1 April 2016

Saving Britain’s steel industry: from Redcar to Port Talbot


With Port Talbot, Britain’s steel industry is once again news. The spectre of nationalization, once deeply buried in free market orthodoxy has again reared its head. All of this against a backdrop of nationalism and protectionism in Europe and the US. Nor is Port Talbot alone.

Across the North of England, one can see the remnants of a once mighty manufacturing industry. Blake’s satanic mills have shut down – the steel plants in Redcar are no more. The once powerful engine of growth that powered Teesside, the blast furnace is cold and cracked. Globalization of the steel industry in the UK, first through the creation of Corus (the merger of British Steel and Koningklijke Hoogovens of Holland), and then through the acquisition by the Tata Group and then through the acquisition by a Thai firm led to the eventual liquidation of the plant. Rationalization carries a terrible human cost – at one point after the closure, male unemployment was 100%. The devastation that hit Redcar will take many years, perhaps generations to recover from. So isn’t this a case of globalization and liberalization damaging human beings, of free market capitalism run amuck?

The story of the steel industry is more complicated than this simple analysis makes it appear. What was happening as the wave of mergers took place to consolidate the industry was a reaction to the emergence of very cheap steel from foreign markets (mainly China). But this cheap steel was not more competitive because the factory in Redcar was inefficient or because somehow the Chinese were exploiting cheap labour. The massive price difference was caused by enormous distortions in the Chinese and other developing country markets. The state owned mills that were producing vast amounts of steel were given free energy, free water, free land on which to build. They were given interest free loans or even grants. These distortions far outweighed any benefits from having access to a cheap, but uneducated and unskilled workforce. These distortions also far outweigh any currency manipulation. The result was artificially low prices that drove other producers such as the British Steel Redcar plant into bankruptcy as they simply could not compete on global markets. But this was not a failure of the free market. It was caused by the lack of a free market because the heart of the free market is competition and China’s policies massively distorted competition. By failing to raise these issues, the British and European governments let down the men and women of Redcar when there was no real need to. Properly competitive prices might have undercut Redcar somewhat, but not in the way that completely negated the business model. The plant would have had options, to increase efficiency, to go up the value chain of steel production (exploiting their competitors’ lack of skilled workers at the time – alas not the case now). British ingenuity would have been allowed to hold sway and make something new out of the plant itself. But this is not possible when Redcar was forced to compete against the power of the Chinese state itself.

Just yesterday, reasonable, rational voices were calling for a re-nationalization of the steel industry in the UK because of the imminent closure of the Port Talbot steel plant. Tata, the owners, have determined that the steel plant is worth nothing. Now the British government is caught between an expensive bail-out which would violate EU state-aid rules, or the retrograde step of part-nationalization. There have additionally been calls for high tariff walls. Meanwhile 40,000 or so jobs are at stake. So close to a BREXIT vote, a fight between a UK government bent on saving a national industry and Brussels bureaucrats charging illegal state aids is something that only the Leave campaign would relish.

So what lessons can be learned now for the Redcars and Port Talbots of today, forced to compete in a world where some are allowed to benefit from economic distortions inflicted by their governments, and others are left to compete on the merits. There are two approaches which the government could employ. One is to try and out-crony the cronies and enter into a subsidies or distortions war. Indeed this has been suggested by some. While it may appear safe, this beggar thy neighbour policy would simply end up destroying wealth out of the economy and increasing unemployment, pushing the poor into even greater poverty.

Increasing the price of steel will increase the price of many manufactured goods putting them out of the reach of the poor. Such a policy would harm the very people it would be intended to help. The alternative is for the government to actually engage in the world in an effort to reduce the kind of distortions that have led to this situation and will lead to many similar situations in the future if they continue to be unaddressed. Existing trade tools can be upgraded to force countries to eliminate their distortionary practices. It simply requires imagination and courage. If the British economy is not to have more examples of Redcar or Port Talbot, the government must act and act now to make sure that its trading partners deliver not only open trade, but equally importantly competitive markets inside the border, undistorted by anti-competitive practices and policies. We need a combination of defensive tools that are carefully calibrated to the actual distortion (not a protectionist tariff wall), and offensive strategies that will lead to real Economic Partnership Agreements that deal not only with conventional trade barriers, but also those behind the border distortions that are plaguing global markets. Without both of these, further dislocations will continue to occur.

We have advocated the creation of a Prosperity Zone of like-minded countries that believe in open trade, competition based on merit as an organizing economic principle, and property rights protection. These three pillars could form the bedrock of the Prosperity Zone Agreement. The UK could and should be an engaged player in such a zone, while at the same time retaining untrammelled access to the European single market. The zone countries could come up with defensive trade measures that would actually incentivise a reduction of distortions, as opposed to restricting trade.

The bottom line is that we don’t know what will result from the natural creative destruction of the marketplace. Perhaps Britain will have a vibrant steel industry or perhaps it will have something else. What we do know is that if distortions continue to damage global value chains, wealth will continue to be destroyed out of the economy, jobs will be unnecessarily lost and the outlook for Britain and the world will be bleak indeed.

Shanker Singham is the Director for Economic Policy and Prosperity Studies, the Legatum Institute, and CEO of Competere