Given the assumptions made in the input-output analysis, Table 5.4 suggests that increasing domestic demand for steel followed by growth of the steel-consuming industries constitutes one of the main sources of expansion of the steel industry in a rapidly developing country. In the short-run, however, a sharp rise in domestic demand will reduce the volume of net trade, if adjustment to the rise through expanding production capacity is less flexible in the short-term than reducing exports and/or increasing imports.
The short-run relationship between domestic demand and net trade can be explained by using the identity of total demand and total supply. The identity at given
11. In the early period of POSCO from 1973 to 1979, around 20 to 38 per cent per annum of total shipment was for exports. The export shares of total shipment in the first half of the 1980s (1980-85) were between 31 and 46 per cent per annum. The shares dropped to less than 30 per cent afterwards (obtained from POSCO data base).
12. This information was obtained by interviewing personnel in POSCO and other steel-making and steel-consuming companies in Korea.
13. For example, the shares of special steel in total crude steel output in Korea was 2.3 per cent in 1977 and 2.6 per cent in 1984, while the figures in the United States, Japan and EC were 13.5 to 18.5 per cent in 1977 and 13.5 to 22.0 per cent in 1984. See Yang (1986) for discussion of development of special steel-making in Korea.
14. The term 'domestic demand pressure' can be defined in various ways according to the purposes of the different studies. In this thesis, it is defined simply as the short-run situation where domestic demand increases more rapidly than production. See Zilberfarb (1980) for other definitions.
point of time t, DD^ + Xt = Qt + Mt, can be written as:
DDt = Qt-NTt (5 1) where NTt = Xt - Mt and 'NT' stands for net trade. Taking the first difference, the identity (5.1) becomes
ADDt = AQt - ANTt (5 2) where A is the difference operator, and hence A At = At - At.„ At = {Qt, DDt, NTt}. In a newly industrialising country, both domestic steel demand and production increase very rapidly in general. In this case,
ADDt>0 => AQt-ANTt >0; and AQt > 0 => AQt > ANTt
where the sign of ANTt could be either positive or negative depending on the sizes of shifts in steel production and consumption between time t-l and t. However, the presence of domestic demand pressure, which can be defined as ADDt > AQt > 0, leads to reduction of the net trade size (ANTt < 0). Then the short-run relationship at time t (IRt) between domestic demand pressure and trade performance can simply be expressed as:
(5.3) Domestic demand pressure can exist in a rapidly growing economy, where continuing industrialisation brings about a very sharp rise of domestic demand for steel but synchronous upward adjustment of the steel production level is limited to the current production capacity. In an industry such as steel, increments to the existing capacity or construction of new plants requires a huge amount of capital investment and long-term planning. The relationship (5.3) may hold even when domestic demand falls.
Table 5.5 provides the IR^ values in major steel-making countries and suggests that, in the 1970s and the 1980s, the relationship (5.3) is more applicable in developing countries, where both production and consumption rapidly increased. In most years of the 1970s and 1980s, domestic demand for steel in developing countries grew rapidly, instantaneously reducing net trade volumes despite continuous increases in production (IRf in Table 5.5).'^ Improvement in their trade balances took place through two channels. One was when domestic demand fell, though this was only occasionally. In this case, the relationship (5.3) still held in these countries due to the steady rise in
15. For example, when ADDt < 0 but AQt > 0, then ANTt > ^Qt > 0. Even if production also falls, net trade may increase and the relationship (5.3) will hold when ADDt < AQt < 0.
16. For the changing patterns of steel production, consumption and trade in major steel-making countries, see Tables 5.1,4.4b and 4.5.
120
Table Ratios between changes in domestic demand and net trade, crude steel equivalents in selected countries and years, 1968-90
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 -0.7 -1.3 (-1.5) (1J) (0J) -0.5 -0.7 -0.5 (-0.9) (-0.8) U -1.1 (-1.4) @J @J (10) -0.4 -0.6 (-0.2) -0.2 -0.1 (-0.1) (®J) -0.6 (-0.5) M (-129) -0.8 -1.4 10 (-0.9) (-0.4) -0.1 (-0.5) -0.9 (®J) (i.7) 12 (-0.8) (O) (17) (-1.3) -3.1 -0.4 (-2.4) -0.7 7A (-0.3) (0J) 23 (MJ) -0.3 (-6.4) -0.6 (-2.2) (-0.7) (Hi) |J (§J) -0.3 -1.6 I J -0.6 (-1.8) -0.2 -2.0 -0.2 -2.3 -0.7 -0.6 IR^ = (ANTt/ADD,) : Australia -0.6 -1.3 -1.1 Japan -6.3 (0J) -0.3 US -0.7 (-0.2) 1.1 0.1 Canada (-0.2) 1.1 -0.2 UK -0.1 10 -0.3 Germany -0.4 -1.6 -0.2 France S.1 0J -0.6 Italy u -0.6 0.0 Korea -0.7 -0.6 W Taiwan -0.9 (-1.4) 0J (-2.0) China 0J (-1.4) 0J U India (-1.1) 0.§ -1.6 -0.6 Turkey (-1.1) 0.§ -0.7 11 Brazil -0.2 -0.2 ®J Mexico 0J -0.1 0.0 Categories of IR, -0.2 0.1 -0.5 (-1.7) (-3.8) -0.4 0.2 §.0 -0.6 -0.9 -0.3 0.S -0.8 (-3.0) -1.1 -0.8 0.11 -0.4 (-0.1) 10 -0.3 (-24) -0.2 -0.6 0.1 (-3.2) -2.6 -0.5 (-6.3) -0.9 (-0.2) (-3.2) -0.9 -0.7 -0.2 -0.8 -0.8 -0.6 (-1.2) -0.6 l i -0.6 1 ? (-3.3) (-3.6) -0.9 (-2.6) 110 -0.1 (-0.8) 0J -0.7 (-1.7) (iJ) -0.5 (-1.1) -0.4 -1.0 (-0.8) -0.4 (-0.9) -0.7 -0.1 Conditions eg. ^
mf: IR,<0 ADDt>0; ANTj<0; AQ,>or< 0 (ADD^>AQ,)= -0.5 IR^ IR^<0 ADDt<0; ANTi>0; AQ^>or< 0 (AQt>ADDJ= (-0.5) IRt: IRt > 0 ADD^ > 0; ANT^ > 0; AQ^ > 0 (AQ, > ADD, >0) ®.i m f : IR, > 0 ADDt < 0; ANT, < 0; AQ, < 0 (0 > ADD, > AQ,) (iJ)
Notes a The production data base on crude steel output and the trade data are from semi-finished and
finished steel figures converted to crude steel equivalents.
b Examples of the IRt values in the table.
c If the sign AQt is negative in the case of 11^, then 0 > AQt > ANTt. In the case IRt, if the
sign AQt is positive, then ANTt > AQt > 0.
Sources IIS I, Steel Statistical yearbook, various issues.
production (IR?). The other was when AQt (> 0) was greater than ADDt (> 0) as in the case IRt^. This was intermittent and may have been the result of gradually growing comparative advantage in steel-making and a long-run outcome of the industries' or firms' efforts to adjust production capacity upward in response to continuously increasing domestic demand.
By contrast, developed countries experienced little domestic demand pressure but many periods of declining domestic demand and production after the mid-1970s (either IR? with AQt < 0 or IR?; see Table 5.5 and also Tables 5.1, 4.4b and 4.5). Even in many of the years when there was domestic demand pressure (IRf), their steel output fell, in contrast to developing countries where the situation of IRt^ was generally accompanied by rising output levels.
finished steel products in Korea, 1965-90 (thousand tonnes) 1965 1966 1%7 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 ADD, ADD, 90 143 289 278 379 150 253 423 987 229 -632 1190 1670 AQ, 35 58 121 243 279 262 181 402 911 447 -392 1069 1155 ANT, •55 -85 •168 -35 -100 112 -72 -21 -76 218 240 -121 -515 ART, -0.07 -0.23 -0.10 0.00 0.07 0.14 0.19 0.13 0.03 0.19 0.11 -0.04 -0.23 ARCAj -0.10 •0.11 -0.09 0.09 0.04 0.11 0.02 0.04 0.03 0.07 0.05 -0.02 -0.07 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 ADD, 1610 254 -1197 1432 -970 1946 2009 e n 997 2400 719 3360 3443 AQ, 1395 1133 373 2262 744 1231 1338 P EI 1376 2199 1381 2869 2780 ANT, -215 879 1571 831 1714 -716 -670 1 2> 379 -201 662 -491 -663 ART, -0.01 0.34 0.77 0.41 2.21 -1.72 -0.70 0.10 0.16 -0.22 0.29 -0.40 -0.35 ARCAj 0.00 0.10 0.16 0.04 0.14 -0.10 -0.07 -0.00 0.01 -0.03 0.02 -0.04 -0.04
Notes a AG, = 6 , - where t = 1965, 1966 1990 and 6 = {DD, Q, NT, RT, RCA}
The values of R C A s were negative until 1979. After that, RCA, > 0. Bold-faced when the signs of ANTt and ARCA, are different,
c R T j = ( X , / M O = ( X / M ) j a n d A R T j = ( X / M X - ( X / M ) , . , . Bold-faced when the signs of ADD, and ARTtare the same.
d A Q t > A D D t > 0 , and ANT, > 0, where shaded. Otherwise, the relationship (5.3) holds.
e The ratios (ANT, / ADD^), which can be calculated in this table, and the IR, values for Korea in Table 5.5 are not necessarily equal, since the figures in this table are based on finished steel production and trade data.
Source Table 3.1.
finished steel was under pressure from sharp shifts in domestic demand to reduce the size of net trade. Korea achieved the highest increase in steel consumption rates in the world during this period (Table 5.1). During the period 1965-90, Korea's domestic demand for finished steel rose every year, except in 1974-75, 1979-80 and 1981-82. F r o m the mid-1970s, the annual increase was more than one million tonnes for most years and, in the period 1989-90, the annual increments were more than 3 million tonnes.
Table 5.6 reveals that, except for 1974-75, K o r e a ' s finished steel output also grew, with the size of increments rising almost every year in the period 1965-90. Nonetheless, the annual increments in domestic demand were greater than in production in most years, and these reduced the size of net trade (X-M, except for those years with shaded cells in Table 5.6). By contrast, the balance of steel trade improved in the years with falling domestic demand (the case ). These data confirm the existence of the negative short-run relationship (IRt< 0) between domestic demand pressure and trade performance in the Korean steel industry in most years during the period, even though
122 the industry grew rapidly and, in spite of rising domestic demand, an increase in net trade followed large increments of output in several years.
Table 5.6 also provides changes in export-import ratios (ARTO and a revealed comparative advantage index (ARCAt), showing shifts in Korea's steel trade performance following the short-run changes in domestic demand.Even if a fall in the size of net trade (NT in Table 5.6) does not necessarily mean a drop in either RCA or RT measures, or vice versa, Table 5.6 shows that, with a few exceptions in the late 1960s and the early 1970s, falling (rising) net trade was also associated with falling (rising) values of RCAs and RTs in the Korean steel industry. This relationship was fairly consistent from the mid-1970s. In particular, an almost continuous drop in RCA and RT values from 1982 corresponded to a substantial fall in net trade due to rapidly rising domestic demand by around 2 or 3 million tonnes per annum in the periods 1982- 83, 1983-84, 1986-87 and 1988-90 (see Table 5.6). This implies that, even though the fall in comparative advantage, measured by an RCA index, in Korea's steel trade in this period basically resulted from increasing production costs relative to other countries (see Chapter 4), it can also be attributed to the impact on net trade of sharply increasing domestic demand relative to production expansion. The Korean experience shows that, in the short run, the pressure of sharply increasing domestic demand has a negative effect on trade performance measured either in terms of the size of net trade or the export-import ratio, even when the country currendy has comparative cost advantage in production.
LONG-RUN RELATIONSHIP BETWEEN STEEL PRODUCTION, CONSUMPTION