Global Steel Trade; Structural Problems and Future Solutions

outstripped growth in domestic
demand. 23 The benefits of
industry coordination, in turn,
encouraged further capacity
increases (see box). 24
120
110
100
Japan Domestic
In effect, industry coordination
removed the threat of
bankruptcy that normally keeps
capacity expansion in check.
The end result was often the
polar opposite of the stated
policy of controlling production
and capacity levels: while
government-sponsored cartels
were supposed to control and
even reduce capacity—via a
reduction in production in the
short term and scrapping of
capacity in the long term—the
market insulation that resulted
90
80
70
U.S. Imports: Japan
60
Jan 97 Mar May Jul Sep Nov Jan 98 Mar May Jul Sep Dec 98
Sources: Japanese domestic price, Bank of Japan; U.S. imports from Japan price,
ITC Trade Dataweb.
3-22. Hot-Rolled Sheet Price Comparison: Japanese Domestic Price vs.
Price of U.S. Imports from Japan (Price Index: January 1997=100)
created a tendency toward capacity preservation and increases. Even as Japan continued its postwar growth
in the 1980s, experts acknowledged more and more that the pitfalls of industry collaboration, including
excess capacity, were becoming increasingly apparent. As noted by one observer in 1982:
One result of the MITI policies was to increase an industry’s capacity beyond what would be
prudent. And today, when the cushion of a cartel still exists, the reduction in total excess capacity
will be slower than when no collusion is permitted. 25
It is in this sense that coordination among producers has historically acted as a buffer against market
fluctuations, which may in turn lead to a lack of market exit and capacity levels higher than would otherwise
occur under more competitive conditions. Given the importance of maintaining capacity utilization in a high
fixed-cost industry such as steel, this can put pressure on supply, particularly during market downturns.
While such practices created distortions during Japan’s high-growth period, the real harm, both to Japan
and to its trading partners, occurred because these practices appear to have become more or less permanent
Cartels and Excess Capacity
The historical relationship between government-sponsored cartels and capacity is explained by one
observer, in a seminal paper on Japanese cartels in steel and other basic industries, as follows:
If the largest firms were to grow rapidly by adopting new technology that was usually larger
in scale than what it replaced, the firms had to produce more, often significantly more than
before, to make optimum use of the new technology. The problem was that such an
increase in productive capacity often tended to exceed the domestic demand and increases
in exports often did not occur swiftly enough. …If the rapidly growing firms were allowed to
engage in temporary “cooperative actions” to fix prices or limit output, no potentially ruinous
price-cutting competition would occur, threatening bankruptcies, and no loss in profits
would result, reducing the internal reserve needed for the next round of capacity expansion
enabling the firms to adopt even more advanced technology.
Chapter 3: Behind the Crisis—Japan 71