The following 3 part entry is to discuss and give an opinion upon the British Steel and larger manufacturing decline within the UK. This initial question was posed:

“Generally I’d like to know if there is anyway of reviving manufacturing in the north Atlantic? Another steel mill closed in Wales losing a couple hundred jobs..”

Recently the BBC reported that as many as 1 in 6 jobs in the UK steel industry may be at risk, given the wholesale decline in steel prices worldwide.

The episode has social implications which echo Thatcher’s 1980s coal mine closures, a divisive series of incidents in British history which are still remembered bitterly by some segments of British society, and are applauded by others.  There are, of course, serious social consequences to this spate of lay-offs.  Increased unemployment puts a burden on the government to react which, in turn, will further burden taxpayers. It is also unlikely that the hard-working men and women within the industry will truly understand the root cause of their redundancy; social upheaval and civil unrest in the affected areas seems increasingly likely. So, what can be done, if anything?

There are two approaches to this fundamentally economic question: a series of policies which can be put in place by the British government, and solutions which come directly from within the industry.  I will first examine the public sector policies, then the industry approach. Finally I’ll discuss the underlying macroeconomic situation to detail which solutions will work best.

1.Government Policies:

Trade Protectionism- Barriers to Trade:

Governments have a range of protectionist policies to implement to support industries at home. These range from import tariffs on foreign export (home import) steel, to import quotas on the more moderate end, to trade embargos or sanctions in more extreme cases. In essence though, these policies can be broken down fundamentally into two camps:

  • Policies which restrict the foreign supply of goods into the country.
  • Policies which make foreign bought goods less competitive relative to home manufactured goods at the point of sale by adding cost to them. Typically by placing fees or taxes on foreign importers.

Subsidies:

The government could decide to support the industry through taxpayer funds, in essence, provide the industry with a fixed cash flow in order to tread water and survive.

Currency devaluation/appreciation:

Intervening in the market value of the currency causing it to strengthen (appreciate) or weaken (depreciate) against other currencies would alter the trade balance. The direction in which the trade balance would need to be influenced depends on the balance of trade.

(More information on neo-classical economic models for the market affects of taxation can be found here via the KhanAcademy. Obviously using the same basic supply and demand curve and neoclassical theory a supply-restricting policy would be exhibited as a left shift of the supply curve.)

2.Industry Solutions:

Profitability is a function of two things. Revenues and costs.

Total Profit = Total Revenue – Total Costs

In order to maintain profitability you must therefore either increase your revenues, or reduce your costs. Revenue is just the cash received by the company from sales.

Solutions to increase revenues are typically increasing sales, or increasing prices.  It should be obvious that this is capped by market demand, as well as supply in the form of competition.

Solutions to decrease costs almost singularly take the form of increasing productivity per unit of labor and capital. This might take the form of laying off the least productive staff (managers, older/slower workers etc.), reducing administrative costs, or increasing the output of the capital stock which would mean increasing the efficiency of the machinery (or the people, through education) which achieves the output.

The latter phenomena explains why there is an incentive for companies to continuously reinvest profits in research and development despite it tending to be quite a risky use of capital.

A trivial implication of the above equation is that if your outgoing costs are greater than incoming money your company is no longer profitable.  This general economic framework will be transposed onto the global economy and discussed in Part 2 ..

Advertisements

2 thoughts on “UK Steel: Can We Revive It? (Part 1).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s