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THE INDUSTRIAL POLICY OF JAPAN: THE CASE STUDY OF IRON AND STEEL INDUSTRY

NaslovTHE INDUSTRIAL POLICY OF JAPAN: THE CASE STUDY OF IRON AND STEEL INDUSTRY
Publication TypeBook
Year of Publication2018
AuthorsĐapo, E, Riđić, O
Volume1
Edition1
Number of Volumes1
Pagination130
PublisherDobra knjiga
Place PublishedSarajevo
ISBN Number978-9958-27-438-1
Accession NumberCIP 669.1(520)
Other NumbersCOBISS.BH-ID 25883654
Abstract

This book is concerned with the development of iron and steel industry
in Japan after Second World War (WW2). This industry was a basic,
fundamental industry, which was the key ingredient of the
modernization of Japan. Understanding the Japanese development is
important for several reasons: First, Japan became leading nation in
production of iron and steel although it is a resource scared country.
Japan took leading position because of the technological advancement
in that industry, as well as due to the various government protectionist
interventions that provided the time for technological improvements.
Second, it is very important for the society to cope with the internal and
external environment and provide for the welfare of their people.
Japan’s economic development remains a model for many developing
countries proving that there is no meaningful and sustainable
industrialization and economic development without the development
of some basic industry. Therefore, it is extremely important to
understand how Japan achieved what it has been able to.
After WW2, Japanese government has played an important role in
nurturing, supporting and developing certain industries and creating the
industrial structure of the country. Government played the crucial role
in development of economic and technological infrastructure, in
providing exchanges of information between private agents, as well as
protecting certain industries from foreign competition and enabling
Japanese companies to acquire the time to learn and gain the
experience, adopt technologies and become competitive, not just at
domestic, but at the international market.
xxxxiiiii
In the economic literature, there are a lot of arguments for and against
the government’s protection.
However, all economists agree that there is a need for the evaluation of
the protectionist measures. In that sense, this book will provide an
explanation for the protection in Japanese iron and steel industry, as
well as the evaluation of the protection.
Japanese economic development after WW2 has been, and still is, a
topic of major interests in the economic literature. Knowing what
happened in Japan gives the contribution to our understanding of the
economic growth, in modern era, as well. This book, therefore, can be
seen as a major contribution to the economic development theory.

URLhttps://www.researchgate.net/publication/326010323_THE_INDUSTRIAL_POLICY_OF_JAPAN_THE_CASE_STUDY_OF_IRON_AND_STEEL_INDUSTRY
Refereed DesignationRefereed
Full Text

THE INDUSTRIAL POLICY OF JAPAN:
THE CASE STUDY OF IRON AND STEEL
INDUSTRY
Edita ĐAPO
International University of Sarajevo (IUS)
and
Ognjen RIĐIĆ
International University of Sarajevo (IUS)
Dobra knjiga – Sarajevo, 2018.
THE INDUSTRIAL POLICY OF JAPAN:
THE CASE STUDY OF THE IRON AND STEEL INDUSTRY
Edita ĐAPO
International University of Sarajevo (IUS)
and
Ognjen RIĐIĆ
International University of Sarajevo (IUS)
with the Forewords by
Assoc. Prof. Dr. Hasan KORKUT
Assoc. Prof. Dr. Mehmed GANIĆ
Assoc. Prof. Dr. Vjekoslav DOMLJAN
Publisher
Dobra knjiga, Sarajevo
CIP - Katalogizacija u publikaciji
Nacionalna i univerzitetska biblioteka
Bosne i Hercegovine, Sarajevo
669.1(520)
ĐAPO, Edita
The industrial policy of Japan : the case study of iron and steel
industry / Edita Đapo, Ognjen Riđić. - Sarajevo : Dobra knjiga, 2018. -
XXII, 108 str. : graf. prikazi ; 21 cm
Bibliografija: str. 87-96.
ISBN 978-9958-27-438-1
1. Riđić, Ognjen
COBISS.BH-ID 25883654
List of Figures
Figure 1
The Industry Life Circle......................................................... 51
Figure 2
Labor Productivity in Major Countries............................... 61
Figure 3
Effects of the Trade Protection in the Import Market.........73
Figure 4
Effects of the Trade Protection in the Domestic Market..... 74
iii
List of Tables
Table 1
Changes in Production, Import and
Export in Iron and Steel Industry after WW2..................22
Table 2
Prewar and Postwar Crude Steel’s Production
of Major Countries................................................................53
Table 3
Labor Productivity in Major Countries; Yearly crude
steel production expressed in metric tons divided
with number of workers.......................................................60
Table 4
Domestic Prices in Major Countries..................................62
Table 5
Average Costs of Production and Average World Price...64
Table 6
Prices of Domestic Finished Steel Products.......................68
Table 7
Value of Domestic Consumption........................................78
Table 8
Consumers’ Surplus Loss and Gain and
Tariff Revenues......................................................................79
iv
Contents
List of Figures......................................................................... iii
List of Tables............................................................................iv
Foreword Nr. 1 of the book...................................................ix
Foreword Nr. 2 of the book...................................................xi
Foreword Nr. 3 of the book..................................................xv
Preface....................................................................................xxi
Chapter I
Introduction........................................................................... 1
1.1 Introduction.........................................................1
1.2 Previous Evaluation of the Industrial
Policy in the Iron and Steel Industry...............4
Chapter II
Japanese Industrial Policy...................................................... 8
2.1 Definition of the Industrial Policy....................8
2.2 Rationale for the Industrial Policy................. 10
2.3 Criteria for Targeting in Japan........................12
v
Chapter III
Industrial Policy towards
the Iron and Steel Industry...................................................14
3.1 Development of the Iron and Steel Industry........... 14
3.2 Declining Costs of Production..................................15
3.3 Analysis of the Protection Measures........................19
3.4 The Influence of the Economic Policies
of the United States of America and
the World Bank to the Industrial Development
of Japan’s Iron and Steel Industry.............................24
3.5 The Origins of Karoshi and Trends in Political
Economy in Japan.......................................................25
Chapter IV
Strategy of the European Economic Community (EEC)
and European Union (EU) regarding steel........................... 27
4.1 Phases in the Development in the EEC
and EU’s Steel Industry.........................................27
4.2 The reasons for lagging behind of
the EEC and EU’s industry..................................34
4.2.1 Fiscal disparities.............................................38
4.2.2 Technical protectionism...............................39
vi
4.2.3 Imperfect customs unions............................39
4.3 The lack of restructuring process..............................39
4.4 Other reasons for the EU lagging
behind and the loss of competitive
power in steel production...........................................45
Chapter V
Infant Industry Argument................................................... 48
5.1 Definition of an Infant Industry..........................48
5.2 Infant Industry Argument and Expectation......57
5.3 Criteria for Removal of Protection......................59
Chapter VI
Evaluation of the Industrial Policy...................................... 70
6.1 Trade Protection.....................................................70
6.2 A Partial Equilibrium Approach to
the Measurement of Trade Barriers.....................71
6.3 Methodology of Calculating
the Welfare Effects of Trade Barriers.................. 74
6.4 Calculating the Welfare Effects
of Trade Barriers in the Iron and
Steel Industry of Japan..........................................77
vii
Chapter VII
Conclusion............................................................................81
References...............................................................................86
Appendix I
Steel Production in key markets
for 1967, 2000 and 2016........................................................96
Appendix II
Steel Production and its use – World’s geographical
distribution, year 2006..........................................................99
Appendix III
Steel Production and its use – World’s geographical
distribution, year 2016........................................................102
Appendix IV
Major World’s Importers and Exporters of Steel,
year 2016...............................................................................105
Appendix V
True Steel Use (TSU) in the World,
years 2009 - 2015.................................................................108
Appendix VI
Major Indirect World’s Steel Importers and
Exporters, YR 2015.............................................................. 110
viii
xixi
Foreword Nr. 1 of the book:
“The Industrial Policy of Japan –
The Case Study of Iron and Steel Industry”
Understanding Japanese industrial policy after Second World War
(WW2) and development of Japanese iron and steel industry is
important for several reasons. First, it is important to understand, how
Japan, as a country with scarce resources and generally obsolete
technology managed to become main world iron and steel exporter.
Second, it is crucial to understand which factors affected Japanese
technological development because Japanese model of development
can serve other countries, especially developing countries, in order to
improve the relationship between government and industries, and to
master and improve their technologies. Third, it is essential to
understand the logic of the protectionism in the case of an infant
industry.
This book provides a detailed analysis and historical explanation of
development of iron and steel industry in Japan. Authors examined
postWW2development of Japanese iron and steel industry and
explained problems and issues of that time. The book’s main
contribution is in the evaluation of protectionist policies that Japan had
used, with valuable discussion as to why the industry needed
protection, when the protectionist measures could be removed, and
what were the costs and benefits of protection.
xxii
Furthermore, this book provides the contribution to the economic
growth theory as it broadens our understanding of Japanese success
after the WW2. The theoretical exposition is descriptive, while the
application of existing models is used in order to evaluate the costs and
benefits of protectionist policies.
The key point of the book is the explanation of the development of iron
and steel industry, through easy to understand examples. Book
describes the importance of the institutional system that was developed
by the Japanese government, competition and innovation within the
industry, as well as the justification of protectionist policies.
The overarching role of the foreword it to outline as to why the book is
important and now it is on the reader to read it, understand it and use it
in the best possible way in order to measure, analyze and improve the
future.
Associate Professor Dr. Hasan KORKUT,
Dean of the Faculty of Business Administration (FBA)
International University of Sarajevo (IUS)
xxiiii
Foreword Nr. 2 of the book:
“The Industrial Policy of Japan –
The Case Study of Iron and Steel Industry”
The book titled “The Industrial Policy of Japan – The Case Study of
Iron and Steel Industry” by Assist. Prof. Dr. Edita Đapo and Assist.
Prof. Dr. Ognjen Riđić represents an important contribution to the
analysis of an infant industry in Japan after World War II (WW2),by
utilizing the specific protectionist measures imposed by the Japanese
government. These measures were the following: 1.) Encouraging
investments in the industry through strategic supply of funds and tax
reduction, 2.) Promoting technological changes and export through
targeted tax reduction provisions, 3.) Importing strategic technologies
and 4.) Strategically protecting the industry from the influences of
foreign competition.
In this academic work the authors discuss that it is difficult for an
industry to become established without temporary protection by the
government. Which industry should be promoted depends not only on
the industry itself, but also on the industrial structure of the country, as
well as on the structure of demand in the world, as a whole. This book
is very useful and can be used as the literature for students who study
this area of economic development at undergraduate, graduate and
post-graduate level. The book, composed of six chapters, opens some
very intriguing questions of development of a particular iron and steel
industry, in a country largely destroyed by war. In the first chapter the
authors provide a detailed review of the findings of previous studies.
xxiivi
The second chapter presents the definition of the industrial policy and
its economic significance.
The third chapter provides an analysis of the iron and steel industry’s
development. The fourth chapter consists of the explanation of an
infant industry argument. The last chapter deals with the evaluation of
the protectionist policies in the sense of national economic welfare. The
last, sixth chapter, presents the conclusion.
The authors list dilemmas, which Japanese government faced and at the
same time provide a detailed analysis of measures, which were aimed
to protect the above mentioned industries. In addition, the authors
analyze in detail, the differences between the economic loss and gain in
Japan’s domestic market, as the result of the imposed protectionist
government policies.
The economic literature points out that it is not easy to evaluate validity
and effectiveness of an infant industry’s protection policy. Among the
economists there are many pro and contra arguments regarding the
imposition of the economic protectionist policies. In this sense, this
very interesting book provides an explanation for the protection in
Japanese iron and steel industry, as well as the evaluation of the
protection.
Besides the analysis of the government’s protectionist measures, the
authors, also, additionally emphasize, two aspects: 1.) Assistance of the
United States’ government and World Bank (WB) in development of
post WW2 Japan and 2.) Practices of “karoshi” dedicated work with
and without pay (i.e. with paid and unpaid overtime), which in many
instances shifted the precarious Human Resource Management (HRM)
xxivii
concept of work-life balance (W-L-B) in a negative direction, where
family life, personal life, leisure, community involvement, physical and
mental health were all in some way, shape or form harmed and
victimized by “karoshi” practices.
Japanese economic development after WW2 has been and still is a
topic of major interests in the economic literature. Knowing what
happened during industrial development in Japan gives the contribution
to our understanding of the economic growth in modern era, as well.
By skillfully applying these measures, Japan managed to, in a relatively
short period of time, become the largest producer of iron and steel in
the world. The so called “Japanese wonder” was an example for many
other countries and economies in the world. This book can be seen as a
major contribution to the economic development theory and I
recommend it warmly for the publication….
I do hope that this book will especially assist the students who study
this economic area, since it is full with examples and the text, by itself,
is very clear, well laid out, concise and easy to read and understand.
Assoc. Prof. Dr. Mehmed GANIĆ,
Department of Economics and Management,
Faculty of Business Administration (FBA)
International University of Sarajevo (IUS)
xiv
xxvvi
Foreword Nr. 3 of the book:
“The Industrial Policy of Japan –
The Case Study of Iron and Steel Industry”
The infant industry argument has spanned over the last two centuries
since it was raised practically by Hamilton in 1790 and theoretically by
List in 1841. The debate has arguably been one of the most ideological
ones in the history of economics and the policy recipe has been
controversial. Economists and policy makers have gathered in two
opposing camps without any perspective of a consensus on the horizon.
They have recently being joined by Edita Đapo and Ognjen Riđić,
assistant professors at the International University of Sarajevo (IUS),
who have used Japan’s industrial policy in the post-second War period
as the case study, in discussing the issue.
It is important to underline that Japan will be remembered in economic
history as the first country that managed to become an economic
miracle. GDP of Japan grew 7% or more in the period 1950-1983
jumping from US$3,500 in 1950 to US$39,600 in 1983.
It is also important to remember that in the aftermath of the WW2
Japan started reconstruction by concentrating its resources into two
critical industries: steel and coal.
Coal was the only available natural resource at the time and it was not
possible to increase its production due to the lack of steel.
xxvviii
The policy recipe was renewing the production of coal and steel at a
constantly larger and larger scale enabling other industries to revive.
In order to find out what the role was of industrial policy in the process
of becoming an economic miracle, it is necessary to start with defining
industrial policy. Many competing conceptions can be found in the
literature. In the second chapter of their study, Đapo and Riđić list them
correctly and adopt Komiya et al.’s (“the government’s policies, such
that, if they had not been adopted, there would have been a different
allocation of resources among industries or a different level of some
aspect of economic activity of the constituent firms of an industry”). In
our view, more appropriate to the purpose of their study would be the
US International Trade Commission’s “vertical” definition
(“coordinated government action aimed at directing production
resources to domestic producers in certain industries to help them
become more competitive”).
Putting the definition aside, particularly since even the current
conservative Prime Minister Shinzo has recently created a new
governance body for microeconomic policy, the Economic
Revitalization Headquarters, which includes an industrial
competitiveness council whose purpose is to formulate growth
strategies, the more important issues are those which Dapo and Ridic
address in the second chapter: Rationale for the Industrial Policy and
Criteria for Targeting in Japan. According to them, Japan’s criteria for
the selection of industries to be supported by the “pro-growth industrial
policy” were: 1.) the stimulation of the industry and restraining
hyperinflation, and later on 2.) the industries experiencing a rapid
increase in productivity and 3.) the production of goods with a high
income elasticity of demand.
xxvviiiii
Later on, two additional criteria for choosing a particular industry to be
protected were added: it had to have a strong linkage to other industries
and it had to improve employment.
The issue of being “rational” for the industrial policy is very debatable.
Many countries have tried to promote specific industries through
import substitution and/or export promotion strategies via high tariffs
and import quotas (as in the case of the Japanese iron and steel
industry’s application of tax breaks, export subsidies, import tariff
exemptions, cheap credit etc.) but the significance of these policies is
hard to prove. It is undisputable that most of the high-growth,
successful economies including Japan have tried industrial policies, but
there has been a lot of failures on the other side. It would be
particularly useful to find out whether the high-growth cases would
have been achieved even without specific industrial policies.
It is obvious that markets do not always work, but industrial policies
don’t either. Putting the issue to intervene or not, to the side, the
following dilemma is: when the decision is to intervene, how to do it
right? In the remaining parts of the second chapter Dr. Đapo and Dr.
Riđić present the criteria for the use of industrial policy in Japan.
In the third chapter, which analyzes the industrial policy towards the
iron and steel industry, the key ingredients of that policy are: (i)
encouragement of investments in the industry through the strategic
supply of funds and tax reduction, (ii) promotion of technological
changes and export through tax reduction provisions; (iii) the
importation of strategic technologies and, and (iv) protection of the
industry from foreign competition. Analyzing these ingredients is very
xxviixi i
important since they assist in establishing a “flying geese model”
which, Japan became famous for.
The essence of the model is for supporting industries to experience
strong and rapid growth rates, one after another, with a lead industry,
precisely the steel industry, providing external benefits to subsequent
industries that help them to develop and grow.
In the fourth chapter, Đapo and Riđić discuss the infant industry issue,
stating that “[it] is the oldest and the best know rationale for an
intervention in the industry” (p. 25). The issue is of particular
importance given that even the most developed countries, such as the
USA used high tariff rates on manufactured products in the 19th
century. Japan had extensive import control until the 1970s and the
question whether Japan should have it practiced in such a prolonged
period is specifically discussed in this study. Economists still consider
these issues and introduce newer and newer elements into discussion.
According to the most updated and most sophisticated elements are
imperfect capital markets and the appropriability problem, both of them
correctly and extensively discussed in the study?
What should be particularly stressed among issues discussed in the
fourth chapter are the criteria for removal of protection. When
protection is introduced, economists agree that it is to be of temporal
longevity not for the prolonged periods, as typically practiced by policy
makers. The factors such as the learning curve and dynamic learning
externalities are very complex to determine and that could lead to
prolonged protection of industries not to mention wrongly selected
industries. Nevertheless, some quantifications are possible by the
utilization of the Mill-Bastable test and productivity growth measures.
xxixx
However, the Mill-Bastable test is hard to apply in practice, and
additionally, Dr.Đapo and Dr. Riđić introduced two more tests: the
Kemp test and the Neigishi test, not usually seen in analyses of this
type.
Đapo and Riđić found out that:
 “Japanese iron and steel companies reached the cost
competitiveness in 1958” (p. 62) by applying the Mill test;
 “Bastable test was also satisfied in 1957” (p. 64);
 “until 1958, Japanese iron and steel industry’s private agents
adopted various types of new technologies, of which main were the
blast oxygen furnaces and continuous casting process technologies”
(pp. 66-67 ) by the Kemp test and
 “the Japanese iron and steel industry prices had an influence
to the world prices, since 1960s” by Neigishi test” (p. 67-68).
Based on carrying out of the aforementioned tests, Đapo and Riđić
rightly and precisely concluded the fourth chapter by stating that “it can
be seen that by 1960, all tests were satisfied”. This is the year, a distinct
point in time when the protection could be removed and abolished.
However, Japanese government continued to protect the iron and steel
industry for a long time after the year 1960” (p. 70).
xxxxi
In the concluding chapter, Đapo and Riđić make evaluation of Japan’s
industrial policy by applying a model developed by Hofbauer and
Elliot. According to the calculation “the Japanese iron and steel
domestic consumers had suffered the loss for the first ten years, but in
the next ten years they gained more than four times” (p. 84).
The last, sixth chapter, discusses the results and tries to draw out
general conclusions on the issue of the infant industry argument
drawing conclusions based on the example of Japan’s experience of
two decades of protectionism.
I recommend this book to students and broader audiences as a very
good and useful introduction to the subject. It is very easily readable
and understandable. Many can find it useful in discussing the
relationship between foreign trade and economic development in a
more and faster paced globalizing world. The key lessons from the
experience of 13 countries, which managed to become economic
miracles is the participation in the foreign trade, and that the experience
of Japan could be very useful for that purpose, particularly in
considering when to stop taking into consideration not only interests of
producers but those of consumers, as well.
Associate Professor Dr. Vjekoslav DOMLJAN,
Dean of the Economics Faculty,
Sarajevo School of Science and Technology (SSST)
xxxxiii
Preface
This book is concerned with the development of iron and steel industry
in Japan after Second World War (WW2). This industry was a basic,
fundamental industry, which was the key ingredient of the
modernization of Japan. Understanding the Japanese development is
important for several reasons: First, Japan became leading nation in
production of iron and steel although it is a resource scared country.
Japan took leading position because of the technological advancement
in that industry, as well as due to the various government protectionist
interventions that provided the time for technological improvements.
Second, it is very important for the society to cope with the internal and
external environment and provide for the welfare of their people.
Japan’s economic development remains a model for many developing
countries proving that there is no meaningful and sustainable
industrialization and economic development without the development
of some basic industry. Therefore, it is extremely important to
understand how Japan achieved what it has been able to.
After WW2, Japanese government has played an important role in
nurturing, supporting and developing certain industries and creating the
industrial structure of the country. Government played the crucial role
in development of economic and technological infrastructure, in
providing exchanges of information between private agents, as well as
protecting certain industries from foreign competition and enabling
Japanese companies to acquire the time to learn and gain the
experience, adopt technologies and become competitive, not just at
domestic, but at the international market.
xxxxiiiii
In the economic literature, there are a lot of arguments for and against
the government’s protection.
However, all economists agree that there is a need for the evaluation of
the protectionist measures. In that sense, this book will provide an
explanation for the protection in Japanese iron and steel industry, as
well as the evaluation of the protection.
Japanese economic development after WW2 has been, and still is, a
topic of major interests in the economic literature. Knowing what
happened in Japan gives the contribution to our understanding of the
economic growth, in modern era, as well. This book, therefore, can be
seen as a major contribution to the economic development theory.
1
Chapter I – Introduction
1.1 Introduction
In the literature concerning the economic development a lot of attention
was paid to the growth of Japan after the World War II. Considering
that Japan has been devastated and lost approximately 25 percent of its
wealth the achievement in the rapid development was noticed and had
to be explained (Takafusa, 1995). The existence of a favorable external
environment, such as the growth of world trade, the ability of foreign
technologies, the Korean War and the payments by the USA for
Japanese defense, may have played a great role in Japanese economic
development, but researchers on this subject “agreed that Japan’s rapid
economic growth was not made possible by the macroeconomic policy
alone” (Sazanami, 1994).Economists were and still are interested in the
model of Japanese development, in order to draw the lessons, which
might be useful in the economic development of other countries.
There is a wide range of different views regarding the efficiency of the
Japanese industrial policy in promoting the competitiveness of specific
industries. The debate about Japanese industrial policy arises not only
because industrial policy was widely employed, but because it is
usually said that such kind of policy was the cause for the economic
growth.
There are methodological problems of quantitative evaluation of the
Japanese industrial policy. Without the knowledge of how Japan would
have developed in the absence of the industrial policy, it is difficult to
assess the contribution that such policy made on growth. It is neither
2
easy to claim what would have happened in the absence of the
industrial policy, nor can the impact of the industrial policy on the
growth be directly quantified (Krugman, 1991).
The debate about the industrial policy was intensified, not only because
of those methodological problems, but, also, because of a high degree
of government’s involvement in the economy. Neoclassical economists
are against government’s intervention and active role in the market,
because they believe that with the intervention a danger exists that such
policy is unfair towards other industries and other countries. The
question of the government’s role in the allocation of investments in the
market is the most important and controversial one. Stiglitz (1998)
pointed out that governments can be involved in too many things, in an
unfocused manner, which reduces efficiency. However, the choice
should not be whether the state should be involved but how it gets
involved. In that sense, an examination of the Japanese government’s
involvement in the economic and technological development provides
us a great lesson of a good practice.
There are different kinds of approaches in explaining and evaluating
the industrial policy of Japan. Many studies on this subject utilize an
institutional approach. They explain what kinds of institutions are
needed for effective formulation of the industrial policy. The
institutional approach underlines one of the key functions of industrial
policy – gathering and disseminating accurate information. Having
proper information is very important for private agents and economic
development. The incorrect information will not just fail to achieved
determined goals, but will have the negative effect on the growth (Itoh,
1994).
3
A second approach, which will be used in this book in order to evaluate
the industrial policy, focuses on the case studies of specific industries.
The first objective of our work will be to contribute in understanding
the rationale for intervention in the Japanese iron and steel industry
after World War II.
Previous studies on this subject, in focusing on quantitative expansion,
historical evaluation and the institutional framework, have generally
overlooked the main point of Ministry of International Trade and
Industry’s (MITI’s) intervention, which provided the iron and steel
industry with the time to start up, develop and gain knowledge
(Johnson, 1983). The main contribution will consist in applying the
theoretical model in the case of iron and steel industry in period from
1950 to 1970, and pointing out on time when the restriction(s) could be
removed. The second objective will be to analyze and evaluate
protectionist policy in the iron and steel industry in the period from
1950 to 1970. Researches and previous studies on this subject are
almost non-existent. The reason may lay in the methodological
problems regarding the examination of the costs and benefits of the
protective policy. First of all, the application of the existing models to
evaluate protection in the postwar Japan may encounter some problems
because Japanese market was protected, not only by formal tariffs, but
also with special kind of the import quotas, as well as with many other
formal and informal barriers. Secondly, there are problems with
collecting data for this time period because the postwar statistics data
are not complete. Japan’s Iron and Steel Federation (JISF) started to
collect the statistics of demand from 1958 on (Kawasaki, 1985).
The remaining part of this chapter provides a review of previous
studies. The second chapter presents the definition of the industrial
4
policy and its economic significance. The third chapter provides an
analysis of the iron and steel industry’s development. The forth chapter
consists of the explanation of the infant industry’s argument. The fifth
chapter gives the evaluation of the protectionist policies in the sense of
the national economic welfare. The last chapter presents the conclusion.
1.2 Previous Evaluation of the Industrial Policy in the Iron
and Steel Industry
Muller and Kawahito (1978) have gathered very interesting data in the
context of Japanese investment in the postwar period. They showed that
from 1957 to 1970, the USA, Japan and the European Union
Community (EUC) invested the same amount, amounting to
approximately US$ 27 billion in their steel facilities. However, the type
of investments, which they pursued were different. In terms of rate of
growth of production capacity the USA increased it by 134 percent, the
EUC by 283 percent and Japan by 1,097 percent. By concentrating the
capital expenditures in large-scale and new facilities, according to the
plans made by the government, Japanese iron and steel industry was
able to make large gains in productivity. In other words, Japanese steel
companies demonstrated economies of scale. Miwa (1996) did his
research in competitiveness and industrial organization in the post-war
Japan.
However, Japanese steel industry did not gain comparative advantage
merely by enlarging the size of factory unit. Odagiri and Goto (1996)
explained the technological development and entrepreneurship in the
iron and steel industry. They pointed out that two technological
developments had a significant impact on the industry’s development.
The first is the importation of the basic oxygen furnace (BOF)
5
technology from Austria and its improvement and adoption to Japanese
steel mills. The second was the introduction of the continuous casting
methods and strip mills during 1950s and 1960s. Technological
innovations helped Japanese iron and steel industries to achieve
economies of scale and cost competitiveness, but the protection from
foreign competition provided the industry with time to achieve those
technological developments.
Krugman (1987) criticized that Japanese industrial policy applied to the
iron and steel industry after the war, had no success, at all. He stated
that government favored relatively non-efficient industry with low
interest loans, favorable tax system and import restrictions. The
evaluation of this statement was based on the rate of return in 1971.
The rate of return on Japanese steel was 10.7 percent; while in all
manufacturing it was 17.5 percent, which means that steel’s ratio in all
manufacturing goods was 0.611. Komiya and Itoh (1988) compared
those data with Crandall’s data of the USA’s rate of return in iron and
steel industry in the same year. By Crandall (1981), in 1971, the USA’s
rate of return of iron and steel was 4.5 percent, while the rate of return
of all manufacturing was 9.7 percent. The ratio was 0.46. In that sense,
the iron and steel industry in Japan has achieved better results than the
iron and steel industry in the USA.
Rate of return was not a major concern of the Japanese government.
Their goal was to gain greater world’s market share and to provide the
intermediate goods for other industries, like: automobiles, shipbuilding,
railways and machinery. Low return on investment in an industry does
1 Data based on OECD, Profits and Rate of Returns,
1979.
6
not necessary lead to a net loss for the economy. Even, if there were
low returns on steel, they could be compensated by the higher returns in
other industries that use steel as a basic material (Komiya, 1990).
Krugman and Obstfeld (2000) pointed out that Japan would have had a
growing steel industry even without the government’s intervention.
They pointed out that return directly earned by the resources used in
steel was actually not as high as it could have been, if the same
resources were used elsewhere. In their opinion, there were no
additional marginal social benefits from protecting the iron and steel
industry.
The creation of jobs did not represent an extra benefit because the
Japanese economy was already running at full employment. He stated
that Japan would develop because Japan’s high savings rate gave the
comparative advantage in capital-intensive industries.
Krugman held the opinion that iron and steel industry could benefit
from the technological innovations and in that way would benefit
monopoly rents. However, the adoption of new technologies and the
improvement of production costs came as the result of temporary
protection from foreign competitors. By protecting the industry from
foreign rivals, the government signalized to the domestic producers to
enlarge their production activities and provide the time which was
important for the improvement in technology. Furthermore, Krugman
stated that the transportation costs were falling and that enabled Japan
to import all materials, cheaply. However, Odagiri and Goto (1996)
explained that it was government that negotiated with the shipping
industry to provide iron and steel industry with low cost transportation.
7
Because of the existence of the economies of scale in the Japanese iron
and steel industry, domestic producers were able to provide the
economy with cheap products. In that way, other industries that rely on
this intermediate product could benefit. It might be that profits of the
steel companies were small but social costs were large. Okuno-
Fujiwara (1988) pointed out the importance of the linkage effects that
industry had on the national welfare and stated that Japanese iron and
steel industry improved world’s welfare in the late 1960s, but serious
studies about the estimation of this argument are almost non-existent.
The reason for this may lay in the methodological problems of the
evaluation of the Japanese industrial policy or in the difficulty to
evaluate, at once, all measures that government applied, in order to
promote the industry.
To prove that the protection was needed we will explain the infant
industry argument and analyze its application to the iron and steel
industry in Japan. Furthermore, we will examine the protection policies
towards this industry.
8
Chapter II – Japanese Industrial Policy
2.1 Definition of the Industrial Policy
Several authors have mentioned that there is no standard definition for
the concept of industrial policy. The most workable definition of
industrial policy was given as “the government’s policies, such that, if
they had not been adopted, there would have been a different allocation
of resources among industries or a different level of some aspect of
economic activity of the constituent firms of an industry”. In other
words, “industrial policy increases production, investment, research
and development, modernization or restructuring in some industry or
industries, and decreases them in other industries”(Komiya et al.,
1998).Industrial policy is any “policy that attempts to achieve the
economic and non-economic goals of a country by intervening in the
resources’ allocation across industries or sectors, or in the industrial
organization of an industry or sector” (Itoh et al., 1991)2. These
definitions emphasize the microeconomic aspects of the economy and
focus on inter or intra-industry resource allocation. From these
definitions, it is clear that the industrial policy fosters and develops
certain industries.
If Japanese industrial policy is to be considered to have helped to foster
the iron and steel industry and successful economic development, it
must satisfy two necessary conditions. First, the industrial policy must
be rational, (i.e. the industrial policy must serve an economic purpose,
which in the absence of the policy would be unfulfilled).The goal of
2 For other definition see Kagami, M. (1995) and
Suzumura& Okuno-Fujiwara (1987).
9
industrial policy in the iron and steel industry was to provide this
industry to develop and grow. The second necessary condition which
industrial policy must fulfill is that it must have an impact on resources
allocation.
Industrial policy cannot be important to economic development of an
industry if it does not affect the way resources are deployed. The
Japanese government was using protective tariffs and non-tariffs
barriers which are typical examples of policies that influence resources’
allocation. The infant industry argument provides a theoretical
justification for industries protection and promotion, while tariffs by
their nature, influence the allocation of the resources (Kafka, 1962).
The industrial policy is always undertaken by the government in order
to achieve the national economic and non-economic goals of a country
(Komiya et al., 1998). It intends to enhance the country’s economic
welfare, if and when, the unrestricted functioning of the competitive
market mechanism is found to fail in achieving that.
The economic literature points out that there are two characteristics of
industrial policy that deserves to be emphasized. First, industrial policy
is concerned with the market mechanism and has to cope with market
failures. Second, industrial policy leads to enhancing the country’s
economic welfare. In order to analyze the industrial policy, it is
necessary to identify causes of market failures, as well as to evaluate
the country’s economic welfare.
10
Discussing the terms of market failures enables the use of terms
familiar to the economic analysis, such as the presence of the
economies of scale and externalities, imperfect or underdeveloped
capital markets, criteria for promotion of infant industries, promotion of
research and development, and dealing with uncertainties in the course
of the economic development (Krugman, 1993; Blacker, 1986).
2.2 Rationale for the Industrial Policy
From the definition of the industrial policy, it is obvious that it is
rationale to use various kinds of interventions if the industry is in its
infancy stage, if there are market imperfections, existence of economies
of scale or externalities.
The neoclassical economic paradigm has offered not just the
justification for industrial policy but it makes a strong case for the
necessity of the government’s intervention in the case of an infant
industry, which has the possibility to grow and become competitive
over the time. Infant industry argument provides basic framework for
analyzing Japanese industrial policy applied in the iron and steel
industry.
Capital market imperfection(s) can also be reason(s) for protection. The
problem that can be created in capital markets is that the rate of interest
for all long-term investments may be too high (Krugman, 1992).
Private lenders may demand higher return in the short time, creating a
bias against the investment that will only exhibit a good return after a
period of several years. A second problem is that the private lenders do
not possess the amount that may be necessary to support an industry to
start up. In that case, creating banks, like the Japan Development Bank,
11
can be useful to correct this imperfection of the capital market. During
the 1950s and the 1960s, Japanese government provided the financial
assistance to the iron and steel industry in the form of grants, low
interest loans and tax breaks.
Thus, the government arranged with the World Bank (WB) low interest
loans to be extended to the iron and steel industry. The Japan
Development Bank insisted that the World Bank loosens its regulation
for the firms receiving the loans (U.S. Congress, 1991).
Speaking about Japanese industrial policy, other factors that have
contributed to the rationalization of industrial policy should be
analyzed. The first is the existence of the static economies of scale,
where average production costs fall simply as output increases. If static
economies of scale are inseparable from learning by doing effects, than
capital market imperfections call for government support. In industries
where the economies of scale have resulted in monopolistic or
oligopolistic behavior, imperfect competition drives a wedge between
price and average cost, thus implying the need for government
intervention. In the case where the economies of scale are very large,
that only a small number of firms can survive in the world market, the
government’s policy that enables the firm with a total control of the
domestic market can reduce firm’s costs, as well as help to increase the
domestic firm’s share in the international market (Grubel, 1966).
Beside the static economies of scale, the second important factor for the
government intervention in Japan is the existence of dynamic
investment complementarities. In the case of complement industries,
the more expansion there is in one industry, the more profitable it may
be for the other industry. For example, if we consider the steel and
12
shipbuilding industry; it may be profitable to expand shipbuilding
production if steel production increases, and profitable expansion of
steel industry may depend upon increased production in the
shipbuilding industry.
The dynamic complementarities will generally arise only in the closed
economy. If trade is possible, the profitability in an industry will not be
affected by the domestic production level of another industry, since the
investing industry would have access to the foreign complement output.
These arguments indicate a positive role for industrial policy in
promoting economic development (Scitovsky, 1954).
2.3 Criteria for Targeting in Japan
In order to choose several favored industries that should be supported
to the exclusion of other industries, MITI allegedly applied some
criteria in picking the industries of strategic importance. Immediately
after the war, the major objective of the targeting and supporting
certain industries was to stimulate the industry and restrain
hyperinflation. The government believed that increasing the production
of coal and steel would improve the economy. Before World War II,
some 60 percent of coal was used by industry and 40 percent by other
sectors, such as: transportation and thermal power. After the war,
demand for energy became immense; therefore, increasing domestic
coal, steel and iron production became critical for the industry
(Johnson, 1983).
During the period of high-growth, the goal of industrial policy was to
build heavy and chemical industry, as well as to improve the industrial
structure. MITI proposed to foster the industries that met the dual
13
criteria of: (1) experiencing a rapid increase in productivity, and (2)
producing goods with a high income elasticity of demand. Later, two
additional criteria for choosing particular industry to be protected were
added: (1) it had to have a strong linkage to other industries and (2) it
had to improve the employment (Komiya et al., 1998). Based on these
criteria the Japanese industrial policy can be divided into two
contradictory sets.
A set of measures that was designated specifically to foster growth in
selected industries in order to further industrialization and with final
goal to create the industry capable of surviving and expanding in the
domestic as well as the international market is called a “pro-growth
industrial policy”. The Japanese iron and steel industry had no
comparative advantage after the World War II, but it relatively quickly
developed into the major exporter in the world. The iron and steel
industry was badly damaged during the war (Johnson, 1983).
Japanese producers had huge cost disadvantages compared to other
Asian countries, largely due to the high price of imported raw materials
and poor labor productivity resulting from the inefficient equipment.
The government protected this industry from foreign competitors,
extended the financial aid for improvements of the plants and
investments in a new technology, and created various mechanisms to
manage domestic price. Initially, the iron and steel industry was
protected by high tariffs and later, by import quotas. Japan heavily
restricted import of iron and steel after the war, even though the
imported prices were much lower. This industry was targeted because it
satisfied all criteria for protection (Johnson, 1983).
14
Chapter III – Industrial Policy towards the Iron and Steel Industry
3.1. Development of the Iron and Steel Industry
During the post-war period, the iron and steel industry become a
primary target of various ministries in their formulation and
implementation of industrial policy. There were interventions in the
industry through a variety of protective and promotion policies. In
particular, the Ministry of International Trade and Industry (MITI)
implemented a number of policies designated to encourage the strategic
allocation of resources to the iron and steel industry as a core of its, so
called heavy and chemical industrialization policy. At the same time,
MITI encourages the collusion among the firms, with the intent of
stabilizing investments, prices and output. Later, MITI’s position was
to encourage an increase in the size of the firms, with goal of
strengthening international competitiveness (Saxonhouse, 1995).
In this book, we will describe the specific measures of these policies
that were implemented in the steel industry. At the same time we will
analyze and evaluate the impact that the protection policies had on the
market structure and various facts of behavior along with allocation
efficiency. Form the early 1960s, policies implemented in the iron and
steel industry were formulated with the goal of rationalizing and
modernizing the industry in order to strengthen its position at the
international market through the expansion of export. In the steel
industry, the First Revitalization Plan was implemented from 1951 on,
based on rationalization framework presented by MITI. Japan
Development Bank played a key role providing funds to implement
MITI’s plan (Komiya et al., 1998). With this plan began the first
significant new investment since the war. The investment had a goal of
15
modernizing rolling mills. The modernization of the rolling facilities
was realized with approximately 60 percent of the new equipment
being imported. This process was followed by import of machinery and
machine operating technology.
The Second Revitalization Plan centered on an expansion and increase
in the scale of blast furnaces and on constructing integrated production
facilities, along with continuation of the modernization of facilities
from the First Plan period. During the Second Plan total investment
rose. At this time, iron and steel industries were protected from imports
by measures equivalent to a 30 percent tariff, while import of the
equipment for production was exempted from the tariff(s).
Furthermore, the industry was encouraged to export through the
utilization of a tax deduction. From 1960s, the Third Revitalization
Plan was implemented. This period is characterized with the expansion
of existing facilities, the construction of large scale integrated facilities
by each firm, in the new coastal industrial zone and the increase in
production capacity. The nature of the Third Plan was extremely
different from previous two plans. During the First and Second Plan
investments were carried out with the guidance of and in coordination
by MITI, while during the Third Plan’s period the coordination of
investment took a place among individual firms (Johnson, 1983).
3.2 Declining Costs of Production
There are many sources of declining costs, but those that are important
in relation to the issue of protecting and fostering an infant industry can
be divided roughly into three categories:1.) Marshallian externalities,
2.) Informational reasons and,3.) Innovations (Buchanan, 1962). In the
case of development of Japanese iron and steel industry all three types
16
can be analyzed. First, declining cost industries can face Marshallian
externalities in which overall expansion of an industry brings an
improvement in the technology and cost conditions of each firm.
Okuno-Fujiwara (1988) showed that Marshallian (i.e. pecuniary)
externalities may occur if several industries are interrelated. Iron and
steel industries are the industries whose product is being used in
various industries as inputs, so the demand for this product depends on
demands of the upstream industries. It is common for intermediate
industries to achieve economies of scale if the demand of upstream
industries is increasing.
Second, the economies of scale may occur because of informational
reasons. Obtaining information about upstream industries’ demand
parameters is difficult and acting only with the private incentives would
not encourage firms to increase production. Japanese government and
MITI, through the organization of various committees, played an
important role constructing and presenting plans and strategies for
development of upstream industries. On the other hand, increase of
demand in the upstream industries would provide opportunity for the
economies of scale to occur (Okuno-Fujiwara, 1988).
Third, dynamic process of learning by doing was exemplified by the
accumulation of experience and increased production of know-how
results in decreasing costs. Demand for iron and steel products was
sufficient, but private incentives and entrepreneurial culture were
crucial in the process of innovation and adoption of the foreign obsolete
technology. Management in Japanese companies believed that no
technology could be learned and improved until it was tried. It is in
Japanese culture that they believe that they have a distinct capability to
understand technology, learn by using it, accumulate experience, know17
how and find the way to improve it. Furthermore, the organizational
culture in Japanese firms is that management trusts the abilities of its
workers. When the new equipment was imported into the Japanese iron
and steel companies, the engineers were showing every part of the
equipment to the workers, asking for their opinions and suggestions.
The engineers would take seriously the workers’ opinions and utilized
them in order to improve productivity (Yonekura, 1986).
In the 1950s, Japanese iron and steel industry was just beginning its
major expansion. By restricting the import, the Japanese iron and steel
companies were provided with the large share of domestic market, as
well as the large share in the world market. From 1958 on, the iron
ore’s metallurgical coal price in the world started to decline.
At this time, Japan was able to purchase basic materials at lower costs
than the rivals from the USA. Japanese export of steel increased during
the 1960s, spurred by the decline in raw materials, as well as the
shipping costs. Japanese steel industry depended on imports of raw
materials and main preoccupation of steel producers was how to reduce
those costs of production. In order to do so, it was necessary to cut
down consumption of raw materials in the production process. That is
why companies invested a large amount of money into technological
development. The second preoccupation was to reduce transportation
costs. Japan’s steel industry had to buy iron and coal from far distant
countries compared to the USA or European countries.
To protect itself from this handicap it was necessary to find a way to
reduce transportation costs. Japanese government negotiated with the
shipbuilding industry to provide large carriers, which economize long
distance transportation and the cost of transportation were reduced.
18
Furthermore, the harbor facilities were reconstructed and reinforced in
order to accommodate newly produced big carriers (Odagiri &Goto,
1996).
Finally, the process of diffusion of a new technology was aided by new
steel exporters in competing with the older, established companies in
the USA and around the world. In terms of technological innovation,
two developments had significant influence. The first is the importation
of basic oxygen furnace (BOF); the second is the introduction of
continuous casting method. By that time, the factories needed huge
input of scrap iron that Japan was importing for very high price in order
to produce steel. In order to become independent from the fluctuations
of prices at the international markets, Japanese producers decided to
import BOF technology. BOF technology was developed in Austria for
commercial use. At its centerpiece is a brick-lined converter vessel that
refines molten iron to make steel. Usually, all converters blow air from
below, while BOF blows pure oxygen from above.
Japanese engineers realized that BOF has two problems. One of the
problems was that burning oxygen would cause high temperature which
damaged the internal bricks of the furnace. To solve this problem the
Japanese steel producers collaborated with the brick producers and
developed new type of brick that could sustain even higher
temperatures. Another problem was the high level of pollution that was
emitted from the plant. To solve this problem new equipment, so called
the oxygen converter gas system was invented. The oxygen gas
converter system was recycling the waste gas. This invention prevented
pollution, but also reduced the energy use which influenced the rapid
decline of the production cost. The oxygen converter system was
19
adopted worldwide and royalty fees excided the amount that was paid
for to import BOF technology (Odagiri & Goto, 1996).
As the Japanese companies adopted and improved the newest steelmaking
technology and went ahead rapidly with continuous casting,
their labor productivity increased dramatically. Moreover, the Japanese
companies led the way in applying sophisticated computer control to
the pouring, forming and rolling of steel products. Improvement in
technology reduced production costs by 20 percent, which gave the
Japanese steel industry the possibility to compete in the world market.
3.3 Analysis of the Protection Measures
The post-war goals of the industrial policy in the iron and
steel industry can be divided into:
1. Encouraging investments in the industry through
the strategic supply of funds and tax reduction;
2. Promoting technological changes and export
through tax reduction provisions;
3. Importing strategic technologies and
4. Protecting the industry from foreign competition.
Before 1949 the foreign trade was controlled directly by the
government. At that time, not a single exchange rate was established. In
1949, direct control was abolished and the single exchange rate was set
as a part of wide range of policies for transition to a market economy.
20
A new system to control foreign trade, (i.e. foreign trade allocation
system) was introduced. The Japanese government could execute de
facto import quota through this system. This indirect trade control
through foreign trade control system was operated as a measure of the
sector’s industrial policy, as well as the macroeconomic policies to
keep the balance of payments (Ryan, 1994).
“Import control aimed at the effective use of the limited foreign
currency to the economic development, and it enabled to secure
necessary import goods preventing the increase of imports. Through
foreign exchange allocation and approval of imports, MITI could
monitor the industries under its jurisdiction and carried out the
administrative guidance necessary for their development” (Okazaki &
Korenaga, 1997).
The foreign exchange allocation system generated rents through
making difference between domestic and foreign prices, and exerted
substantial economic and political influence. The Foreign Exchange
and Foreign Trade Control Law provided the system for allocating
foreign exchange for imports, also functioning as a non-tariff barrier to
trade. This can be thought of as having an impact equivalent to that of a
system for directly licensing imports. Iron and steel products were put
on a “funds allocation” basis, until 1954. From 1954 onwards, an
“automatic funds allocation” system was applied until June of 1960
when the “funds allocation” system was abolished. These systems were
applied as the important means for restricting imports.
After WW2, besides de facto import quotas, the tariff regime was
applied for the iron and steel industry’s products. Tariff rates were
quite high in comparison with the rates in the United States (U.S.) and
21
the European Coal and Steel Community. The tariff rates during 1950s
were the following: for pig iron 10%, raw steel 15%, finished steel
15%, and ingot 12.5%. Until late 1960s, the industry was protected
from imports by measures equivalent to 30 % tariff. Even after the
conclusion of the Kennedy Round, tariffs were not reduced until 1972.
In 1972, tariffs imposed on the iron and steel goods were reduced by
50% (Komiya et al., 1998).
The impact of import restrictions, which operated through the import
allocation of tariff systems, can be seen through the analysis of changes
in imports. As it can be seen in Table 1, the import of iron and steel
products has been at an extremely low level. In the 1960s, when the
import restrictions that took form of the “automatic funds allocation”
were abolished, the import of pig iron has dramatically changed, while
the import of the raw steel and finished steel remained at a very low
level. The reason for this is that Japanese iron and steel industry gained
competitive advantages during the 1950s.
Besides post WW2 goals of the industrial policy, in the iron and steel
industry, we would like to emphasize two other important factors which
helped Japan, in a relatively short period of time, to rebuild and
modernize its iron and steel industry. The first aspect is represented in
the American role in rebuilding Japan. The second is the workdedication
and sacrifices of Japanese people, especially workers to
rebuild its largely destroyed country (LaFeber, 1999).
22
Table 1:- Changes in Production, Import and
Export in Iron and Steel Industry after WW2
Production Import Year Pig Iron
Crude
Steel
Finished
Steel Pig Iron
Crude Steel
Products
Finished
Steel 1946 204 557 524 - - - 1947 347 952 747 - - - 1948 808 1.715 1.355 - - 1 1949 1.548 3.111 2.384 134 - 3 1950 2.233 4.839 3.754 0.9 - 1 1951 3.127 6.502 5.211 44 0.2 25 1952 3.474 6.988 5.348 6 0.8 20 1953 4.518 7.662 6.011 4 4 90 1954 4.608 7.749 6.159 2 5 77 1955 5.217 9.408 7.533 0 0.04 58
23
1956 5.987 11.106 9.054 314 28 189 1957 6.815 12.571 10.422 949 266 916 1958 7.394 12.118 9.978 3 0.5 111 1959 9.441 16.629 13.373 279 1 229 1960 11.896 22.138 17.855 1.006 4 176 1961 15.921 28.268 22.646 2.066 127 205 1962 17.972 27.546 22.989 1.454 115 90 1963 19.936 31.501 26.278 1.563 4 42 1964 23.778 39.799 32.686 3.397 7 26 1965 27.502 41.161 34.113 2.631 2 20 1966 32.018 47.784 93.825 2.876 4 20 1967 40.095 62.154 51.499 6.486 283 103 1968 46.397 66.893 56.944 4.498 96 15 1969 58.147 82.166 68.471 3.623 105 32 SourceSource: World of Iron and Steel (Tokkou Kai), various issues.
24
3.4 The Influence of the Economic Policies of the United
States of America and the World Bank to the Industrial
Development of Japan’s Iron and Steel Industry
After WW2, Japan was largely in ruins. Many cities were leveled by
American US Air Force (USAF) bombing and two of Japan’s large
industrial cities became irradiated wastelands. Broken citizens were
trying to reconcile a view of them indoctrinated by decades of
nationalistic, chauvinistic and militaristic rhetoric with the reality of
their position as a genocidal aggressor and as a defeated nation
(Kincaid, 2014).
The victorious United States of America (USA) had to try and figure
out how to rebuild a shattered nation and people. While, this may seem
an odd thing to do, given the extreme animosity between the two
nations at war, this policy served well America’s global interests. The
Cold War was already in its beginning phase. The Soviet Union and
Communist China were spreading their influence all around the world.
In that situation, it was an imperative that America restored Japan to
economic stability in order, both to prevent the spread of communism
and to give itself a powerful ally in the region (Kincaid, 2014).
Under the guidance of the United States of America, Japan rebuilt itself
as a democratic, capitalist nation, without armed forces. Therefore, civil
work became the only option for the Japanese citizens. In the last 60
years the globalization has heavily altered the Japanese work culture.
Long, unpaid hours and stiff competition on small, densely populated
islands gave rise to “karoshi” (eng. death by overwork) and “karojisatsu”
(eng. suicide by overwork) (Luu, 2010).
25
3.5 The Origins of Karoshi and Trends in Political Economy
in Japan
Originally, defined as circulatory disease caused by stress and severe
stress; “karoshi” (literally translated from Japanese means “death from
overwork”) was first diagnosed in 1970s, after the OPEC oil crisis
forced the first major post-war restructuring of Japanese industry and
employment relations. Since then, increasingly competitive and intense
work conditions have proliferated and firms have hired more
irregular/temporary workers to meet the demands of globalization.
Presently, the irregular workers account for approximately 40 percent
of the labor force, increasing up from ten percent in 1990s.
Effectively, the division of labor between regular and
irregular/temporary workers created the basis for discrimination at
work, whereby the regular workers were required to work longer and
harder to justify and maintain their elite status. In addition, they had, by
default, to carry the additional burden created by their temporary
(temp) colleagues/counterparts, who are generally described as the
contract workers, who do not work overtime or put in long hours.
While the abuses increased and medicine started to link: overwork,
stress, job burnout, anxiety, depression, etc.; employees and their
families became increasingly aware that their traditional right to
rest/benevolence was not being honored and social superiors were
failing to meet their social obligations. In order to insist on their rights,
rather than accepting their situation, is commonly considered to be
morally inferior in Japan. Propped by the professional assistance from
the labor activists increasing number of families who were victimized
by deaths and disabilities, resulting from overwork, sought to
26
implement the positive changes through the Ministry of Labor and the
courts, from the late 1980s and, onward.
Labor lawyers and occupational medical specialists led the
improvement effort. Propped by the assistance from the allies, confined
to the small number of radical unions, leftist political parties, academic
and the media, they saw “karoshi” as an issue that could mobilize
workers and increase social consciousness regarding the decline of
traditional morality in employment relations in the light of Japan’s
failure to translate national wealth into a living standard worthy of an
advanced G-7 developed industrial society. “Karoshi” showed that even
minimum standards of employers’ care were not being met and pointed
to the weakness of Japanese regulatory system. The Japanese are
famous for possessing unique ability to take things to the extremes.
Reasons for this behavior are hard to centralize in a common theme, but
could be attributed to commonly held stereotypes – one being of hard
working Japanese Samurai of the corporate world.
This is the one worker who will work relentlessly and incessantly to
promote and advance the interests of his/her company. The bizarre
extremes of Japanese culture can be attributed to its strict work culture
and its highly regimented and polite society (Dower, 1999; LaFeber,
1999; Kincaid, 2014). Since 1969, when a 29 year old shipping
department worker of the largest newspaper in Japan dropped dead
with a stroke, a phenomenon of sudden death has swept through
Japan’s working world. “Karoshi” has been blamed for an estimated
10,000 deaths per year, a number that unfortunately has been rising in
the last years, as Japanese companies sharply reduced its human
resources (HR) and put an even heavier work-load on those workers
who chose to remain (Kincaid, 2014).
27
Today, “karoshi” is well recognized fact of the working life in Japan.
Employees and their families fear the possibilities of death due to
overwork on a daily basis. Death by karoshi usually comes about in the
forms of stroke or heart attack. Multiple cases of karoshi resulted from
workers’ who simply did not have time to devote a time to visit a
physician, in order to undergo a regular (annual) check-up or to see a
doctor to receive treatment for chronicle ailments, like asthma or heart
disease. Karoshi does not appear to be a conventional disease; it is not
even an unconventional illness like mass hysteria. It, rather, represents
a social disorder, rooted in how companies are structured and how
Japanese workers are conditioned to approach work (Kincaid, 2014).
28
Chapter IV - Strategy of the European Economic Community
(EEC) and European Union (EU) regarding steel
4.1. Phases in the Development in the EEC
and EU’s Steel Industry
The European Economic Community (EEC) was established on the
foundation of the European integration in 1950. It was based on the
plan of the French foreign minister Robert Schuman about the
European integration in regards to the production of coal and steel.
Following, May 09, 1950 declaration, the entire French-German
production of coal and steel was placed under the control of the single,
joint, supra-national body. Joint action by France and Germany helped
the France to free itself from the long-established nightmare of German
invasion. Saarland, which the France was seeking for itself as the war
damage reparation, was taken out of the total French control and placed
under the control of joint supra-national governance body (Graham,
1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
But what is to be said about the future of Western European states?
Both the First World War and the Second World War occurred in large
part because of Franco-German conflicts. Creating a stable Europe
29
required reconciliation between France and Germany. One of the major
obstacles to Franco-German reconciliation after the war was the
question of coal and steel production. Coal and steel were the two most
vital materials for developed nations; the backbone of a successful
economy. Coal was the primary energy source in Europe, accounting
for almost 70% of fuel consumption. Steel was a fundamental material
for industry and to manufacture it required large amounts of coal. Both
materials were also needed to create weapons (Carleton, 2017; Moore,
1998).
The largest concentration of coalmines and steel production was found
in two areas in Western Germany: the Ruhr Valley, and the Saarland.
The Allies detached the Saarland from West Germany and made it a
semi-autonomous region. In the Ruhr Valley, the Allies placed
restrictions on the production, ownership and sale of coal and steel in
an attempt to restrict German economic growth. The Ruhr Valley coal
and steel production was also restricted as a guarantee to Germany’s
neighbors, France, Luxembourg, Belgium and the Netherlands, that
these crucial resources would not be used to re-create a Germany army.
France wanted to control and access the coal and steel in the Ruhr
Valley and wanted the Saarland permanently separated from West
Germany. The French government was especially worried that West
Germany could use its massive coal and steel resources to attack France
once again. West Germans, under the leadership of Chancellor Konrad
Adenauer, who was elected in 1949, wanted the Saarland returned to
Germany and objected to the strict controls placed on Germany heavy
industry. The Franco-German conflict persisted over coal and steel. A
reconciliation of the two former enemies seemed unlikely (Carleton,
2017; Moore, 1998).
30
The solution to the coal and steel problem and the core of the
reconciliation between France and Germany was the Schuman Plan,
named after the French Foreign Minister Robert Schuman. The
Schuman Plan was presented on 9 May 1950. It argued that coal and
steel production should be placed under a supranational High
Authority. Following shortly after Schuman’s declaration, the
negotiations that established the European Coal and Steel Community
began. The European Coal and Steel Community (ECSC) pooled the
coal and steel resources of six European countries: France, Germany,
Italy, Belgium, the Netherlands, and Luxembourg (BENELUX). These
countries would be collectively known as “the Six”. Pooling coal and
steel resources greatly reduced the threat of war between France and
West Germany. The ECSC became a reality in 1952 (Carleton, 2017;
Moore, 1998).
The author of the Schuman Plan was another Frenchman, Jean Monnet
a bureaucrat in the French government. Monnet had worked at the
League of Nations between the World Wars and was committed to the
goal of a United States of Europe. Monnet was also the first President
of the ECSC. For Monnet, and for Schuman, the ECSC was to be the
first step in creating an federal Europe. The ECSC provided the first a
small but important step towards European integration. By integrating
coal and steel under a single authority, the Schuman Plan demonstrated
that European integration was feasible. Furthermore, it eased tensions
between France and Germany. The success of the ECSC led to other,
more drastic proposals to integrate the original six member states
(Carleton, 2017; Moore, 1998).
31
Declaration from May 09, 1950 signaled the beginning of the French-
German, post-World War 2 reconciliation and creation of the
foundation for the renovation of their steel and coal industry. This was
unique beginning in the integration of the European countries.
Schuman’s plan found the joint support of the Benelux (i.e. Belgium,
Netherlands and Luxembourg) countries and Italy. The governments of
these countries had realized that only the real solidarity and joint base
of economic development can enable the renewal, build-up and
prosperity of Europe. On August 10, 1952 in Paris, the European
Community for Coal and Steel (ECCS) was established. On March 25,
1957, in Rome, six signing countries: West Germany, France, Italy,
Belgium, Netherlands and Luxembourg, did provide the new economic
impulses for the ECCS. European Economic Community in the 1950s
and 1960s had defined the multitude of joint actions and harmonization
(Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha,
1989).
Joint customs union, joint agricultural policy, joint discipline and
financial solidarity are some examples of these policies. In this way
EEC’s clearly defined identity was set through the establishment of the
supra-national community. The before the unification present issues
and difficulties were quickly overcome. By the entrance of the Great
Britain, Greece, Spain and Portugal, the European Economic
Community becomes the community of 12 national states At the
beginning of the last decade of the 20th century (1990s) EEC represents
the largest economic power in the world with its 19 percent
involvement in the aggregate proportions of world trade. The
involvement of industrial products in the world trade is significantly
larger with the portion of 26.5 percent (Graham, 1986; Pearce, Sutton
& Batchelor, 1986, Stevović-Buha, 1989).
32
For comparison sake it is important to note that the participation rates
of the U.S. and Japanese industrial products in the aggregate world
trade was measures at 16 and 14 percent, respectively, at the beginning
of 1990s. As of 2016, as far as the steel production is concerned, the
EU-28, as an important competitor of Japan, participates with 9.9
percent and Japan with 6.4 percent of world’s aggregate output. EEC’s
industry employs around 40 percent of the active population and its
contribution in the creation of gross-domestic product (GDP) was
measured at 41 percent. It is important to note that the involvement of
the agricultural production in GDP amounted to only 3.7 percent
(Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha,
1989).
In the EEC’s export structure the industrial products represent 75
percent of its exports’ value. However, in contrast to Japan, it is
important to note the European industrial production is characterized by
two inherent weaknesses: 1.) the production of the so called “base
products” and 2.) the so called sectors of the future (IT, CS). In these
areas the European industry is exposed to increasingly frequent
competition in the world’s markets. To the American challenge to the
European industry during 1960s, additionally came the Japanese threat
in the 1990s. It is important to also add the newly industrialized
growing, so called, “economic tigers”, like Taiwan, South Korea,
Singapore, China etc. In the areas of the industries for the future (i.e.
information technology (IT), computer science (CS), software
engineering (SE) and telecommunications the European industry is
exposed to the increasingly frequent competition in the global market.
The global status of the European Community (EC) looks increasingly
less appealing in the international division of labor in comparison with
the status of its main competitors: the United States, Japan, China and
33
newly developed economic tigers. The vulnerability of the EU is
increasingly present in the areas, in which the key competitive
advantage factors are being exemplified by the creativity and
innovation (Graham, 1986; Pearce, Sutton & Batchelor, 1986,
Stevović-Buha, 1989).
The so called “progress period of the EU was set out to be 23 years
long, in the time period between 1950 and 1973. This favorable
economic and business cycle was characterized by the fast and
continuous industrial growth. The investment in the European industry
is being exemplified by the strong increase in 1960s and 1970s. In
1979, the portion of the industry in the aggregate percentages of GDP
creation amounted to 41% in the EU, 39% in Japan and 34% in the
United States of America. The strong investing wave within the above
listed two decades contributed, not only to the recovery and
development but also to the modernization of its industrial base. In this
context, it is important to note that productivity increases followed
along the above discussed positive developments. The establishment of
the common European market has its effects to the investing within the
community. Therefore, the amount of West German investments in the
remaining EU member’s countries has increased from US $60 million,
measured in 1958, to US $530 million in 1965 and to US $2,550
million during 1972, respectively. The creation of the common market
caused the increased interest in the significant number of companies
outside the community for their direct investment in the community’s
countries. In the period after 1968, there were worrying signs that the
EC’s economy was befallen by the economic slowdown and weakening
signs. Mobility and dynamism started to give way to passivity,
stagnation, business uncertainty and general apathy. Even though the
EC remained a powerful economic force with its 270 millions of
34
customers, and with its second and third expansion to 320 million,
respectfully, it never managed to create the industrial EC (Graham,
1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
If we take 1975 as the base year, in which the industry production
index was assessed with 100, the indicator of industrial production in
the EC in 1983 was measured at 112.6. At the same time the industrial
production index in USA was measured at 122.5, while in Japan this
index reached 141.1 in 1983. The lack of timely industrial
(re)orientation in the EC resulted in its limited ability to adjust to the
changing demand and supply conditions in the world market. The EC
started to increasingly lean on the American and Japanese industrial
production when it came to the highly technical and technology
intensive goods. EC’s base industry, which in 1950s and 1960s enjoyed
an increase in basic chemical industry of 15 percent per year, and in
dark metallurgy and in industry of colored metals of 5-6 percent had
fallen into the difficult crisis it is currently in up to present time (2018).
The weakening of the competitiveness of the European industry has
started to increasingly materialize in the loss of its export markets.
Japanese started to dominate the world when it came to the electronics
for the mass consumption. In 1980, in EEC, there were 11 robots for
10,000 employed, in the USA 18, and in Japan 40, respectively. The
decrease in industrial development was connected to the employment
loss. Europe has lost the step with the ongoing technological process.
Her biggest competitors, the United States and Japan do possess with
the remarkable industrial rejuvenation abilities, in addition to big
mobility of all factors of production. Japan, besides its economical and
scientific-technological, has its added competitive elements
exemplified through collective discipline and self-sacrifice (Graham,
1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
35
4.2. The reasons for lagging behind of the
EEC and EU’s industry
As the first reason for lagging behind of the European industry, we are
citing the decrease in investment after 1972. In the period 1976 – 1980,
the annual investment increase rate was measured at 3.4 percent,
whereby after 1980, the rate took a negative sign. At the same time the
investment rate in Japan in 1982, was measured at 30.6 percent. The
ration of the French and West German investments aimed towards the
United States in the period 1973 – 1977 has increased from 16 to 38
percent. Great Britain has invested only 11 percent of its investing
capital in the EC, while it steered 50 percent towards the United States.
The economic crisis in 1970s contributed significantly to the
international capital flows. In this regard, the special importance and
role was contributed to the factors of monetary policy. Initial low price
and weak exchange ratio of the US $, has significantly reduced the
price of the American capital and its supply costs. Later on, when it
came to the over-appreciation phase of the US $, which is connected
with the recovery of the US economy, the ability for profit gain on that
base became the new factor of attraction of foreign capital to the United
States. With the dynamism and agility on one side, there stood the
weakened European economy. The Europe was not prepared to face the
challenges of the third technical and technological revolution taking
place. Even though the Europe does not lag behind the United States in
the fundamental research, it is faced with the structural challenges in
the application and utilization of the scientific research results. Europe
was not able to quickly transfer its scientific and technological research
into the industrial innovation.
36
European research potential signifies to the following worrying
signs, such as:
1.) the decrease in creativity and productivity of its research systems;
2.) duplication of the research activities in its member countries;
3.) the lack of coordination between the fundamental and industrial
research and
4.) the lack of multi-disciplinary research (Graham, 1986; Pearce,
Sutton & Batchelor, 1986, Stevović-Buha, 1989).
As the result of these deficiencies many European enterprises, not only
managed to reach an “offensive” character in their technological and
trade area, which is the condition for the capture of big markets, but
remained non-competitive in its current markets. The constantly
increasing competition has forced the EEC to start investing an
increasing amount of its economic policy towards all aspects of
protectionism, which represents the first sign of its weakening
economic power. The big reason for lagging behind of the European
industry (from the very beginning of its existence) was exemplified
through the lack of the creation of its industrial policy and its sector
strategy at the European level. The 1957 Agreements from Rome
capture some aspects of industrial policy, such as governmental
assistance, dominant firms, cartels, free movement of labor and capital,
dumping and forming of the common market have neither being taken
into consideration, nor specified in sufficient scope. The EEC and later
on EU member countries have reacted to the issues in technical and
technological progress in disorganized manner with differing and often
37
contradictory strategies. For example, the industrial strategy of West
Germany and today’s united Federal Republic of Germany (FRG)
mainly relies on research in order how to protect from the Japanese
industrial “aggression”. Great Britain, in its strategies has come into an
agreement with predominantly Japanese dominated conglomerates.
There is even the danger lurking to form the technological pull
comprising Japan, Great Britain and France in order to dominate over
the German pull. The lack of one coherent and joint strategy diminishes
the joint efforts geared towards the achievement of its own norms and
standards as being competitive towards the Japanese and American
ones. The lack of coordination of the EEC’s and EU’s national
strategies augmented by the lack of joint goals make impossible to
achieve the full scope of EU’s national integration. This is related
foremost to the economic dimensions of the European integration, time
savings in technological competition, more timely ability to deal with
risks, economic advantage and domination over the competition, the
advantages of joint research projects and the avoidance of unnecessary
capacity duplications. In the outside the EU markets, the individual
member states are frequently behaving as the arch economic rivals. In
the process of individual member states conquering of the same foreign
markets significant efforts and financial means are being spent, which
inevitably leads to the outflow of precious and limited EU’s resources.
The presence of the single national EU’s national members’ industrial
strategies in the EU, in contrast to the joint one of Japan and the United
States, carries with it the significant risk that these fragmented and
coordinated single member national R&D strategies become
contradictory, laden with excess duplication of efforts and investments,
and frequently in serious lack of research of particular areas due to
constrained and already spent resources. Scientific-technical research,
in the steel production as well as in the field of electronics and
38
informatics do exceed the capabilities of each of single member state.
The scientific path from the R&D till concretization of the research
results is fairly complex, long, expensive and risky. In that direction,
the improvement of the cooperation of the individual EU’s member
states, their enterprises, research institutes is being set as an imperative
for the future. Common strategy could also represent the path towards
the joint European cultural identity. This is necessary to obtain from the
EEC, one new entity capable of attracting young people and, at the
same time, to motivate them to take care of their future (Graham, 1986;
Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
The established of the internal common market is also the basic and
real presumption for the prosperity of the European industry. The joint
market was ordered by the principles of free circulation of goods, labor
and capital. The gradual removal of the customs and non-customs
restrictions between the EU member states, up to their complete
abolishment and the establishment of the joint customs rate, did not
remove the “economic borders” between them. The borders between
the member states have served as the great impediments to the
establishment of the joint European market (Graham, 1986; Pearce,
Sutton & Batchelor, 1986, Stevović-Buha, 1989).
These borders are conditioned and formed by:
1. Fiscal disparities;
2. Technical protectionism; and
3. Imperfect union (Graham, 1986; Pearce, Sutton &
Batchelor, 1986, Stevović-Buha, 1989).
39
4.2.1. Fiscal disparities
The presence of the differing taxation rates leads to the deformation in
the competitiveness conditions at the territory of the EEC. An
important step in direction of the complete synchronization of the fiscal
system was achieved by the gradual acceptance of the so called total
value-added (TVA) system in all member states. In other words, this
represented the acceptance of the definition of fiscal category of the
total “value added tax” (VAT). Unfortunately, the differences in VAT
taxation still remain and it is highly unlikely that they will be abolished
in the near future (Graham, 1986; Pearce, Sutton & Batchelor, 1986,
Stevović-Buha, 1989).
4.2.2. Technical protectionism
The increase of the so called “technical protectionism” increasingly
takes place and threatens to lead to the real “boundaries” between the
individual member states. The technical protectionism is defined as the
multitude of the impediments in movement of goods, which are
inherited from the differences in policies and the administrative norms
(Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha,
1989).
40
4.2.3. Imperfect customs unions
In regards to the EU member states’ customs union it must be noted
that there are still obstacles in free movement of goods. This
development is due to the unfortunate remains of numerous national
procedures and different formalities spanning from one EU’s member
state to the other. It is estimated that the administrative barriers of this
kind do create the added costs which climb in the span between 2.5 up
until 5 percent of the product’s selling price (Graham, 1986; Pearce,
Sutton & Batchelor, 1986, Stevović-Buha, 1989).
4.3. The lack of restructuring process
When the problem of EU’s industry is researched and in particular the
EU’s steel industry one of the largest for its lagging behind is being
exemplified by the lack of timely restructuring in its basic industries.
The process of restructuring involves the adjustment of the production
system to one weakening market. The measures in that restructuring
direction can be undertaken from the sides of companies, individual
member states and the EEC and EU, as the whole (Graham, 1986;
Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
The metallurgy represents the typical example of untimely carrying of
restructuring efforts. For example, the black metallurgy used to be the
leader of the European production and became the burden for the
majority of EU’s member states.
41
The core problem of the black metallurgy is being found in the
following issues:
1.) The lack of joint union’s discipline in the process of
assistance awarding to this industrial sector;
2.) The underestimation of the technical development of steel
products’ customers;
3.) Ever increasing phenomenon in decrease of steel
production;
4.) Unpredictable and increasing slow-down of the economic
growth after 1973 and;
5.) Insufficient consideration taking of changes in certain
industry sectors (i.e. electronics, informatics, telecommunications, etc.).
(Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha,
1989).
The steel consumption, until 1970, has been increasing almost by the
same rate as the growth of GDP. Following the year 1970, the steel
consumption has been reduced by an annual rate of 3 percent in
comparison to the rate of GDP, and by more than 2 percent in
comparison to the annual increase of industrial growth in the steel
industry.
42
These developments are the results of:
1.) gradual reduction the contribution of the industry economic
sector in the creation of the aggregate GDP;
2.) the reduction of the necessary steel quantity for the
production of one unit of final product (due to the increases in steel
structural and other qualities);
3.) the reduction of steel consumption due to its substitution
possibilities with other materials (i.e. aluminum and plastic-based
composite materials) and
4.) the reduction in production capacities produced by the
economic recession in the EEC and EU.
It is being estimated that the steel consumption rate will continue to be
on the decrease, at an estimate annual rate between 1.4 to 2 percent. It
is important to note, that, in the future years, this unfortunate
development for EU’s steel industry is unlikely to change. General
demand weakness that begun to be felt in the beginning of 1970s
brought about demand reduction in almost all basic goods’ markets. To
this unfortunate development must be added the sharp rise of raw
materials and energy needed in the steel production have accelerated
the price inflation of steel production costs (Graham, 1986; Pearce,
Sutton & Batchelor, 1986, Stevović-Buha, 1989).
The situation is not better at all, at the traditional export markets as well
as at the majority of the remaining markets, which forced the EU to sell
its steel at “the marginal” prices. In fact, the export prices of steel, do
43
only suffice to cover the marginal costs, so that the large differences
between the prices at the internal and external (outside the EU) are
being covered with taxpayer laden and otherwise costly subsidies,
which in aggregate is being projected to community’s internal
customers. Restructuring of the metallurgy complex which was badly
needed, was not completed timely in a market in a weakening market.
Fairly long period of the economic prosperity was retarding more real
thinking in a more proactive and course-changing direction, and the
very market play could not provide the sufficient information about the
future. Modern market economy could only function if it is supplied
with sufficient information regarding the future, if there are worked out
projections/schemes about that future and if these projections are
sufficiently explained and let go into the circulation. In resolving of this
task the contribution is being provided by the already established study
bureaus, such as BIPE in France, IFO in Germany and others, which
with their future projections shed more light to the potential and
possible future developments. In this way, the businesses in the
conditions of the better information flow tend to make easier and more
reliable decisions about the future actions, with the reduction of
palliative state measures to the lowest possible level (Graham, 1986;
Pearce, Sutton & Batchelor, 1986, Stevović-Buha, 1989).
In the world in which development takes place at the rapid pace, the
intensive and frequent adjustments are necessary. The Japanese
adjustment scheme is being exemplified by the above conditions –
rapid and turbulent, involving all societal victims that the adjustment
process brings along. The American adjustment scheme has somewhat
milder form and demands less “societal sacrifices”. Despite the adverse
situation the sudden changes were not accepted in the EEC. In this
context it is important to emphasize that the high share and the gigantic
44
dimension of the base industry in the economic and industrial structure
of the community made it difficult to find the right way of raising
economic efficiency and competitive capabilities of its economy. There
are difficulties in modernizing heavy industry and steel production
since it is heavily burdened with a socio-economic complex. This is
above all a problem of employment that would inevitably be shaken up
with any of its radical modernization, especially with the orientation to
its alteration with some more economically more efficient and more
propitious industry sectors. State measures of support and protection
are always ready to lend a helping hand and forever uncompetitive and
economic failure from the will to avoid "traumatizing" certain
vulnerable areas and pools because of the economic importance that
black metallurgy and steel production have in their overall economic
activity (Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-
Buha, 1989).
Let’s mention the case of Arbeda Company, which would seek to
reduce its financial deficit by 5,000 dismissed workers, or the case of
the Italian company Finsider, which was implementing some European
directives, had to lay off 13,000 workers. Obviously, the crisis situation
was affecting the acceptance of the European framework as the only
possible way out of this situation. In this direction, in October 1980,
production quotas were established, the orientation prices were
published and a law on aid was adopted, with the importance until
December 1985.In June of 1983, the European Commission decided to
reduce production capacity in ferrous metallurgy by as much as 16
percent in order to achieve profitability increases by 1986.As early as
November 1983, after a meeting in the City of Elsener in Denmark, a
reduction in production capacity was organized. In terms of achieving
success, it is partial, given that the steel industry was one of the main
45
sectors for the reconstruction of Europe in the 1950s, and it was
unrealistic to expect quicker, more energetic and expeditious moves
(Graham, 1986; Pearce, Sutton & Batchelor, 1986, Stevović-Buha,
1989).
On the whole, the "scapegoat list" of reducing production capacity
included France with completely outdated capacities, followed by
Belgium and the United Kingdom. Some modernized facilities are
located in Germany and Italy. The Netherlands and Luxembourg are
somewhere in the middle when it comes to capacity modernization.
This heterogeneous situation diminished the effectiveness of the move
by the European Commission. Namely, with this system, which wanted
to realize the idea of a proportional decrease in the production of all
members, as one would not be "more" punished, and the other less in
the costs of European restructuring, profitable companies (i.e. Italsider,
Thyssen in Germany) while others, without any possibility for further
growth, have been kept in life. When they want to do something in the
restructuring of the metallurgical sector and the production of steel, the
Member States are scared of the steps in uncertainty, as well as from
the possibility that the parent unions will accuse them of "selling off
national companies". On the other hand, the European Commission's
move to equally submit the costs of European restructuring suggests
that future progress in the restructuring of European industry depends
to a large extent not only on the Member States' strong will to address
the many problems that they are pressing, but also on the willingness of
each of them to "victims" in the form of a sacrifices in favor of the
community. Goals that were predicted for 1990 and later are more
realistic than those of the mid-1980s. However, their biggest drawback
remains that they still do not achieve a more fully defined global
strategy and economic development in general and individual key
46
sectors. In this sense, for example, the strategy of optimal development
of black metallurgy, technological research, trade, and regional and
social policies remains insufficiently elaborated and completed.
Therefore, we cannot say that the companies in EEC with such set
goals are most reliably focused on the future that is ahead of them.
4.4. Other reasons for the EU lagging behind
and the loss of competitive power in steel
production
The cause of the lagging and loss of competitive power can be
attributed to a pre-ambitious wish that from the beginning follows the
life of this integration group to create a welfare state in all member
states. In this regard, sectoral trade protectionism and aid to vulnerable
industries, as well as the multiplication of individual market legislation
and detailed national regulation of economic activities, have largely
deferred the EEC structural adjustment process to the changed
requirements of the new international division of labor. In addition to
the mentioned moments, which can be taken as an explanation for the
emerging crisis in the European steel industry, it should be noted that
the labor costs in it are increased. And while, for example, a Japanese
worker more easily accepts the ethics of "giving up" in favor of
national achievements, and even to the detriment of his living standard,
the European workers are much more comfortable and they are not
ready for such sacrifices; they are not yet ready to accept the ethics of
"giving up" in someone's favor. They appear to be the colors of the new
technological revolution and what it could bring, or take away, with the
47
eyes of the British and other workers who, in the name of
rationalization, were out of work. The loss of competitiveness of
European industry is a consequence in good parts and procedures of
member governments. They underestimate the amount of difficulty,
they believe, and they are convinced that it is a classic conjuncture
cycle, and therefore have a cure for it within the framework of the
classical therapies, applied so far. Protection mechanisms have also
contributed significantly to this, which have been alleviating social
difficulties and playing the role of factors of relative stability in the
economies of the member states. One of the reasons for the lagging of
the European steel industry lies in agricultural production, or the way
its organization is organized in the EEC. This should take into account
the preoccupation with the EEC problems of agricultural production, so
that the community simply did not have enough time to devote itself to
its core business, (i.e. industrial production).A weakened EEC
substance could cause some country to leave (Great Britain, with
Brexit, for example). Therefore, the way out of the crisis will not be
easy, nor can it be spontaneous. It is estimated that much more decisive
steps will have to be taken than the previous ones. It is considered that
solutions cannot be found in the "economic inventions" such as
reducing working hours, occasional financial assistance, for example,
for new employment, or creation of new enterprises. Solutions cannot
be found even in the division of labor among the members, which
presupposes that the scope of needs to be satisfied is plain, nor in
healings that would come through "ideological inspiration" in:
nationalization, uncontrolled free exchange, monetarism, and so on.
Does this mean that the EEC of a national Member State should raise
their hands? The history of industrial development shows that the
economic position of a country, or a group of countries, is never
definitely secured or definitively lost. Will the EEC know how to create
48
an industrial base that is needed not only for it, but for the world
economy, especially for developing countries, in order to play an
economic and political role in solving the problems of our planet?
A positive answer to this question is related to the European industrial
strategy. Then today it becomes more necessary more than ever,
although the difficulties in its creation and realization are great. It is not
scarce in ideas, less abstract, less utopian, and the time of common
actions seems to be close. There is an increasing awareness that,
otherwise, European countries can quickly be brought into a state of
economic dependence and political subordination, which would be not
only economically fatal but also politically unbearable. Thus, following
a series of failed European commission attempts, in June 1984 in
Stuttgart, the European Council underlined the need for an inevitable
introduction of a common industrial strategy. On that occasion, he
could point to successful examples of cooperation between European
countries in the industrial field (i.e. AIRBUS commercial aircraft
manufacturing and ARIANE space program) (Moggridge, 2014).
49
Chapter V – Infant Industry Argument
5.1 Definition of an Infant Industry
The infant industry argument is the oldest and the best known rationale
for an intervention in the industry. It is one of the arguments used to
justify the protection of the industry from international trade. The
argument claims that protection is needed for new industries because
new small domestic companies have little chance to compete and
survive the competition with large, already established companies
located in the developed countries. This argument means that, in the
early phase of industrialization, a country may exhibit higher
production cost in certain industry than their counterparts in already
industrialized countries. The infant industry in the country that is just
beginning industrialization would fail to survive without the
government’s intervention and protection of the industry. The argument
has offered not just a justification for the industrial policy, but made a
strong case for necessity of government’s intervention, while the
industry is in the infancy stage (Krenin, 1991).
Temporary protection would allow domestic industry to gain
experience, develop skills and reduce costs of production to the levels
prevailing in similar industries in developed countries. The infant
industry argument makes several assumptions: (1) there is a learningby-
doing process in the industry that reduces costs of production; (2)
only domestic production experience can help learning process; and (3)
knowledge and technology are industry specific. With industry specific
technology, the protection helps that technology in a specific industry
can be improved only by accumulating the experience in that industry
(Krenin, 1991).
50
Therefore, the country can achieve new comparative advantages by
protection if the period of protection is long enough to accumulate the
experience and find innovations needed to reduce the costs of
production, so the firms can stand the competition in the world’s
markets. The main point of the infant industry argument is that
protected industry will gain a comparative advantage if it is given
temporary protection (Krenin, 1991).
Meade (1955) pointed out that the analysis of the infant industry
argument requires a careful distinction between learning economies
that are internal and those that are external to the firm. Learning
economies are defined as internal to the firm if the costs of production
are lowered by learning that takes place within the firm. Examples of
learning economies are investing in a cost-cutting innovation,
technological advancement(s) and/or investments in workers’ training
etc. In either case, the firm is the only beneficiary of cost reduction
resulting from the investment. Learning economies are also called the
external economies if the learning within the firm leads to the cost
reductions of other firms in the industry.
Furthermore, the analysis of the infant industry argument can be based
on two concepts: 1.) Economies of scale (static concept) and 2.)
Economies of time (dynamic concept). The first concept claims that the
infant industries will achieve economies of scale when production gives
them preferential access to domestic market. Economies of scale result
in falling costs, as the scale of output, at any point in time, tend to
increase. The second concept claims that the infant industries will
achieve economies of time, (i.e. experience, when protection gives
them a time for learning by doing). Economies of time result in falling
costs in connection with the time period (Krugman & Helpman, 1989).
51
As Japan made its prewar industrialization process under the
protection, this argument provides basic framework for analyzing
Japanese industrial policy applied in the iron and steel industry in the
1950s. Vestal (1993) was first who noticed the need for defining
whether or not the iron and steel industry was an infant industry. “For
economic development in Japan to have benefited from policy to
extend to steel industry depends on whether the iron and steel was an
infant industry…”(Vestal,1993).This question is crucial because if it
was not the infant industry then it would not require governmental
support. Every textbook of the industrial organization explains that the
industry goes through three phases: infancy, maturity and declination
over time. This is called the industry life circle and it is presented in
Figure 1. The industry life cycle is not the same as its product life
cycle, because within an industry there is a constant updating of
products. For example, TV manufacturers first produced monochrome
TVs, then color TVs and subsequently home entrainment systems.
Industries evolve over time, both, structurally, and in terms of overall
size. The industry life cycle is measured in total industry sales and the
growth in total industry sales.
52
Figure 1-The Industry Life Circle
Source: (Adjusted, according to Porter, 1980, p.156)
An infant industry, by definition, is an industry that currently cannot
survive under free trade conditions without protection, but will acquire
a competitive advantage against foreign competitors by accumulating
production experience and employing economies of scale, if it is
temporarily protected during the initial stage of development. Maturity
phase comes into place when the protection should be removed because
the industry has grown large enough to compete with its competitors in
the world markets and the industry has accumulated production
experience. Declining phase of the industry is characterized by falling
53
output or revenue, as well as the employment. It is most often
connected to the drop of demand in the world’s markets and drop in the
world prices of the final goods. At this stage, the firms may also
combine forces and ask for government’s intervention or subsidies to
help to protect the declining industry. The main reason for the
government’s intervention at this stage is centered on the employment
protection (Sazanami, 1995).
If we consider duration of an industry’s existence, than the Japanese
iron and steel industry was not in the infancy stage, because the
industry has been operating since Meiji Era. In addition, in pre-WW2
period, Japanese iron and steel industry accumulated, both
technological and organizational skills, at quite high levels, when
compared with the world standards. Odagiri and Goto (1996) were also
eager to outline that production technology in the iron and steel
industry was at high level before the war. This means that during its
existence the industry had accumulated the experience and knowledge
(Yonekura, 1991).
However, to answer the question if the iron and steel industry was in
the infancy stage, we have to analyze its competitiveness, immediately
after the war. At that time, Japanese iron and steel industry was almost
non-existent and because it was supposed to start its production from
zero, it is considered as the infant industry. Furthermore, the costs of
production were too high that it would not survive under the free trade.
Table 2 shows that volume of the production was at the very low level
comparing to its international rivals. Thus, Japanese iron and steel
industry has faced with development of production technologies in
other countries that occurred immediately after the war. Import of new
54
equipment and improvement in the large scale production process was
necessary for the industry to survive. Japan had to scrap existing
facilities and start anew with unfamiliar technologies, such as a basic
oxygen furnace. The iron and steel was considered to be an infant
industry due to the fact that the learning of a new technology was
crucial for its survival. In addition, in its infancy stage, in the late
1940s, Japan turned into market economy facing entirely new
circumstances (Sakurai, 2000).
Table 2 - Prewar and Postwar Crude Steel's Production of Major
Countries
(Unit measures: thousands of tons)
Year The USA Japan The UK Germany France SSSR World
1875 396 1 719 371 256 13 1,900
1880 1,167 2 1,316 624 389 308 4,400
1885 1,736 1 1,917 1,917 554 193 6,300
1890 4,346 2 3,636 2,162 700 378 12,400
1895 6,213 2 3,312 3,941 890 880 16,900
1900 10,352 1 4,980 6,646 1,591 2,211 28,500
1905 20,345 107 5,905 10,067 2,255 2,544 45,200
55
1910 26,514 252 6,476 13,699 3,413 3,444 60,500
1915 32,667 514 8,687 13,258 1,111 4,116 66,200
1920 42,809 811 9,212 8,538 2,706 162 72,500
1925 46,122 1,300 7,504 12,195 7,464 1,873 91,200
1930 41,353 2,289 7,443 11,511 9,444 5,761 95,000
1935 34,640 4,704 10,017 116,419 6,277 12,521 99,400
1940 60,766 6,856 13,184 19,141 4,413 19,001 142,000
1941 75,151 6,844 12,510 20,836 4,310 14,500 154,000
1942 78,047 7,044 13,149 20,480 4,488 10,000 154,000
1943 80,591 7,650 13,240 20,758 5,128 12,000 162,000
1944 81,322 6,729 12,337 18,318 3,092 16,350 156,200
1945 72,304 1,963 12,014 300 1,661 18,500 118,300
1946 60,421 557 12,899 2,551 4,408 13,600 111,500
1947 77,015 952 12,929 3,060 5,733 14,700 136,000
1948 80,413 1,175 15,115 5,561 7,236 18,700 155,500
56
1949 70,741 3,111 15,002 9,156 9,152 23,300 160,000
1950 87,848 4,839 16,554 12,121 8,652 27,300 189,300
1951 95,436 6,502 15,889 13,506 9,835 31,350 210,700
1952 84,521 6,988 16,881 15,806 10,867 34,492 211,400
1953 101,251 7,662 17,991 15,420 9,997 28,128 234,300
1954 80,115 7,750 18,117 17,434 10,627 41,434 223,600
1955 106,173 9,408 20,008 21,335 12,631 45,271 270,400
1956 104,522 11,106 20,990 23,189 13,441 48,698 284,000
1957 102,253 12,570 22,447 24,507 14,100 51,176 293,700
1958 77,342 12,118 19,880 22,785 14,633 54,920 274,600
1959 84,773 16,629 20,110 29,435 15,197 59,950 308,400
1960 90,067 22,138 24,995 34,100 17,300 65,292 346,500
1961 88,917 28,268 22,441 33,458 17,577 70,751 354,400
1962 89,201 27,546 20,820 32,563 17,234 76,306 361,500
1963 99,120 31,501 22,882 31,597 17,554 80,226 387,800
57
1964 115,281 39,799 26,651 37,339 19,781 85,034 438,200
1965 119,260 41,161 27,439 36,821 19,599 91,000 459,400
1966 121,654 47,784 24,705 35,316 19,594 96,907 474,900
1967 115,406 62,154 24,279 36,744 19,658 102,235 498,700
1968 119,260 66,893 26,277 41,159 20,399 106,532 530,600
1969 127,976 82,166 26,855 45,316 22,511 110,000 573,600
Source: Catalogue of Iron and Steel Statistics (Tekkou Toukei Youran), various issues
58
5.2 Infant Industry Argument and Expectation
The economic literature points out that it is not easy to evaluate validity
and effectiveness of the infant industry’s protection policies. In
neoclassical models of an infant industry there are static expectations
which basically imply that private agents respond just to the current
costs and prices. In that case, consumers of iron and steel in Japan
would go for cheaper imported steel. Domestic companies in the iron
and steel industries, in Japan, would work with loss due to the high
international competition, and it may well be, that their production
would be completely reduced over time. However, dynamic
expectations and beliefs that the industry will develop and provide
cheaper goods in the future call for the government interventions and
protections.
Japanese policy makers viewed the market competition as the case that
occurs in the later stage of the economic development. They
temporarily blocked the competition, in order to make the successful
development and help industry with various sets of measures which
would encourage growth. Because of the relations inherited from the
past, the companies in the iron and steel industry made their investment
decisions based on government’s expectations. If the government did
not expect the industry to grow and if there was no protection, it would
influence the individual producers in a way that they would not expect
a future increases in productivity. If this was a case, no producer would
invest, and the expectation that the industry would not grow would be
fulfilled. On the other hand, under the protection, if growth of the
industry and realization of economies of scale were expected,
investment could become worthwhile for individual producers. If this
59
was the case, producers would invest and the expectation that the
industry would grow would be realized (Okayaki, 2000).
The infant industry argument has been often abused, there are many
implementation problems and it is usually very difficult to end the
protection (Baldwin, 1966). The test of lifting the protection should be
that, if the protected industry has developed to the point when it can
compete in the world’s markets, it becomes mature industry and the
protection policies should be removed. However, the main problem
with protection comes from the fact that it is complicated for the
government to remove the measures of protection once the industry is
protected. Krugman & Obstfeld (2000) explained that trade policies in
practice are dominated by special interest politics. Our further analysis
will point out the proper time and conditions when the trade restrictions
could be removed.
60
5.3 Criteria for Removal of Protection
Neoclassical economic theory holds that the protection of an infant
industry can be justified only under some specific conditions. There are
four tests which should be satisfied if the industry deserves to be
protected and fulfillments of these criteria calls for removal of trade
protection. As we are analyzing the development of the iron and steel
industry that occurred in the period from 1950 to 1970 in Japan, we can
make the analysis if and when those tests were satisfied.
1) Mill’s Test – John Stuart Mill (1848) alluded to one of the
main prerequisites for the infant industry: the presence of dynamic
learning effects that are external to the firms. By protecting the industry
the firm has time to learn from its own experience and, possibly, from
the other firms in the industry.
Mill pointed out that for the protection to be really temporary it is
necessary that the industry in question should, in fact, eventually
become self-sustaining. This means that protection should be temporary
and that infant industry must mature and become viable without
protection. This requires the productivity to increase over time such
that the industry can eventually be able to compete under the free trade.
In Table 3, it is shown that the productivity inJapanese iron and steel
industry was growing over time. Moreover, that presented data of
Japanese iron and steel industry shows us that, after 1966, Japan took
the first position in the world regarding the labor productivity in the
iron and steel industry.
61
Table 3 - Labor Productivity in Major Countries; Yearly crude
steel production expressed in metric tons divided with number of
workers
Year Japan The USA Germany France
1959 78.9 - 90.4 83.1
1960 94.7 - 99.6 97.7
1961 108 185.9 95.9 91.5
1962 105.8 187.6 96.2 89.8
1963 121.2 206.9 105.3 98.6
1964 149.8 223.6 118.1 111.2
1965 159.6 221.5 118.4 113.1
1966 186.6 229.1 121.9 113.1
1967 235.3 226.6 133.5 111.6
1968 250.1 237.1 148 121.7
1969 301.1 247.6 156.3 122.5
Source: Iron and Steel Monthly Statistics, various Issues
62
Figure 2 - Labor Productivity in Major Countries
Source: Authors’ Calculations
Coden (1974) stated that Mill’s test is satisfied if the average cost falls
to the level of the import prices(i.e. when the average costs equals the
import prices).Most textbooks of the international trade and economic
development indicate this to be the timing for the protection removal.
63
Because the data of prices on imported goods are unavailable, we will
base our discussion on the comparison of the average costs and average
world prices of iron and steel final products. Table 4.presents the
domestic prices in major iron and steel producer countries and provides
the average world price, excluding prices in Japan. Comparison of
average production costs and average world prices is presented in Table
4. It can be seen that Japanese iron and steel companies reached the
cost competitiveness in 1958.
Table 4 - Domestic Prices in Major Countries
unit: US$
Year Japan The USA England Germany France
Average
World
Price
1956 175 119 117 118 121 118.75
1957 170 128 119 124 125 124
1958 148 127 118 126 131 125.5
1959 132 138 119 129 139 131.25
1960 125 147 120 131 147 136.25
64
1961 125 152 115 132 147 136.5
1962 127 156 123 143 148 142.5
1963 124 155 123 145 156 144.75
1964 123 158 126 148 155 146.75
1965 123 161 124 143 157 146.25
1966 123 173 125 148 159 151.25
1967 117 182 128 153 162 156.25
1968 116 199 129 159 164 162.75
1969 124 253 130 161 165 177.25
1970 123 220 139 166 168 173.25
Source: World of Iron and Steel (Tekkou Kai), various issues
2) Bastable Test – In 1921, Charles Francis Bastable added
another condition for protection of the infant industry requiring that the
cumulative net benefits provided by the protected industry exceed the
cumulative costs of protection. In other words, social benefits from the
industry, when it becomes mature, should more than compensate for
the social costs incurred in protecting the industry in its infancy stage.
65
The period when the protection should be removed, by this test, is the
time when the average costs are less than the imported prices or world
average prices. From data, in Table 5, it can be concluded that Bastable
test was also satisfied in 1957.
Table 5 - Average Costs of Production and Average World Price
Currency units: US$
Year Japan The USA
Average
World
Price
1956 108.72 100.55 118.75
1957 120.85 99.79 124
1958 89.49 110.84 125.5
1959 81.68 103.4 131.25
1960 77.18 109.03 136.25
1961 83.09 111.13 136.5
1962 73.99 107.72 142.5
1963 71.7 105.24 144.75
66
1964 68.22 104.3 146.75
1965 69.29 102.5 146.25
1966 65.19 102.7 151.25
1967 63.08 106.78 156.25
1968 61.49 108.32 162.75
1969 63.44 113.63 177.25
1970 70.81 124.49 173.25
Source: World of Iron and Steel (Tekkou Kai), various issues
3) Kemp Test – Kemp realized that not only Mill’s and
Bastable’s tests are sufficient for the industry to be protected (Kemp,
1960). He proved that after passing these two tests the industry could
not stand on its own feet in the world market. Kemp focused on
learning processes and distinguished those which are internal and those
that are external to the firm. The former, is the concept of dynamic
internal economies, economies happening not only from current
production, but also from the integral of past production. The later one
is the concept of dynamic external economies that suggests that a
temporary protection may be justified if the pioneering firms share the
knowledge with the newcomers. He admitted that the protection could
also be based on the presence of the uncertainty and the imperfection of
the capital market.
67
The capital market failure is the inability to access finance for the
economically valuable purposes. Usually, all postwar countries have to
deal with the imperfections with the proper capital markets and
companies are faced with large interest, lack of information, poor
judgments or even discrimination in the market. Japan, as the postwar
country, has also experienced this anomaly. However, the capital
market’s imperfection was solved through the establishment of the
Japan’s Development Bank, which supported the iron and steel industry
with the low credit interest rates (Uekusa& Ide, 1986). Uncertainty is
connected to the technological improvement. If firms within an
industry can appropriate the benefits of the learning process, there is no
need to protect them socially, since they can make up for their initial
private losses by their future private profits. However, nonappropriability
of the outcome of the learning process constitutes
legitimate reason for protecting an infant industry. If the outcome of the
learning process spills over to others, including latecomers, the firms
that sustain initial losses today may not be able to compensate properly
for them in the future. Until 1958, Japanese iron and steel industry’s
private agents adopted various types of new technologies, of which
main were the blast oxygen furnaces and continuous casting process
technologies (Odagiri &Goto, 1996).
4) Neigishi Test – Neigishi developed his argument for infant
industry protection by constructing the model where he assumed that
newly-born infant industry cannot compete with foreign mature
industries in the world market because its initial operating costs are too
high compared with foreign competitors (Kemp &Neigishi, 1970).
However, this industry is expected to become competitive in the future,
if it begins to operate and produce same output with the loss at the
present time. Neigishi pointed out that there is a clear case of protecting
68
the infant industry if the country is large enough in jargon of the
international trade.
Neigishi used the concept of dynamic internal economy and the general
equilibrium approach, in order to prove his statement. Neigishi
developed the model of inter-temporal optimal allocation of resources
and proved that there is a case that protection may be necessary, even
without generating external effects. He supposed that by the expansion
of output at the present time, the infant industry reduces the
international relative price of its product in the future. The production
set of the world expands and become larger compared with the
production set in the first period with the protection. Therefore, the
consumers in the world have more products thanks to the growth of the
infant industry. Furthermore, decrease of international prices in future
will increase consumer surplus and this is the case where protecting
today’s infant industry may yield higher overall level of the world’s
economic welfare. The Japanese iron and steel industry emerged as a
dominant exporter.
Furthermore, the Japanese iron and steel industry prices had an
influence to the world prices, since 1960s (see Table 6.). After 1964,
the Japanese domestic prices of iron and steel production were the
lowest. In 1969, Japanese export prices decreased so that the USA and
the European Community put the Voluntary Export Arrangements, in
order to limit export and prices (Kawahito, 1981). Table 6. shows the
prices of the finished steel, in the USA and Japan, as well as the
average world’s prices.
69
It is rather difficult, for a government planner who wishes to follow
these recommendations when deciding on the specific policy for an
infant industry to check through all these tests. These tests are hard to
apply and evaluate in practice because the cost and benefits of
protection change over time as learning process. Furthermore, the
fulfillment of the tests depends on the industry’s learning potential, the
speed of learning and the degree of substitutability of foreign and
domestic goods.
Table 6 - Prices of Domestic Finished Steel Products
Year Japan The USAv erage World Prices (in US$)
1948 155 77 80
1949 154 83 83
1950 150 88 88
1951 148 95 95
1952 146 96 110
1953 142 103 113.6
1954 140 105 117
1955 154 109 121.8
70
1956 175 119 130
1957 170 128 133.2
1958 148 127 126.2
1959 132 138 134.6
1960 125 147 134
1961 125 152 134.2
1962 127 156 139.4
1963 124 155 140.8
1964 123 158 142.2
1965 123 161 141.6
1966 123 173 145.6
1967 117 182 148.4
1968 116 199 153.4
1969 124 253 166.6
Source: World of Iron and Steel (Tekkou Kai), various issues
71
However, from our analysis above, it can be seen that by 1960, all tests
were satisfied. This is the year when the protection could be removed
and abolished. However, Japanese government continued to protect the
iron and steel industry for a long time after the year 1960.
Chapter VI – Evaluation of the Industrial Policy
6.1 Trade Protection
It is difficult for an industry to become established without temporary
protection by the government. In general, which industry should be
promoted depends not only on the industry itself but also on the
industrial structure of the country, as well as on the structure of demand
in the world, as a whole. Policies that protect and promote an infant
industry can be justified for the developing countries, but it has to be
evaluated how those policies have affected countries’ economic
welfare.
As we mentioned earlier, the studies about the estimation of costs and
benefits of protection of the iron and steel industry in the postwar
period, are almost non-existent. Regarding the issue of the protection
only, the estimation was conducted by Kawasaki (Kawasaki, 1985). He
estimated that the effective rates of protection were extremely high in
comparison with other countries. Before the Kennedy Round, the
effective rates of protection in the Japanese steel industry were 24.4
percent for pig iron, 47 percent for crude steel and 35.1 percent for
finished steel products.
72
6.2 A Partial Equilibrium Approach to the Measurement of
Trade Barriers
Protective measures may be estimated in general or partial equilibrium.
As we will make an estimation of protective measures for the iron and
steel industry, we will concentrate on the partial equilibrium model.
Measuring the consequences of the trade barriers requires accessible
data on trade flows and domestic outputs, as well as on the size of
barriers. If the good is homogenous, it has the same price of the import
and in the domestic market; all changes could be presented in one
figure. Consequently, the application of the Coden-Johnson model
would be possible (Pomfred, 1991).
This model is applicable only in analysis where domestic price is
enlarged just for the tariff amount. However, the application of the
Coden-Johnson methodology to evaluate the protection in Japan would
be inappropriate because Japanese market was not only protected by
formal tariffs but also by the import quotas and other measures. This is
why we have to separate domestic and import markets and apply a
model that was designed by Hofbauer and Elliot (Hofbauer & Elliot,
1994).
The framework is founded on the partial equilibrium analysis
with three key assumptions:
- The domestic goods and the imported goods are perfect
substitutes;
73
- The supply schedule for the imported goods is flat (perfectly
elastic) which shows that country is small, and as the iron and steel was
an infant industry, it was small comparing to other foreign rivals; and
- The supply schedule for the domestic good is upwardly
sloped (less than perfectly elastic).
The effects of the barriers (e.g. either tariffs or quotas) under these
assumptions are illustrated in Figure 3.and Figure 4. Trade policy raises
the import prices of steel by tariff factor (Pm – Pw) or lowers the
import by (Qw – Qm) in the case of the quantity restrains. The increase
of the import price shifts the domestic demand curve from Dd to Dd’.
The increase in import prices leads domestic suppliers to raise price by
“Pd” amount, which in turns raises the import demand schedule to
“Dm”. The post restriction equilibrium is given by “Pm”, “Qm”, “Pd’”
and “Qd’”.
74
Figure 3 - Effects of the Trade Protection in the Import Market
Source: (Hofbauer & Elliot, 1994).
75
Figure 4 - Effects of the Trade Protection in the Domestic Market
Source: (Hofbauer & Elliot, 1994).
76
6.3 Methodology of Calculating the Welfare Effects of
Trade Barriers
In a short run, the changes in prices and quantities due to a trade
protection results in a loss of consumer surplus, both at the import and
domestic market. However, in a case of the protection, which is
imposed in order to develop an industry, today’s protection might result
in gain of consumer surplus in the future. Simply, the consumers,
presently, pay more for the goods than they would in the absence of the
restriction, but later when the protected industry is developed, the
consumers’ gain will rise in national and international level. This gain
arises because consumers will be provided with cheaper products.
The trade restriction(s) will provide producer’s gain and consumer’s
surplus (Schmalensee, 1970). If the trade restraint takes a form of tariff,
than the government tariff revenue will rise. If non-tariff barriers, such
as import quotas are imposed, the rents to the domestic importers will
be captured3. Finally, there would be an efficiency loss because the
trade restrain effected the allocation of resources. By imposing the
trade barriers the wedge between the domestic price of the import and
the world price will be captured. Consequently, a transfer of resources
towards production of the import substitutes and away from other
sectors would stimulate the shift toward the resources that could have
been used more efficiently (Schmalensee, 1970).
The methodology used here to quantify these welfare effects is based
on the assumption that goods are perfect substitutes. The consumers’
3 In Japan domestic importers generally capture the
quota rents that arise from non-tariff barriers.
77
surplus loss from trade barriers, in the import market is approximated
by the area bounded by points labeled as “aceg”, in Figure 3. This
method of estimating the consumer loss in the imported market
provides an average of the consumer loss calculated separately from
two demand curves. Jones (1993) gave a mathematical proof of the
validity of this method. Using the new demand schedule (Dm) outlines
the area marked “acdg” as the change in the consumer surplus, while
the old demand schedule (Dw) gives the are marked “abeg”. The
difference between the two areas is shown by the parallelogram marked
“bcde”. Line “ce” divides the area in half and gives the compromise
consumer surplus change, area “aceg”. Area “aceg” can be estimated
by adding rectangle “acfg” to triangle “cef”.
If the form of protection is exemplified by tariff, the
rectangular area “acfg” represents the government’s tariff revenues,
and may be estimated as:
(Pm – Pw) x Qm
The area of the triangle marked “cef” represents loss, which may be
estimated as:
(1/2) x [ (Pm – Pm’) x (Qm’ – Qm) ]
If non-tariff barriers are used, than the “acfg”area represents a transfer
from consumers to importers and distributors (i.e. those who control
domestic market). In either case, the consumer loss in the import
market equals the sum of rectangle “acfg” and triangle “cef”. If both
tariff and non-tariff barriers are imposed, the tariff equivalent of the
non-tariff barriers is assumed to be difference between the total
78
inclination in the import price (Pm – Pw) and the price effect of tariff.
The price effect of tariff is normally calculated as “Pw” times the ad
valorem tariff rate.
The market effect for domestically produced goods (Figure 3)
is calculated, as follows: the consumer welfare loss from higher
domestic prices may be approximated by the area marked “svyz”. The
area “svyz” can be estimated by subtracting rectangle “svxz” and
triangle “vxy”. This amounts to:
(Pd’ – Pd) x Qd’ – (1/2) x [ (Pd’ – Pd ) x (Qd’ – Qd) ].
In domestic market, the consumer loss is just offset by the producers’
surplus gain.
6.4 Calculating the Welfare Effects of Trade Barriers in the
Iron and Steel Industry of Japan
As, after WW2, the iron and steel industry was an infant industry, it
needed the government support to start up. To establish and develop
such industry the government could provide subsidies for protection or
temporarily restrict the imports. In the case of Japan, it was easier to
choose the second option because country was faced with difficult
fiscal situation. The Japanese iron and steel industry become the
world’s largest steel exporter; therefore, we may conclude that
protection in the earlier periods was justified. Krugman (1984) has
explained how the protection can work as a force for export promotion.
Anyhow, in order to check the difference between the loss and gain in
the domestic market, it is needed to compare how much the domestic
consumers actually have paid for finished (carbon) steel products in the
79
protected domestic market, as well as how much they would pay if
there was no protection. In that sense, we will compare the real
expenditures consumers paid in domestic market with the
“hypothetical” expenditures they would have paid, in the absence of the
trade barriers.
During the period from 1950 to 1970, domestic consumers
paid, as follows:
Table 7 - Value of Domestic Consumption
Qd’ x Pd’ Qm x Pm Total
47,041,986,000 372,929,360 47,141,915,360
Source: Authors’ own calculations
“Qd’” is domestically produced quantity domestic consumers
consumed per year;
“Pd’” is the price consumers were paying for the domestically
produced product that year;
“Qd’ x Pd’”represents the consumption of domestically produced
goods;
80
Qm is imported quantity that was available to domestic consumers;
Pm is the price of imported products, it is the world’s going price plus
ad valorem tariff, and mathematically, it can be presented as, “Pm = Pw
x (1+t)”;
“Qm x Pm” is the value of domestic consumption of imported goods.
“Total” represents domestic consumers’ total expenditures for the
finished steel products.
If we assume that domestic consumers were consuming the same
quantity (Qc = Qd + Qm) and paying world’s current/going prices (Qc
x Pw) then total expenditures would be US$ 53,394,843,800.00. In this
calculation, we used the average world’s prices that included the prices
of Japanese producers, which in the late 1950s became the cheapest
prices in world’s market.
The difference between real expenditures and expenditures that would
occur in the absence of the trade barriers was calculated at US$
6,252,928,440.00. This means that the domestic consumers at the
beginning of the protection process were facing a loss but in the future
period they gained from the development of the infant industry. In the
period of 20 years, Japanese consumers benefited for more than US$
six (6) billion. If we assume that the iron and steel industry in Japan
was not established and exclude the Japanese domestic prices in the
process of calculating the average world price, the consumer gain
would be even higher. For their consumption they would pay US$
55,033,840,000.00 and the difference between real expenditures and
81
the calculated ones would be US$ 7,891,925,000.00. The cost and
benefits from trade barriers are presented in Table 8.
Table 8 - Consumers’ Surplus Loss and Gain and Tariff Revenues
(Pd-Pw) x Qd’
10 Years Loss
(Pd-Pw) x Qd’
10 Years Gain
(Pm-Pw) x Qm
Tariff Revenue
1,982,687,600.00 7,970,692,400.00 48,642,960.00
Source: Authors’ own calculations
The consumers’ surplus gain, in domestic market, over the period of20
years was US$ 5,988,004,800.00 (which represents the difference
between gain and loss). In first ten years, the domestic consumers
suffered the loss, but in the last ten years their gain was four times
larger. On the import market, if we ignore the efficiency loss, the
consumers’ loss is equal to the government’s tariff revenues which
equal to almost US$ 49 million. To discover the efficiency losses in the
import and domestic markets it is common practice to compare the
volume of imported goods before and after the restriction. In the case of
the postwar iron and steel industry, in Japan, it is of no use to compare
data with the prewar period, as much as it would by comparing it with
the period after 1970, when the industry was already in the mature
phase. In the absence of elasticity’s’ data or data on the produced and
imported volume changes that would have happened in the absence of
the trade barriers, we cannot find the real efficiency losses.
82
Chapter VII - Conclusion
It is difficult for an industry to become established without temporary
protection by the government. In general, which industry should be
protected and promoted depends not only on the industry itself but also
on the industrial structure of the country, as well as on the structure of
demand, in the world, as whole. Many economists noticed that there is
a special payoff to investment in “linkage” industries whose outputs are
used as inputs by other industries. The representative view on this issue
was provided by Hadley (1983) who wrote that successes of Japanese
industrial policy lay in the fact that “Japanese target industries have
been selected not only for their own importance, but, also, for their
ramifying effects on other industries. For example, steel was chosen
because, in an industrial economy, steel is the basic building block. To
have a cheap, good quality steel and the products made of it, like –
ships, automobiles, rails, locomotives, heavy electrical equipment, etc.
– will result in the ultimate price advantages” (Hadley, 1983).Japanese
producers were able to achieve high rate of production because the
great demand for steel existed in postwar Japan. In this sense, the
Japanese government was not myopic. As it was postwar period, it was
logical to expect the incremental demand for iron and steel, due to the
fact that not just Japan, but half of the world had to be rebuilt from
WW2 damages.
Theoretically, the protection of the infant industry can be justified if
there is possibility for static or dynamic externalities to occur. If there
are Marshallian externalities, the cost will decrease with the expansion
of the industry, in that case the government should provide
circumstances for the expansion, which means that it should provide
industry with large market share. The Japanese government did it in the
83
case of the iron and steel industry by restricting the competition and
subsidizing the exports. In the case of dynamic externalities, the trade
barriers can produce two contradictory reactions. First, trade barriers
may discourage innovation or even efficient use of the existing
technology because they tend to remove the competitive pressures and
may reduce the flows of technical ideas. Second, trade barriers may
allow firms to survive their infancy and establish new technologies in
national industries, whereas under the free trade they would be driven
out of business.
By protecting the domestic industry, Japanese iron and steel producers
received signals from the government to enlarge their production. In
addition, they gained the necessary time to search for additional
technology improvements. The improvement in technology has the
roots in the culture of Japanese business people who are eager for
innovation and capable of actually achieving it. It is in the nature of
Japanese business people to innovate, in order to reduce costs or
improve the product(s). Those employed in iron and steel industry
understood that technology cannot be just imported and implemented
but it has to be adopted or developed further. If other countries would
be in similar situation, it may well be that they would not reach the
same technological improvements. No matter how hard the government
tried to foster and protect the industry, if the private agents within the
industry were not built up with the foundation for accepting and
improving the technology than the development could not be expected.
For example after the WW2, the World Bank’s expectations were that
India will become the biggest producer of the iron and steel. It was
country with plenty of raw materials and cheap labor, but in
comparison with the iron and steel industry, in resource scarce Japan,
84
Indian iron and steel industry did not develop, successfully (Agbu,
2007).
Policies to protect and promote an infant industry can be justified for
developing countries, but it has to be evaluated how those policies have
affected country’s economic welfare. By protecting an industry the
government directly affects the allocation of resources and it may be
that development of the iron and steel industry was based on
consumers’ losses. Shortly, it is very much possible that the iron and
steel industry achieved the development on the account of the domestic
consumers whose development was slowed down due to the
detrimental impact of costly products they had to consume in the first
ten years. In that sense, it is necessary to estimate the welfare effects of
the trade barriers, which we did with this book.
In the case of the Japanese iron and steel industry, the improvement in
the production process was achieved, so that the prices of the products
were declining compared to other foreign rivals. Thus, in the long run,
not just domestic, but also, foreign customers of these products gained.
The Japanese iron and steel domestic consumers had suffered the loss
for the first ten years, but in the next ten years they gained more than
four times. This is the reason why the iron and steel industry did
deserve to be protected in the process of Japan’s, post WW2, industrial
development.
85
If we take a look at the Appendix 1, in 1967 the aggregate world’s steel
production amounted to 493 millions of tons. The largest steel producer
was the EU, with its percentage share of 33.5 percent. EU was followed
by the North America (United States, Canada and Mexico) with 25.8,
former USSR (Soviet Union) with 20.7 and Japan with 12.6 percent. In
this context it is interesting to mention that in 1967 the steel production
in the People’s Republic of China amounted to 10.35 million of tons or
2.1 percent of world’s total production and the production of steel in
India was 6.4 million tons or 1.3 percent of the aggregate world’s
output. Just 33 years later, in the year 2000, the aggregate world’s steel
production almost doubled to 850 million of tons. EU was still the top
producer with 24.7 percent share of the total world’s production,
followed by North America (USA, Canada and Mexico) with 15.9,
China with 15.1 and Japan with 12.5 percent. By the year 2016 the
situation changed rapidly in several aspects. The production, again,
almost doubles in comparison to the year 2000, and amounted to
1,630.00 million of tons. In the same year the prime world’s steel
producer was China with its output share of 49.6 percent, followed by
the EU-28 with 12.3, North America with 6.8 percent and Japan with
6.4 percent. In addition it is important to mention the fact whereby the
South Korea, which in 1967 produced 493,000.00 tons of steel, in 2016
reached the production of 68.46 million of tons. The crude steel
production, which in 2006 amounted to 1,252.00 million of tons,
geographically was divided in the following share percentages. China
produced 33.6 percent of the aggregate world’s steel production, EU-28
states’ members, 16.6, North American Free Trade Agreement
(NAFTA) countries (United States, Canada and Mexico) 10.4 percent,
Japan with 9.3, Commonwealth of Independent States (CIS) with 9.6
and other Asian countries with 11.0 percent share.
86
In the year 2016, the aggregate world’s crude steel production
amounted to the highest ever, level of 1,630.00 million of tons, out of
which 808.48 million of tons or 49.6 percent was produced by People’s
Republic of China (PRC). The remaining Asian countries had the
aggregate production of 13.1 percent, EU-28, 9.9, NAFTA, 6.1, Japan,
6.4 and CIS, 6.3 percent. It is evident that the traditional world’s steel
production leaders, EU, Japan, CIS and Japan were replaced by PRC,
India and South Korea. In the same year the largest world’s steel
exporter was PRC with 108.1 million of tons, followed by Japan with
45 million of tons, Russia with 31.2, EU-28 with 29.9 and Ukraine with
18.2 million of tons. At the same period of time, the export of steel
attributed to the United States amounted to 9.2 million of tons.
As far as steel export share is concerned, depicted the following picture
in the year 2016. EU-28 exported 40.4 million of tons, USA, 30.9
million, Federal Republic of Germany (FRG), 25.5 million of tons,
South Korea, 23 million, Italy, 19.6 and Vietnam, 19.5 millions of tons.
True steel use (TSU) is obtained by subtracting net indirect steel
exports from apparent steel use (ASU). TSU does not equal to ASU due
to differences in country coverage and methodological specifications of
indirect trade in steel calculations. The major indirect world’s steel
exporters in 2015 were: PRC with 70.5 million of tons, FRG with 32.2
million, South Korea with 22.7, Japan 21.7 and USA with 19.9 million
of tons. The main indirect steel importers in the same year were: USA
with 42.7 million of tons, FRG with 21.9, France with 12.1, United
Kingdom (UK) with 11.9 and Canada with 11.4 million of tons. Japan
came out to be on the 10th of place of indirect importers with 7.1
million of tons.
87
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Appendix I – Steel Production in key markets for
1967, 2000 and 2016
Source: (50 Worldsteel Association 1967-2017, 2017)
98
Source: (50 Worldsteel Association 1967-2017, 2017)
99
Source: (50 Worldsteel Association 1967-2017, 2017)
100
Appendix II – Steel Production and its use –
World’s geographical distribution, year 2006
Source: (50 Worldsteel Association 1967-2017, 2017)
101
Appendix III – Steel Production and its use –
World’s geographical distribution, year 2016
Source: (50 Worldsteel Association 1967-2017, 2017)
102
Appendix IV – Major World’s Importers and
Exporters of Steel, year 2016
Source: (50 Worldsteel Association 1967-2017, 2017)
103
Source: (50 Worldsteel Association 1967-2017, 2017)
104
Appendix V – True Steel Use (TSU) in the World,
years 2009 - 2015
Source: (50 Worldsteel Association 1967-2017, 2017)
105
Appendix VI – Major Indirect World’s Steel
Importers and Exporters, YR 2015
Source: (50 Worldsteel Association 1967-2017, 2017)
106
Appendix VII – Monthly Crude Steel Production, millions of tones,
2013 - 2016
Source: (50 Worldsteel Association 1967-2017, 2017)
107
Source: (50 Worldsteel Association 1967-2017, 2017)
108
Source: (50 Worldsteel Association 1967-2017, 2017)
Source: (50 Worldsteel Association 1967-2017, 2017)