One of the main concerns regarding excess capacity in the global steel market is how it affects international trade dynamics. While an increase in domestic steelmaking capacity in periods of low domestic demand would normally result in an increase in exports, the effect it may generate on bilateral trade patterns and export prices is rather unexplored.
An analysis of bilateral trade patterns reveals that capacity increases are likely to inflate exports after one year-on average and are likely to have persistent effect on trade. Imports and exports of steel are found to be negatively related over time in particular in economies facing growing production capacity. This suggests the existence of import substitution strategies, where past trade deficits encourage economies to build up a domestic steel industry and companies to further invest in steelmaking capacity which ultimately results in an increase of exports.