5 April 2016

In or Out, nationalising steel will hit the poorest hardest


It is normal to feel sympathy for the 15,000 employees of Tata Steel who are set to lose their jobs if the Indian company cannot find a buyer for its heavily lossmaking UK operations. “This disaster isn’t their fault,” as Boris Johnson put it in the Daily Telegraph. But that does not mean the government should follow Jeremy Corbyn’s advice and step in to nationalise, subsidise or protect what remains of Britain’s dying steel industry. And it is both disingenuous and wrong-headed of Boris and his fellow Brexiteers to argue that if only Britain left the EU, the government would be free to pursue a failed 1970s-style industrial policy to prop up unprofitable businesses such as Tata Steel’s.

Back in the nineteenth century, when making steel was at the cutting edge of the industrial revolution, Britain dominated global steel production. But making steel is now a mature, mostly low-margin industry where Britain is a bit player: the UK accounts for a mere 0.7% of global output. Moreover, Tata Steel’s British output is mostly of the commoditised variety, not higher-grade, higher-margin specialist steel products. A high-tech industry of the future it isn’t.

A global glut is precipitating the longstanding decline of Britain’s steel industry. Perhaps half of the world’s massive excess capacity is in China, which bashes out far too much of the stuff at a time when its once-booming domestic demand has stalled. Chinese firms, which account for around half of global output, are exporting their surplus production, contributing to a plunge in global prices. That’s a big reason why steelmaking in Britain is no longer profitable: Tata Steel’s British operations have lost some £2 billion in recent years and are currently losing £1 million a day.

With the global economy weak and China’s both slowing and shifting from steel-reliant construction and manufacturing investment towards consumption and services, demand is unlikely to pick up, while reducing excess capacity will take time. There seems little prospect of prices recovering any time soon, which is why Tata is throwing in the towel.

If Tata Steel can nonetheless find a private buyer for some or all of its British operations, that would be great. It is conceivable that by cutting costs or investing in going upmarket, a more productive steel sector could regain profitability. But if not, the government should let the operations close. It should then focus its energies on helping people to retrain, investing in local regeneration, and stimulating private investment by loosening planning restrictions and reducing unduly burdensome business taxes and regulations.

Propping up unviable businesses makes no sense. Nationalising Tata Steel’s British operations would force (often-poor) taxpayers to shoulder future losses. Quite why Labour leader Jeremy Corbyn and shadow Chancellor John McDonnell think this is progressive is mystifying. Bailing out steelworkers in boiler suits is no more desirable than bailing out bankers in pinstriped ones. Since the government does not have the right skills or incentives to manage a steel business and state ownership of British Steel previously proved disastrous, there is no reason to believe it would succeed in turning around Tata Steel’s operations.

Subsidising private businesses to take over Tata Steel’s British operations would scarcely be better. If the underlying business is unviable, such handouts would likely attract asset strippers who would pocket the subsidies while flogging off any valuable assets they can before declaring bankruptcy. That would be another unfair waste of taxpayers’ money.

The worst option would be to resort to protectionism. Even if subsidised Chinese firms are selling their surplus steel at a loss, that is scarcely a reason to slap “anti-dumping” duties on it. Cheap steel imports are a boon for Britain’s manufacturers and construction industry, and hence ultimately for consumers.

Protectionist taxes that push up the cost of steel would damage the rest of the economy. Think, for instance, of car manufacturing, which directly employs more than 160,000 people and generates £34 billion a year in exports. That American policymakers have slapped massive anti-dumping duties on Chinese steel is scarcely a compelling argument to do likewise. If other countries want to shoot themselves in the foot, must we follow?

The only economic justification for intervention would be if Chinese steelmakers were temporarily slashing their prices to drive their competitors out of business and would subsequently be able to corner the market and jack up prices again. But with many global steel producers, fierce competition and relatively low barriers to entry, that is highly implausible. For the same reason, the argument that domestic steel production is necessary for national defence is a protectionist canard. Steel is strategic only in the sense that it would be a strategic mistake to prop it up.

The bottom line is this: whether or not the UK remains a member of the EU, it is not in Britain’s interests to lavish taxpayers’ money on its declining steel industry. So it is hardly a bad thing that EU state-aid rules would make it difficult for the government to step in, just as it is a good thing that World Trade Organisation (WTO) rules constrain trade protectionism. And if Britain did leave the EU and start subsidising its steel industry, it would also doubtless face countervailing duties from a more protectionist EU.

Likewise, in or out of the EU, punishing the rest of the economy by taxing steel imports would be counterproductive. Regrettably, the EU does sometimes impose anti-dumping duties, but in the case of steel, British influence in Brussels has helped stay the EU’s hand. EU duties on Chinese steel range between 9% and 16%, whereas the US’s peak at nearly 500%. That’s a reason to remain in the EU, not leave.

Let’s be honest: if Britain left the EU, a putative prime minister Boris Johnson would be unlikely to intervene to prop up the steel industry. So his argument that EU membership prevents the government defending British interests amounts to cynical political posturing.

Brexiteers like to claim the mantle of Margaret Thatcher. But the Lady would be turning in her grave if she could hear Conservatives arguing for Brexit on the basis that it would allow them to pursue Corbynite policies.

Philippe Legrain, who was economic adviser to the President of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.