The Politics of British Steel

by George Hatjoullis

Anyone over 60 , and especially those that have studied economics, will be only too familiar with the present ‘crisis’ in British Steel. We have seen it all before. Shipbuilding, coal, textiles, British Leyland and so on. An industry can become uncompetitive in a global context. It is problematic because whole geographic regions have become dependent on one industry and the human cost of the decline is both politically and socially unacceptable. There are cries for nationalisation, subsidies, tariffs and all round condemnation of Johnny Foreigner who is ‘dumping’ cheap product on our doorstep. Governments develop ‘regional policies’ to deal with the problem. In reality, there is only one option.

Regional policy is largely a reactive political response to such ‘crises’. I have always argued it should be a proactive look at where such problems might arise and the development of contingency and diversification strategies. Turns out there is no political gain to anticipation so no party does it. It is also quite difficult. The result is that as the ebb and flow of comparative advantage proceeds these ‘crises’ emerge. Industries decline and things change. It is flexibility and responsiveness that yields wealth and not denial.

The economics of british steel is not my main thrust here. If it was economic in a global context Tata would not be looking to get rid of it. They would close other less efficient plant. Also, despite the frantic search for a buyer, I do not think Tata want to find one. There is excess capacity in the global steel industry and selling it to a competitor hardly helps. No one will want to buy it as a going concern though they may want bits of it. Whatever happens british steel as a commercial enterprise is dead. UK costs are high and the recent strength of sterling against the euro (a consequence of not being in the eurozone) has killed the business. Many jobs will be lost and whole regions economically decimated. Here we go again.

The situation is not the result of UK membership of the EU. First, as noted, this sort of problem was evident long before we even joined the EEC (and was one reason that we did as I recall). Second, if we were in the eurozone the sterling element would not have been a problem. Third, as you can read in today’s FT , the present Conservative government has been active in opposing EU anti-dumping tariffs against China steel, the main source of the problem. The situation is a direct result of Conservative government free trade policies and not of EU membership. The clamour to blame the EU and support the Leave campaign is both wrong and wrong headed.

Leave supporters will no doubt draw attention to EU rules against nationalisation. Do you think this government, the sons of Thatcher, would ever consider nationalisation? The Brexit supporters are also, by and large, anti-nationalisation. More to the point, nationalisation does not change the economics of steel. If it is uncompetitive globally it needs to be closed and replaced. Membership of the EU will entitle the affected regions to transitional and regional aid from EU funds. Far from being the source of the problem the EU can and will provide assistance in the solution, which is to retrain and encourage new industry and enterprise into the affected regions. Rather than spending money to keep an industry going for a bit longer, for short term political reasons, (as has been the norm) it makes sense to spend the money supporting the community and achieving the inevitable transition. Denial is expensive and wasteful.

Those with an eye on the short term political fallout will allude to steels ‘strategic’ significance. Which strategic significance is this? Steel is made from iron ore which has to be imported. If the free trade system breaks down (either through war or protectionism) where do you imagine we will be getting iron ore? If we can buy iron ore we can buy the steel as well. The industry has no strategic significance. It is a traded good just like everything else. The issue is free trade or protectionism. This government (and most Brexit campaigners) are free traders. They are willing to sacrifice the steel industry to China in exchange for access to Chinese markets for other UK (and EU) goods in which we are more competitive. This is how comparative advantage works. Of course, this is bad news for the steel towns and some of the gains from trade need to be used to cushion the blow and aid the transition. There will be more funds for this available in the EU than out.