Can exporting resolve overcapacity? Evidence from Chinese steel companies

The global overcapacity in the steel sector has triggered growing trade disputes and tensions worldwide. However, it is controversial whether steel overcapacity should be a systemic trade concern and if exporting can resolve steel overcapacity. This paper investigated the nexus between exporting and overcapacity at the firm level. We estimate a measure of capacity utilization (CU) for a large sample of Chinese steel companies. By statistically comparing the estimated CU distributions, we found that, before exporting, exporters have more excess capacity than non-exporters. Moreover, we found that exporting has no significant impact on a firm's CU ex-post. As steel overcapacity has become a global issue, the weak demand in the export markets is far from being adequate to absorb excess capacity and improve the capacity utilization of exporting firms. Our study implies that encouraging export cannot act as a strategy to resolve overcapacity, although China's steel production overwhelmingly feeds the country's domestic market.