Changing comparative advantage and the restructuring of the international steel industry

Abstract

This dissertation studies sources of comparative advantage from both a theoretical and an empirical point of view. It examines changes in the international steel industry over the past two decades or so and analyses their major underlying economic causes. It emphasises particularly the effects of technological difference, technical progress and demand, as well as factor endowment (capital/labour ratio), on the relocation of the international steel industry. The thesis examines the historical evolution of leadership in the industry and investigates the Chinese steel industry within the context of international relocation of the industry. Countries specialise and trade with each other according to their comparative advantage. A country's comparative advantage is determined by a variety of sources. Conventional trade theories stress one main type of comparative advantage, but this thesis takes an eclectic view and attempts to synthesise a number of theories in the explanation of trade specialisation in steel products. It argues that technology and factor endowment are the major determinants of comparative advantage, and that technical progress and changes in factor endowment can alter comparative advantage. Non- homothetic demand has both direct and indirect effects on trade. The indirect effect of demand on trade arises mainly from asymmetric information between domestic and foreign firms about the prospects of domestic and foreign markets, and the effect of this on technology (and technical progress). The thesis uses the international steel industry as a case study to verify empirically theoretical arguments about the sources of comparative advantage. Using panel data for 46 economies over the period 1967-90 for the estimation, the following results were obtained. Factor endowment has a role in steel production, although its effects are not linear. There are large differences between countries in levels of both technology and technical progress. In fact, a large part of the differences in steel production and trade in steel is accounted for by differences in technology and technical progress. Demand for steel is closely related to income level but is non-homothetic. Demand affects steel production and net trade in steel positively. There are large differences in demand patterns for steel across countries as well. These are a consequence of differing economic structures, and reflect the nature of steel as an intermediate input to other sectors. When related to factor endowment (capital/labour ratio), net steel trade exhibits complex patterns that cannot be satisfactorily explained by the factor proportions trade theory alone. The reason for this lies in differences between countries in technology and demand. The empirical evidence from the international steel industry indicates that factor endowment, technology level and demand structure are the major determinants of comparative advantage in the steel industry. Technical progress and changing factor endowment were the major factors driving the relocation of the international steel industry during the period studied. The thesis also examines the historical evolution of leadership in the international steel industry from the point of view of per capita steel production. In line with changes in comparative advantage in steel production, leadership in the steel industry passed from the United Kingdom to the United States in the late nineteenth century, and then to Japan by about the end of the 1960s. Leadership will soon move to dynamic developing economies such as Korea and possibly China. Leadership in steel production was associated with a country's leadership in overall economic development until the middle of this century. As the role of the steel industry in the national economy has changed, however, leadership in steel no longer means leadership in economic development. The Chinese steel industry has played a significant part in the relocation of the international steel industry in the past decade. Although China's per capita steel production is low, it was the world's largest crude steel producer in the first quarter of 1994. This was in spite of the lag in economic development that took place from the late 1950s to 1976, which adversely affected the growth of China's steel industry. Economic reform and integration with the world economy is expected to facilitate rapid industrialisation in China. Some Chinese steel firms now use the world's best technology and are in some respects world leaders in performance. This indicates that the Chinese steel industry is catching up technologically. With its rapid economic growth and improving comparative advantage in steel production, the Chinese steel industry is already following the growth path of other Northeast Asian economies. The findings of the thesis indicate the importance of technology, technological learning and human capital accumulation in steel production and economic growth, and the significance of taking these factors into account when studying international trade. The lack of significant technical progress in many developing economies highlights serious market failures with respect to technological learning and human capital accumulation in these countries. It is argued that economic policy needs to be formulated to encourage not only static efficiency in resource allocation but also dynamic efficiency of resource allocation, so as to overcome market failures. The dissertation suggests that the establishment of an international or regional steel community may assist in more optimal resource allocation in the international steel industry.