Industry and entrepreneurship

General Assembly of the World Steel Association - Opening Remarks

 

Remarks by Angel Gurría,

OECD Secretary-General

16 October 2017, Brussels, Belgium

(As prepared for delivery)

 

 

Ladies and gentlemen,


Thank you for inviting me to this distinguished event. You meet at a critical time for the steel business as there is a lot at stake for the months to come.


Let me start with the big picture.


There are some welcome signs that our economies may finally be escaping the low growth trap. The OECD projects global growth to increase to around 3.5% in 2017 and 3.7% in 2018, up from 3% in 2016. Consumer and business confidence have been strengthening, and trade and investment have started to improve at last.


But we are not out of the woods yet. Employment rates are improving, but wages aren’t picking up: real wages have only grown by 0.2% per year since 2008 on average in OECD countries. We are also faced with vulnerabilities from rapid credit growth in many emerging economies. In China, non-financial sector credit exceeds 200% of GDP, and in Russia and India non-performing loans represent over 9% of gross loans.


The other concerning trend is that the benefits of growth have been far from evenly spread domestically. The poorest 10% of households in OECD countries have not yet regained the purchasing power they had back in 2007. Moreover, the average income of the richest 10% across the OECD area now representing more than nine times that of the poorest 10%, up from seven times 25 years ago.


At the same time, sluggish productivity gains continue to undermine the capacity of the economy to engender sustainable growth. Recent signs suggest that the global IT market has regained momentum. But while firms at the global frontier have done well, raising their productivity by about 3% per year over the last 15 years, the rest of the economy has not followed suit, barely registering any productivity gains. The broken ‘diffusion’ machine’ will need to be fixed for these signs of capital upgrading to translate into higher long-term growth, wages, and lift everyone’s living standards.


In this context, it is critical to re-boost trade.


We are seeing a shift in geographical patterns of trade and the different growth rates of goods vs. services.


Goods trade is larger, but growing more slowly than services trade, and has shifted away from OECD economies toward China and Dynamic Asia.


China and Dynamic Asia represented 11% and OECD countries 80% of world goods exports in 1995 while they represent now 24% and 59% respectively. But global trade has vastly expanded over the same period, as has the volume of exports by OECD countries: the larger and more integrated global market has brought opportunities to advanced as well as emerging economies.


At the same time, we are seeing that, while trade is picking up, with global trade growth projected to average around 4% per annum through 2017-18 – we are still experiencing the longest period of stagnation in the ratio of world trade to GDP in 70 years.


This slowdown is in part cyclical, linked to lacklustre global demand and the post- crisis retrenchment in global private investment that weakened trade in capital goods. But structural factors are also at work.


It could be due to a rebalancing of the Chinese development model toward domestic demand and toward services: China’s booming investment has been a major driver of global growth. But it has started to reorient its growth model to manage risks and imbalances, and to move towards a more moderate and sustainable path – as it should.


More consumption-driven growth will mean rebalancing from external to internal demand, and from manufacturing to services. The transition is already under way: while services accounted for only a third of GDP 20 years ago, they now represent over half of the economy.


And of course, new technologies and digitalisation may be a game changer, not only for production but also for trade. It may make it cheaper to engage in GVCs thanks to steadily faster and cheaper communication tools and by making it easier to operate longer and more complex GVCs.


But, it could also reduce the international fragmentation of production: Thanks to information technologies such as robotics, artificial intelligence or 3D printing, companies may bring more production home and rely less on long and complex GVCs.


What do we see in the steel sector?


Steel is increasingly becoming part of GVCs as steel production and trade is more and more about value added, rather than simply about volumes and tonnes.


Moreover, the generation of value along the steel value chain is progressively linked with the quality of goods produced.


This ultimately depend on firms investments in innovative production processes and new and higher quality products. Evidence from patent data indicates that the steel sector is far from dormant, with significant innovation in terms of both production processes and product characteristics.


Digitalisation can play a key role. We are already seeing smart production systems being adopted at steel mills: for example, automatic control of steel furnaces and mills are fostering reductions in fuel requirements and boosting productivity. Digitalisation can also help enhance the safety of steel workers, the biggest priority for all steel companies today.


And all of this pays off: Steel firms that have focused on quality and less on volume have typically weathered downturns more effectively than other firms.


In a nutshell, trade growth is a moving target and any measures to reboost trade should take into account the changing trade patterns. But we shouldn’t lose sight of the ultimate goal. The OECD does not champion trade for trade's sake, but as a way of improving people's lives.


So, what policy package do we recommend?


We need an integrated approach – a comprehensive policy package.


One that will ensure trade benefits all: looking at lifelong learning and skills, social protection systems that get people back on their feet and prevent lasting hardship, investment in infrastructure and people.


We also need domestic policies that encourage opportunity, innovation and competition. We need to make it easier for SMEs. Cut the tariffs, make trading cheaper. Remove the barriers to services that raise costs for all sectors. Regulate efficiently and fairly to promote competition. Keep credit flowing.


For the steel sector, policymakers should ensure that the right framework conditions and incentives are in place so that companies focus and invest more on product quality and industrial upgrading as well as the identification of new market opportunities.


And finally we need to make sure everyone plays by the rules!

  • This will require more transparency and accountability in the implementation of policies that have global spill-overs.

  • Second, we need to make sure that key players in globalisation, in particular multinational corporations, are conducting their operation in a responsible manner. We are proud that more and more countries join the OECD Guidelines for multinational enterprises. These Guidelines are relevant for the global steel industry as they help companies to respect human rights and to avoid contributing to conflict through their mineral or metal purchasing decisions and practices.

  • Third, fair and effective “rules of the game” need and can be defined. With the support of the OECD, the G20 successfully demonstrated it in the area of tax with the move towards Automatic Exchange of Tax Information and with the continuous advancement of the G20/OECD BEPS agenda. More needs to be done however, for instance, in the area of anticorruption, where all countries should consider the OECD anti-bribery convention as a powerful instrument against foreign bribery.

  • Finally, we need collective responses to forces such as excess capacities that can destabilise sectors, firms and workers. 


And the steel sector is a case in point.


While there are some positive developments as excess capacity in the steel sector has eased this year from its high of 750 million in 2016, it still remains considerable. Capacity utilisation rates in the sector are only just over 70%. Moreover, over the longer term, demand growth is expected to remain sluggish, and structural imbalances may continue to plague the market. The recent “bounce” in prices may well be a temporary phenomenon.


So, there is still a lot to do and steel is part of these sectors which will be particularly affected by the changing trade patterns and for which the policy packages described above will be crucial. Several actions should be taken:

  • First, address the subsidies: There are many subsidies and other government measures that distort steel markets. Let’s face it: too many of them lie outside the scope of the WTO. Countries should stick to the principle of refraining from market-distorting subsidies and other types of support measures to the steel sector.

  • Second, all companies should be treated equally, avoiding distortions which can favour state-owned enterprises. Let’s put in place a level playing field in the steel industry.

  • Third, governments also need to encourage adjustment in the sector. Countries need to ensure that the framework of incentives for firms in the sectors are such that non-viable firms exit the steel sector. This includes effective bankruptcy legislation, support for displaced workers, and in some cases alleviating the burden of closure for environmental and other reasons.


We are convinced at the OECD, that a multilateral approach is the most promising way to address these challenges.


This is what we aim to achieve in the Global Forum on Steel Excess Capacity.


Decided under the Chinese Presidency and put in place under the German Presidency with our support, this newly established forum faced a litmus test at the G20 Leaders Summit in Hamburg when Leaders had to decide between a unilateral or multilateral approach.


For me, it was one of the biggest success at Hamburg: Leaders decided to uphold a multilateral approach to the challenge of steel excess capacity, including by accelerating the work of the GFSEC.


Don’t get me wrong: there is a lot of work to do and we must deliver.


But the OECD is committed, as facilitator of this Forum, to bring key players together to find a common solution.


And to make all this happen, we count on you, the business community, as you play an important role to “fix” the challenge of steel excess capacities by leading by example, by advocating for more responsible policies, and by integrating the new trade patterns in your business model.


And keep in mind: While the temptation to resort to protectionism in the sector is great in the face of excess capacity, the future of steel rests with innovation and openness.


This would be a major contribution to revive trade and growth and more importantly to head towards a more inclusive globalisation that can truly work for all.

 


See also

OECD work on steel

OECD work on trade

 

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