Despite being poor in natural resources, the Korean steel industry grew throughout the 1970s and the 1980s and obtained comparative advantage. Trade theory suggests that an industry's comparative advantage derives from its relatively low unit labour costs (or, by the same token, high labour productivity) when capital and natural resources are freely traded. As discussed in Chapter 2, however, uniformity of unit labour costs (or the world price) in the trading world, which the theory suggests as an equilibrium, is subject to much friction and, hence, international differences exist in unit labour costs to produce homogenous products. This implies that the real world lies somewhere between the autarkic situation and the theoretical equilibrium situation.
In practice, differences exist in unit labour costs in steel-making. In the real world, moreover, there are also international differences in other factor costs per unit output. In this case, comparison of international differences in total production costs per tonne and costs of each input factor can make it possible to examine whether Korea has an overall comparative cost advantage in steel-making, which production factor(s) Korea's cost advantage has originated from, and how Korea's cost advantage has changed.^' In the analysis of financial statements of firms or industries, production costs per unit output comprise three major factor costs: employment costs, material costs and financial costs.^^ It is possible then to infer from the trade theory that a
21. Production costs per tonne at an industry level are in fact 'average' costs of many steel firms with different product mix, which may constitute another reason for the existence of international differences in estimates of unit production costs.
22. Employment costs comprise wages, pensions, benefits, allowances and other expenses for workers. Material costs include expenses for raw materials, energy, scrap, alloys, electricity, working machinery, other consumables and durables, and so on. Employment costs and material costs are both referred to as operating costs. Operating costs are also closely related to technology embodied both in labour and equipment such as labour productivity, fuel ratio and coke ratio. Financial costs
country with an abundant supply of a factor input (labour, raw materials or capital) has a certain cost advantage in use of the factor, ceteris paribus.
Factor cost advantage
Table 4.8 compares total production costs per unit crude steel among the world's major steel-competing countries. Even if the data do not reflect differences in product quality and product mix, they show that Korea along with Taiwan have enjoyed strong competitiveness in terms of production costs in ordinary steel-making since launching their major integrated mills - POSCO and China Steel, respectively." Recently, although the Korean steel industry still shows lower unit production costs than most steel-competing countries, except for Taiwan, its comparative cost advantage has been eroded substantially due to rapid rises in wage rates and continuous appreciation of its domestic currency since the mid-1980s.^'^
Table 4.8 shows that Korea enjoyed an extremely lower cost advantage in using labour than the other major steel-making countries. Even compared to other developing countries such as Brazil and India, Korea's employment costs per tonne were very low. Until the late 1980s Korea's employment costs per tonne of steel production were about 20 per cent of the costs averaged over the major international steel mills. As of 1990 Korea's employment costs per tonne were still US$60-120 less than those of Japanese, Australian and North American producers.
From the early 1980s, Korea along with Taiwan showed a prominent cost advantage also in use of various materials. In the period 1985-90, Korea's material cost advantage over major steel-makers in developed countries ranged from US$30 to US$200 per tonne. Material costs account for the largest shares (in general 50-70 per cent) in total production costs and, as shown in Table 4.8, the largest difference in unit
consist of interest costs and depreciation costs.
23. Meanwhile, some older steel-makers such as the United Kingdom and the United States, who had suffered from falling competitiveness in the 1970s and/or the early 1980s, show considerable improvement in cost advantage relative to other countries since the mid or late 1980s. Table 4.8 shows that, in 1989-90, these were the only countries to record average production costs per tonne of less than USS500 among the developed countries in Table 4.8.
24. The reduction in Korea's comparative cost advantage in steel-making may be due to rising wage rates and appreciation of the Korean currency and/or relative improvement in cost conditions in other countries in recent years. The effect of these factors was assumed in the estimates of production costs in dollar terms (Table 4.8). Close examination of the effects of these factors is a separate research topic, and is not explicitly treated in this thesis.
25. In this section, the cost data of each country are averages over their major steel firms, unless otherwise specified. POSCO is the only one included in the case of Korea. Other countries represented by one firm are Australia (BHP), France (Usinor-Sacilor), the United Kingdom (British Steel), Brazil (CSN), India (Tata Iron & Steel) and Taiwan (China Steel). The countries that include more than two firms are the United States (14), Japan (8), West Germany (6) and Canada (4). Two firms were included in the Mexico data until 1985, but one afterwards. For the names of firms included, see WSD, Financial Dynamics of 61 International Steelmakers, 1991.
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