacity. excess capacity.

Empirical application:Empirical application:► Provides a test of cyclical dumping (few studies)Provides a test of cyclical dumping (few studies)► Provides a test of structural dumping (no studies)Provides a test of structural dumping (no studies)► Provides a set of data on foreign subsidies from CVD Provides a set of data on foreign subsidies from CVD

investigations. investigations.

Cyclical Dumping Cyclical Dumping Staiger and Wolak (1992)Staiger and Wolak (1992)

► Foreign firm supplies its home market with Foreign firm supplies its home market with protection, but may export to a competitive market.protection, but may export to a competitive market.

► Foreign firm has production and capacity costs. Foreign firm has production and capacity costs. Production costs<export price<production + capacity costs.Production costs<export price<production + capacity costs.

► Capacity decisions made before home demand is Capacity decisions made before home demand is realized realized

► In low demand periods, excess capacity is “dumped”.In low demand periods, excess capacity is “dumped”.► In high demand periods, there is no excess capacity.In high demand periods, there is no excess capacity.

Structural Excess CapacityStructural Excess Capacity

► We modify a simple version of Staiger and Wolak to We modify a simple version of Staiger and Wolak to allow for the effects of foreign subsidization, and allow for the effects of foreign subsidization, and demonstrate that subsidization lead to excess demonstrate that subsidization lead to excess capacity.capacity.

► This increases the volume of exports by the foreign This increases the volume of exports by the foreign firm and can exacerbate cyclical excess capacity.firm and can exacerbate cyclical excess capacity.

Summary of ResultsSummary of Results

► Data are exports of 37 steel products from 22 different Data are exports of 37 steel products from 22 different foreign countries to the U.S. from 1979-2002.foreign countries to the U.S. from 1979-2002.

► We find evidence of both cyclical and structural We find evidence of both cyclical and structural dumping, but…..dumping, but….. The effects are very isolated and seem isolated to The effects are very isolated and seem isolated to

less-developed countries especially Latin Americanless-developed countries especially Latin American These countries account for only a small share of These countries account for only a small share of

U.S. Steel consumption.U.S. Steel consumption.

► HENCE, EXCESS CAPACITY HYPOTHESIS DOES NOT HENCE, EXCESS CAPACITY HYPOTHESIS DOES NOT SEEM TO EXPLAIN THE ILLS OF THE U.S. STEEL SEEM TO EXPLAIN THE ILLS OF THE U.S. STEEL MARKET.MARKET.

ConceptualConceptual(Capacity Choice)(Capacity Choice)

20 1

, ,Max E ( ) ( )

subject to .

F US

e F F F US US

K Q Q

F US

Q Q cQ P c Q K K

K Q Q

** 0

1

( )(2(1 ))

eF cK Q

Capacity ChoiceCapacity Choice

MR Expectedc

US

K*

A

$

K

P

MC=c + η0+ η1K

c + η0

DExpected

αe

Output ChoiceOutput Choice(after demand is realized)(after demand is realized)

MRLow

MR

MR

Expected

c

PUS

K*

A

B

CD

Dumped Exports

$

K

High

Optimal Firm Output, Dumping, and Optimal Firm Output, Dumping, and

SubsidiesSubsidies

MRLow

MRExpected

c

US

K*

A

B

$

KK*NS S

C D E FP

CVD ProtectionCVD Protection

► Because of the effects that subsidization and Because of the effects that subsidization and dumping can impose on an industry, statues allow dumping can impose on an industry, statues allow for countervailing duties.for countervailing duties. US Steel has files 289 CVD cases from 1980-US Steel has files 289 CVD cases from 1980-

2002. 2002. ► Most have been found to have insufficient evidence of Most have been found to have insufficient evidence of

foreign subsidies or found to be insignificant to be foreign subsidies or found to be insignificant to be injurous.injurous.

► Most active periods:Most active periods: Early 1980s leading to VRAsEarly 1980s leading to VRAs Early 1990s when VRAs expired in 1992Early 1990s when VRAs expired in 1992 Late 1990s and early 2000s before steel safeguard Late 1990s and early 2000s before steel safeguard

protection.protection.

Summary of CVD CasesSummary of CVD Cases

► Substantial variation in frequency of cases Substantial variation in frequency of cases across countries and in “successful” outcomes.across countries and in “successful” outcomes. Most activity against EC/EU, Korea, South Most activity against EC/EU, Korea, South

Africa, and Latin American countries.Africa, and Latin American countries. Success rates are generally lower with Success rates are generally lower with

respect to EC/EU countries.respect to EC/EU countries.► Average CVDs for successful and non-suspended Average CVDs for successful and non-suspended

cases suggest that subsidization is more prevalent in cases suggest that subsidization is more prevalent in Argentina, Brazil, Canada, Italy, South Africa and Argentina, Brazil, Canada, Italy, South Africa and

SpainSpain..

Summary of CVD CasesSummary of CVD Cases

► Extent of US Steel affected by foreign subsidization.Extent of US Steel affected by foreign subsidization. Multiply % of a country exports * share of US Multiply % of a country exports * share of US

consumption accounted for by the foreign consumption accounted for by the foreign country’s exports of steel.country’s exports of steel.

► The largest impact is Germany at just .34% of the US The largest impact is Germany at just .34% of the US market affected by subsidation.market affected by subsidation.

► Totals across all countries is just 1.32% is affectedTotals across all countries is just 1.32% is affected

► CVD CASES ARE NOT SUGGESTIVE OF CVD CASES ARE NOT SUGGESTIVE OF LARGE IMPACTS FROM FOREIGN LARGE IMPACTS FROM FOREIGN SUBSIDIES.SUBSIDIES.

Empirical SpecificationEmpirical Specification

EXEXTons exported to USTons exported to USUSP(+)USP(+) real foreign currency price for product in real foreign currency price for product in

US marketUS marketFDEM(-)FDEM(-) Measure of Demand in Foreign Market Measure of Demand in Foreign Market

(real industrial value added)-cyclical excess capacity(real industrial value added)-cyclical excess capacitySubsidy(+)Subsidy(+) 1+ad valorem foreign government 1+ad valorem foreign government

subsidization rate-structural excess capacitysubsidization rate-structural excess capacityTPROT(-)TPROT(-) matrix of variables measuring special US trade matrix of variables measuring special US trade

protection programs (CVDs, AD-Duties, VRAs, protection programs (CVDs, AD-Duties, VRAs, safeguards)safeguards)

Year, Country Product Fixed effects, time series controls through first Year, Country Product Fixed effects, time series controls through first differencing.differencing.

1 2 3 4ln ln ln ln lnijt ijt it ijt ijt ijtEX USP FDem Subsidy TProt

DataData

► 22 countries, 37 products, 1979-200222 countries, 37 products, 1979-2002► Primary sources:Primary sources:

Imports: American Iron and Steel Institute Imports: American Iron and Steel Institute ((Annual Steel Report)Annual Steel Report)

Prices: Indices from Bureau of Labor StatisticsPrices: Indices from Bureau of Labor Statistics Exchange Rate: Exchange Rate: International Financial StatisticsInternational Financial Statistics Foreign Subsidization: Constructed from Federal Foreign Subsidization: Constructed from Federal

Register.Register. Special Protection, from Federal RegisterSpecial Protection, from Federal Register

Initial ResultsInitial Results

► Base model (column 1)Base model (column 1) Cyclical and Structural Excess Capacity Effects Strong.Cyclical and Structural Excess Capacity Effects Strong. Control variables perform well.Control variables perform well.

► Does Foreign Subsidy exacerbate the cyclical Does Foreign Subsidy exacerbate the cyclical capacity effect (column 2)?capacity effect (column 2)? Interact foreign demand with a dummy for positive Interact foreign demand with a dummy for positive

subsidization. subsidization. Expect negative, more pronounced cyclical excess Expect negative, more pronounced cyclical excess

capacity. While negative, not statistically significant.capacity. While negative, not statistically significant.► Does cyclical dumping depend on whether foreign Does cyclical dumping depend on whether foreign

demand is in a high or low state? (column 3)demand is in a high or low state? (column 3) Interacted foreign demand with a dummy if above the Interacted foreign demand with a dummy if above the

trend or not. Effect is negative, not statistically significant.trend or not. Effect is negative, not statistically significant.

Base

Subsidy & Foreign Demand

InteractionHigh Versus Low Foreign Demand

Ln (U.S. Price) 0.647*** 0.647*** 0.646***

Ln (Foreign Demand) -1.525*** -1.468*** -1.604***

Ln (1 + Subsidy Rate) 3.168** 3.161** 3.159**

Subsidy Dummy* Ln (Foreign Demand)

-0.397 

Ln (Foreign Demand) * Dummy for Demand Above Trend    

0.174

Ln (1 +AD Duty) -1.648*** -1.648*** -1.645***

Ln (1 + CV Duty) -1.048 -1.043 -1.044

VRA Dummy Variable -0.438*** -0.438*** -0.438***

Ln (1 + Safeguard Tariff Rate) -1.480* -1.488* -1.474*

Constant 0.315** 0.313** 0.314**

Specification IssuesSpecification Issues

► No direct measures of capital costsNo direct measures of capital costs difference data by country-product combinationsdifference data by country-product combinations Product, country, and year effectsProduct, country, and year effects

► Measurement of foreign demandMeasurement of foreign demand Same results obtain with industrial production Same results obtain with industrial production

indices or real GDPindices or real GDP► Measurement of subsidy variableMeasurement of subsidy variable

Qualitative results the same as when we use a Qualitative results the same as when we use a subsidy dummy variable.subsidy dummy variable.

► Are results consistent across subsamples?Are results consistent across subsamples?

High CVD vs Low CVD ProductsHigh CVD vs Low CVD Products

 

Cyclical Excess Capacity

Structural Excess Capacity

Coefficient on

Foreign Demand F-Statistic

Coefficient on

Subsidy F-Statistic

High-Activity CVD -1.48*   3.15**  

  (pval=0.084) 0.01 (pval=0.046) 0

Low-Activity CVD -1.55*** (pval=0.940) 3.07* (pval=0.972)

  (pval=0.001)   (pval=0.093)  

Non-OECD vs OECDNon-OECD vs OECD

 

Cyclical Excess Capacity

Structural Excess Capacity

CoefficientOn

Foreign Demand F-Statistic

Coefficient on

Subsidy F-Statistic

Non-OECD -1.71*** 4.36**

  (pval=0.003) 0.26 (pval=0.011) 5.63**

OECD -1.27* (pval=0.608) -0.65 (pval=0.018)

  (pval=0.057) (pval=0.601)

South American vs Rest of SampleSouth American vs Rest of Sample

 

Cyclical Excess Capacity

Structural Excess Capacity

CoefficientOn

Foreign Demand F-Statistic

Coefficient on

Subsidy F-Statistic

South American (Agentina, Brazil, and Venezuela) -2.38*** 4.65**

  (pval=0.003) 9.97* (pval=0.015) 5.57**

Rest of Sample -0.57 (pval=0.003) 0.51 (pval=0.018)

  (pval=0.276)   (pval=0.686)  

SynopsisSynopsis

► Are excess capacity effects larger for High CVD Are excess capacity effects larger for High CVD products? products? NONO

► Are excess capacity effects different between OECD Are excess capacity effects different between OECD vs Non-OECD? vs Non-OECD? Cyclical NO, Structural YES.Cyclical NO, Structural YES.

► Are excess capacity effects different for South Are excess capacity effects different for South American vs Rest of Sample? American vs Rest of Sample? YES!YES! Coefficients on South American (Argentina, Brazil, and Coefficients on South American (Argentina, Brazil, and

Venezuela) are large and statistically important, while for the Venezuela) are large and statistically important, while for the other sample these are essentially zero.other sample these are essentially zero.

RESULTS SUGGEST THAT EXCESS CAPACITY RESULTS SUGGEST THAT EXCESS CAPACITY EFFECTS ARE LIMITED TO A FEW SOUTH EFFECTS ARE LIMITED TO A FEW SOUTH AMERICAN COUNTRIES AND THESE COUNTRIES AMERICAN COUNTRIES AND THESE COUNTRIES HAVE A COMBINED MARKET SHARE OF 3.6% IN HAVE A COMBINED MARKET SHARE OF 3.6% IN 2002.2002.

Summary and ConclusionSummary and Conclusion

► US steel largest user of special U.S. trade protection US steel largest user of special U.S. trade protection laws.laws.

► Justification is the need for protection from foreign Justification is the need for protection from foreign producers that are subsidized, and this leads to producers that are subsidized, and this leads to dumping in the US.dumping in the US.

► This paper separates short-run cyclical excess This paper separates short-run cyclical excess capacity from structural excess capacity.capacity from structural excess capacity.

► Initially find evidence of both cyclical and structural Initially find evidence of both cyclical and structural excess capacity.excess capacity.

► But, later find that the result is due to a very small But, later find that the result is due to a very small set of countries with small market shares.set of countries with small market shares.

► UNLIKELY THAT EXCESS CAPACITY HAS BEEN A UNLIKELY THAT EXCESS CAPACITY HAS BEEN A SIGNIFICANT FACTOR IN THE US STEEL INDUSTRY SIGNIFICANT FACTOR IN THE US STEEL INDUSTRY PERFORMANCE.PERFORMANCE.