Jordan Taylor: Bailing out steel would be blow to principles of free trade

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THIS has been a throwback year in terms of politics. The Conservatives defied the opinion polls to win the General Election, as they did in 1992, and Labour elected a hard left leader as they did in the 1980s. Now the UK’s steel industry is laying off thousands of workers and some are demanding government intervention to save jobs. Such calls are severely misguided.

Part of the reason for the outcry is the historic importance of the industry. During the Industrial Revolution, the production of steel helped grow the railways, build machinery and expand. The industry boomed and by 1870 Britain produced 60 times more steel than it had in 1800. By 1875 Britain was responsible for 40 per cent of the world’s steel production.

Post-war, the industry was nationalised in 1949, privatised in 1952 and nationalised again in 1967. By the 70s British Steel bore all the hallmarks of British state-owned industries – antiquated equipment, complacency, inefficiency and an overpaid, oversized workforce.

Today’s problems are somewhat different. In the past 15 years, steel production has doubled. China now produces 800 million tonnes of steel a year, more than the entire world did 1997. The 14 largest Chinese steel companies each produce more than the entire UK with the biggest producing four times as much.

Even with prices at $400 per ton, the margins on steelmaking were microscopic, but the price has more than halved now growth in China has slipped below seven per cent.

The glut and ensuing price collapse has prompted the Chinese government to call for mergers between smaller companies to exploit economies of scale. Local authorities, which are major shareholders in many of the local steel plants which dominate the industry, have been encouraging local plants to expand on credit, fuelling growth despite reduced domestic demand. In the 12-month period to February 2015, China exported 55 per cent more steel than they did in the previous period.

This excess is being “dumped” (sold at a lower price internationally than is charged domestically) and UK producers simply can’t compete.

Many on the left have claimed that steel is a “foundation industry” (whatever that means) and that it is somehow vital to the country, but the facts simply don’t support this. The industry accounts for less than 0.1 per cent of employment and unlike German plants which are often integrated into the car industry and produce specialised alloys, most of what is made in the UK is generic and low-grade.

What the UK government can do about all of this is severely limited. Some form of bailout would be extremely foolish and require permission from the European Union. The collapse of the steel industry would not wreak havoc on the British or indeed the global economy in the same way that the collapse of RBS would have in 2008.

Unfortunately for steelworkers, their industry is not systemically important and taxpayers should not be made to prop up failing industries as they were in the 1970s.

Protectionism has also been mooted as a solution. The World Trade Organisation allows members to take anti-dumping measures such as imposing tariffs, but talks would have to take place at an EU level.

Besides, if China wants to sell us cut price, perhaps even subsidised steel, we shouldn’t stand in their way. What’s often not mentioned in this debate are the benefits to British manufacturers who use steel to produce high end goods which are exported. Cheap Chinese steel reduces their costs.

The benefits of free trade are well established and backed up with overwhelming empirical evidence. The benefits in terms of consumer choice and improved efficiency far outweigh any impacts on employment.

Tariffs would benefit steelmakers at the expense of everyone else, and government efforts should instead be focused on retraining programmes for those who have lost their jobs.

The biggest government-created problem facing manufacturers, not just in the steel industry, is high energy costs. Under the EU Emissions Trading Scheme, manufacturers have to buy credits equal to their annual emissions. But the UK also has a carbon price floor that is higher than the cost elsewhere in Europe. Carbon prices have plunged but the price floor has increased, leaving British manufacturers paying as much as six times more than their European competitors. Britain’s heavy industries paid 9.3 pence per kilowatt hour for electricity in 2014 when the median cost in the EU was just five pence.

It’s vital that the British government shows some steel in standing up for free trade and private enterprise as the plants close. But it’s equally important that they recognise the role their misguided policies have had played and end this industrial masochism.

Jordan Taylor is campaign manager at the TaxPayers’ Alliance.