Foreign subsidization and the excess capacity hypothesis

Bruce A. Blonigen

"The U.S. steel industry contends foreign-subsidized excess capacity has led to its long-run demise, yet no one has formally examined this hypothesis. In this paper, we incorporate foreign subsidization considerations into a model based on Staiger and Wolak's (1992) cyclical-dumping framework and demonstrate that foreign export supply responses to foreign demand shocks depend critically on whether foreign firms have subsidized excess capacity. We then test the excess capacity hypothesis using detailed product and country data on steel exports to the U.S. market from 1979 through 2002, and find strong statistical evidence that rejects the U.S. steel industry's foreign excess capacity claims. Our empirical methodology may be applicable to many other products, including agricultural markets that have been the subject of intense discussions within the WTO"--National Bureau of...