Job losses in the European steel industry made headline news recently. Unions in the UK and elsewhere have been rendered deeply unhappy. The basic problem is huge overcapacity in Chinese state-owned enterprises (SOEs) producing steel, which has caused global prices for the commodity to drop. Some have called for the EU to impose tariffs on Chinese steel imports, in order to protect Europe’s steel producers. There are tariffs already, but at the relatively low level of 16%. By contrast, tariffs in the US have reached 266% on coiled steel imports from China.
The economics of steel have thus become highly political. As ever, the UK government is reluctant to support the imposition of higher tariffs, wedded as it is to a free-market position. It is therefore somewhat strange to see the US policy response in what is held to be the leader of the free (market) world.
Since Chinese steel producers are SOEs, they have less incentive to cut production levels in the absence of pressure from the government to restructure by reducing investment and overall capacity. As a result, cheap Chinese steel output is being ‘dumped’ on the world market, disrupting the conditions faced by its competitors in other countries.
What are the implications of all this for industrial policy and international trade flows? It is clear that China has a highly interventionist industrial policy, part of the aim of which is to support domestic producers until they can compete internationally. In its own way, it is following the likes of Japan, South Korea and Taiwan, countries whose governments adopted industrial policies to accelerate the development process, in which they were highly successful.
A slowing world economy and significant over-investment by Chinese SOEs, the latter a legacy from the stimulus policies it used to avoid a major slowdown during the 2008 Global Financial Crisis, have led to excess capacity and falling prices. The case for scrapping this excess capacity is strong, and would help to stabilize world steel prices. The government is likely to be worried about political stability in the case of major job losses from SOEs, but if it fails to act, further losses will accumulate and the failure of these sectors to restructure will ultimately slow economic growth and productivity improvements. In the absence of reform in China, the immediate burden of adjustment falls on unprotected competitors, such as in the UK.
EU governments could follow the US example and temporarily protect their domestic steel industries. Those committed to free trade should realise that in the case of steel, prices are being strongly influenced by industrial policies, rather than the free market.
Industrial policies in one country will, if successful, lead to a larger and more competitive industrial sector there. If their international competitors commit to a free market model, with an absence of state support, it is possible that their industries will find it harder to compete and be priced out of the world market. This could lead to falling output and rising unemployment in particular sectors and regions. Among the world’s largest economies in recent decades, this sort of ‘hollowing out’ of manufacturing has gone furthest in the UK and US. New jobs have been created but many have been lower paid and in the service sector. This trend has contributed to stagnating wages at the bottom of the income distribution, and a dramatic decline in middle-income level jobs. Deindustrialisation in some rich countries has thus contributed to rising inequality as the structure of the labour market has altered. To some extent this has been caused by rapid industrial growth in China, which has captured a large share of global industrial production with the help of state intervention.
If one country’s industrial policies lead to significant structural change in its competitors, contributing to problems of rising unemployment and inequality, should governments in these competitor countries retaliate with interventions of their own? Or should they stand by and wait for free trade to work its magic once the relevant countries have signed international agreements?
In the face of competition from China, temporary tariffs at an appropriate level in enough countries could put pressure on the Chinese government to speed up the restructuring of firms with excess capacity. Its steel companies may remain as SOEs, but this does not preclude significant change in the path towards greater productive efficiency. Of course, this could also be the beginnings of a trade war: if China responds to Western tariffs with its own, global trade will suffer further, with potentially damaging effects on economic growth in the longer term. In the face of a slowing global economy, and without international coordination, such an outcome is a strong possibility.
A more managed response to global overcapacity in the steel industry is therefore necessary. Policies across the countries involved are likely to lead to an uneven distribution of job losses and shifts in wages as restructuring takes place. Governments should therefore help to manage the changes by working with firms and unions, aiding displaced workers with help for retraining and relocation. In the case of steel as elsewhere, there is no market ‘free’ of political influence, contrary to the idealized model-building of mainstream economics. On the long road of economic development, it is misleading to separate the economics from the politics.