China Offers Cure for Overproduction

In an effort to quell the widespread problem of overproduction, China is encouraging mergers in nine key industries: steel, cement, shipbuilding, autos, aluminum, electronics, pharmaceuticals, industrialized agriculture, and rare earths.  Chinese officials are confident that these mergers will increase economies of scale and limit brutal price wars.  Government officials are also hopeful that consolidating companies in these main industries will result in larger companies that will emerge as titans of international trade.

China is currently home to 2,700 steel mills, which last year produced a surplus of 160 million tons of steel.  Clearly, industrial structures are not functioning optimally and resources are not being allocated efficiently.  Mergers would increase efficiency and quality, as small, inefficient firms would be partnered with mature funds that have the equipment and means necessary to manufacture quality steel products. 

The downside of having a few super-sized companies in each industry would be reduced competition and also some cities would lose vital sources of employment.  As a result of firms merging, some cities would lose factories, stores, and offices.  If job transfers are not possible, unemployment would increase and many cities would have to endure economic setbacks.

The main reason the consolidation of industries has not gained much traction nationally is local governments.  Each city wants its own steel plant or shipbuilding factory and is reluctant to permit mergers that would negatively affect its economy.  Without such businesses, cities miss out on investment, jobs, taxes, and other economic benefits.

From a global trade perspective, China would greatly benefit from consolidated firms in each industry.  Larger and more efficient firms would benefit from economies of scale and be able to offer products at competitive prices.  As the largest exporter in the world, China clearly has had little trouble remaining globally competitive on a broad scale, but still wishes to improve exports in key industries to garner more trade opportunities. 

The looming question is will the federal government be able to convince local and regional leaders to sacrifice their cities’ economic prosperity for the betterment of the nation’s economy?  So far the answer has been an emphatic no.  Do you think local governments will begin to allow or promote mergers?  If so, do you think trade opportunities for China would increase? Feel free to leave a comment below!