IMPLICATIONS OF THE DCA MODEL FOR STEEL IN NICS

The dynamic comparative advantage (DCA) model developed in Chapter 2 suggests that, as a newly industrialising country (NIC) develops a relatively abundant supply of human capital, its production of tradables and its export specialisation in manufacturing gradually switch away from unskilled labour-intensive products to human capital- intensive ones.' In human capital-intensive industries, production technology is relatively well standardised throughout the world, and of a sufficiently high level that well-trained skilled labour is a dominant factor in production. High levels of scientific and technological leadership and R&D capacity for technology innovation, which are 1. Some human capital-intensive industries may require high levels of physical capital inputs, which

developing countries, though growing rapidly, may still lack. However, physical capital is not considered to be a determining factor of comparative advantage due to relatively high international mobility (see Chapter 2). A degree of international capital mobility in the form of foreign loans may allow the human and physical capital-intensive industry in a developing country to proceed faster along its development path than the country's capital-labour rado alone would do.

76 Still in relatively scarce supply in NICs, are not crucial in determining international production location.

As shown in Table 4.1, ordinary steel-making can generally be considered as a human capital-intensive industry, where a newly industrialising country may eventually obtain comparative advantage. The theory of dynamic comparative advantage therefore predicts the following general propositions with respect to changing comparative advantage in the steel industry in a NIC, particularly in a country like Korea with a high population density and poor natural resource endowments.

In the domestic economy: Shares of manufacturing in the NIC's GDP, employment and exports rise as the country grows rapidly. At the same time, the primary sector's importance in the national economy shrinks. Within manufacturing, comparative advantage shifts gradually from unskilled labour-intensive light industries towards human capital (or skilled labour) intensive heavy industries.^ Steel becomes one of the manufactured items for which production and consumption are increasingly important in the NIC. Rapid increases in steel consumption result at first in rising shares of steel in manufacturing imports. As imports are gradually replaced and exports expand following increases in domestic production, the shares of steel in manufacturing exports grow and eventually its shares in manufacturing imports decline. When the economy grows further and obtains comparative advantage also in technology-intensive manufactures, the importance of steel in its GDP, employment and exports declines although its output and exports of steel products continue to increase.

In the international steel market: Inter-country relocation of steel production occurs over time, with some NICs gradually eroding the developed countries' dominance. Rapidly growing NICs gradually obtain comparative advantage in steel, with rising shares in world steel output and exports. The product cycle of steel with respect to consumption also suggests rising intensity of steel use in developing countries but the opposite trend in most developed countries.^ As a consequence, a NIC's importance in world steel consumption and possibly imports also grows.

Within the NIC's steel industry: The steel industry has many component processes, and factor intensities vary between its sub-sectors (Findlay, 1990). Final goods also comprise various product types manufactured in different mills with different technology. Accordingly, production and trade patterns within the steel industry differ between sub-sectors or between different product groups.'' As the

2. As assumed in the DCA model developed in Chapter 2, the service sector is excluded from the discussion.

3. The demand-side issue of the product cycle of steel will be discussed in Ch^ter 5.

4. Even though a NIC establishes an integrated steel-making system, it specialises neither in all sub- sectors nor all products in any sub-sector even if overall comparative advantage is sustained.

economy grows and the steel industry develops further, the densely populated but resource-poor NIC specialises more in downstream rolling processes.^ Among finished steel products, the country may be a net exporter of some steel products and, at the same time, a net importer of others. At first, production and exports (and also consumption) will be concentrated on long products and, among flat products, plates and pipes (Findlay, 1990). These products are not only, in general, less capital- intensive and technically sophisticated than hot rolled or cold rolled flat products but are also mostly consumed in the early stage of economic development.® As the industry develops, comparative advantage shifts gradually to hot/cold rolled flat products that are used mostly in various manufacturing activities (Findlay, 1990). Continuing economic growth in the country reduces its dissimilarity with developed countries in regard to factor proportions, resulting in overlapping production and consumption patterns with developed countries in commodity composition. As impUed by the theory of intra-industry trade incorporated into the dynamic comparative advantage model, the NIC will then engage in increasing intra-industry trade in various steel products, particularly in hot/cold rolled flat products.

Sources of comparative advantage: In an environment where all factor inputs other than labour are internationally traded, unit labour costs or labour productivity (per man-hour) will be the major determinant of international competitiveness. In the real world, however, there exist international differences in other factor costs per unit output. In this case total production costs per tonne, which can be divided into labour costs, material costs and financial costs, provide a proper means to measure intemational comparative cost advantage. A densely populated resource-poor NIC may enjoy a low labour cost advantage relative to developed countries but have

5. This is because, even if the countr>' has an apparent advantage in its use of skilled labour, increasing impon dependence on raw materids becomes a major constraint to expanding further into more raw material-intensive products such as pig iron and, to a lesser extent, steel primary forms. As a result, iron and steel-making in an integrated steel mill would be limited by the degree to which it can support its own rolling capacity. Even if the i n t e ^ t e d production system that processes imported raw materials through to final products is internationally competitive, extra production of pig iron and steel primary forms to supply other domestic firms or for export would not be beneficial unless there exists sufficient domestic demand. Therefore, the country may be a net importer of pig iron and, to a lesser extent, steel primary forms, even if integrated mills in the country are able to sustain self-sufficiency in those products.

6. It is generally accepted that manufacturing HR/CR flat products requires higher technology levels and capital inputs than long products. Findlay (1990, p.28) argues, 'the use of a large hot strip mill to make flat products will raise the capital intensity of the rolling stage'. While long products are used mostly for buildings and infrastructure construction, HR/CR flat products are used as intermediate inputs to wider ranges of capital goods and consumer goods. Among flat products, manufacturing plates and other secondary products (welded pipes and tubes) require in general simpler processes and less capital or technology than HR/CR flat products. Plate are rolled directly from slabs without going through a strip mill or delicate coating processes like HR/CR products (see Figure 3.1). Tubes are further rolled from plates. Welded pipes are secondary products of HR steel. Among pipe products, seamless products are produced from blooms or billets. For details of steel- making technology and use of steel, see the first section of Chapter 3 and Appendix 2.

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disadvantages with respect to material costs compared with resource-rich countries. The country with higher external financing and depreciation expenses (due to its being equipped with relatively new facilities) will incur higher financial costs. An alternative measure of international competitiveness is productivity of labour. The NIC may suffer relatively low labour productivity but have advantages in relatively abundant supply of labour time inputs and low wage rates compared with developed countries.