22 September 2015

What the government can do for the steel industry


Steel production has been ‘paused’ at one of Britain’s major steel plants at Redcar in the North East and the factory may well close completely. Nor is it an isolated case. The future of the whole steel industry in the UK is under severe threat.

The Government should provide assistance, not only to save the thousands of jobs at stake but also to uphold free-market principles in international trade. At first glance the idea of state aid to uphold free enterprise may sound paradoxical, but allow me to make the case for the defence.

The low-priced imports that are destroying our steel industry are the result of subsidies paid by overseas governments, notably China, which has over-invested in capacity and, by common consent, is now selling its unwanted steel on world markets at far below the cost of production.

The rules of the World trade Organisation (WTO) allow for action to be taken against countries that ignore free-market principles. The underlying philosophy is that we will all be better off if companies are allowed to discover in a free contest who can produce high quality products at the best price. The most basic requirement of the WTO is for member countries to apply tariffs equally to all other WTO members. This ‘most favoured nation’ principle, as it is called, has worked well in discouraging a repetition of the trade wars that deepened the depression of the 1930s. Three exceptions are allowed in order to discourage nations from taking advantage of the self-restraint of trading rivals: (1) when countries ‘dump’ products on overseas markets and harm the industries in importing nations (dumping occurs when exports are priced below the cost of production or below domestic prices in exporting countries); (2) when products are subsidised by governments to the disadvantage of firms that compete on productivity alone; and (3) in emergencies when the continued existence of a domestic industry is threatened by imports.

Action against China is justified on all three grounds. The USA and the EU have already applied some anti-dumping measures against China as permitted by WTO rules, but more stringent measures are justified. Productivity is only improved if a market is a genuine process of discovering who can create products at the lowest price. Not only do hidden subsidies destroy the market’s discovery process, they are often a predatory strategy aimed at driving rivals out of existence in the short run so that far higher prices can be imposed later, once competition has been eliminated. China’s strategy should also be seen in geo-political terms. It is intent on becoming the most powerful military force in the world and eliminating productive capacity in the West is an important part of its plan.

Moreover, China is not a market economy. As its recent manipulation of its stock market has revealed, it remains a totalitarian dictatorship that uses market discipline as a convenient device for central control. When things don’t work out as the ruling party wants, it resorts to naked force. In a reminder of the darkest days of communism, journalists have recently been forced into ‘confessing’ that they caused the recent fall in the stock market, even though their only offence was to report events.

China is still officially classified as a ‘non-market economy’ by the USA and the EU. Under its 2001 accession agreement to the WTO, nations were allowed to classify China as a non-market economy until December 2016. This is important in anti-dumping proceedings because the initial question is whether or not a country is exporting at below its domestic price. This comparison makes little sense in a state-dominated economy because there are no genuine domestic market prices to serve as a benchmark. Moreover, the cost of production is also of little value because state subsidies are hidden and company accounts do not comply with international standards. The costs of a company are simply not transparent to an independent observer.

To overcome these problems, the EU and the USA classify China as a non-market economy and use a different criterion when judging the validity of its export prices. They are compared with an ‘analogue’ country, often the USA, because its prices are taken to be the outcome of a fair fight between rivals.

Applying these principles to China is not a watering down of market principles. It is upholding free enterprise. Markets depend on prices to inform choices but if they are concealed they can’t perform their technical function. Ensuring the reliability of price comparisons is, therefore, a service to consumers worldwide.

There is a second reason why the steel industry is struggling to compete with foreign suppliers. It is that since the 2008 Climate Change Act successive governments have increased the cost of energy, a major component in steel making. The present Government already compensates energy intensive industries for some of these costs, but not all. It should immediately make allowance for all its impositions. The humanitarian case alone should be strong enough, even before any account is taken of the cost of the unemployment benefits that will fall on the public purse.

Of course, as a member of the EU we have given up our right to take action under WTO rules without getting permission from officials in Brussels. Fortunately the EU has already initiated some anti-dumping measures. We need to encourage more comprehensive and more urgent action. In addition to anti-dumping measures the Redcar plant could be assisted under the WTO’s emergency provisions. There is no doubt that the very existence of a domestic industry is threated by imports that are priced below the cost of production. Supporting Redcar is not propping up a lame duck, it is maintaining productive capabilities in the North East in the face of predatory selling.

Some supporters of market principles act as if all WTO members shared their enthusiasm for a market economy. Even when faced with unequivocal evidence that they don’t, many economists turn a blind eye. But the rules of the WTO have been honed over the years to cope with the realities of trade and the exceptions are there for a reason. We should use them.

One more thing: even enthusiasts for free markets are allowed to be a little bit patriotic, as Mrs Thatcher surely must have believed.

David Green is Director of Civitas.