Following on from  Part 1 and Part 2 I will finally move to discuss public policy. First I will discuss my own approach, then I will discuss measures taken by the UK Government to address the problems faced by the industry.  I will not address social programs directly as logic dictates that a better economy (higher employment, and higher real wages) will solve instability issues by default.

Please note: the personal recommendations were not influenced by the actual policies in place prior to expressing them.

miners-strike

(Protesting Miners flee from an encroaching army of bobbies during the 1980s Miner’s Strike.)

1.Government Policy Options

Trade Barriers:

The UK is part of the European Economic Area (EEA), therefore tariffs and barriers between the UK and Europe are simply not feasible.  It would be illegal under EU law to do so.  Whether the EEA is to the British steel industry’s benefit is a complex question in itself which requires further research.  It is likely that both the EU member nations and the UK benefit from this arrangement overall, even if the Steel Industry does not benefit specifically.

With respect to the Chinese steel exports flooding the markets, it would be plausible for the EEA to place barriers to trade on Chinese goods at the European level to protect industry in Europe.  The efficiency of doing so is dependent upon the relative economic bargaining power of both economic trade zones. Generally policies like this do not benefit global economic efficiency, but it should not be ruled out as a political measure, particularly if the Chinese are being aggressive in capturing global market share (tit-for-tat as it were.)

In this specific instance I would personally recommend taxation over quotas. It is also worth noting that the EEA would need to act in unison and there would be an impetus amongst the Chinese to attempt to fragment the Union as a result.

In summary, this option remains a realistic possibility, but comes with potentially serious diplomatic consequences. Such consequences should not be taken lightly and a deeper political and economic analysis would need to be taken of the policy. Europe would not want to be on the losing end of a trade war, but neither should they be cowed by aggressive mercantalist policies internationally.

Subsidies:

This solution would be a short-term stopgap measure. The government would need to anticipate whether the UK market is expected to pick up again in future. Their expectations of future steel demand and supply would factor here.  I would absolutely not recommend this policy measure longer term unless specific national security interests (such as military production) were at stake.

Subsidies are like a honey pot which the private sector need to keep dipping their paws into for a sugar rush.  It could broadly lead to an even less competitive industry in future. Still, as a short-term measure it would remain on the table.

Currency devaluation/appreciation:

This would not be preferable, though it remains a policy option as the UK retains autonomy over their currency. The exchange rate is a complex multivariate function, typically the less governments need to intervene in the exchange rate the better, as the taxpayer is always on the hook for failed currency experiments.

1A80A40C000005DC-0-image-a-3_1427324619874.jpg

2.Industry Solutions

It would be naive to believe that the businesses which own the plants which are at risk of closure have not done a cost-benefit analysis. It would also be naive to believe that these businesses, having invested a great deal of cash into the purchase of these production facilities would simply just step away if they did not see a future in the industry.

Short of reinvestment into more efficient production facilities, there probably isn’t much that can be done for the industry to reduce costs without layoffs. Furthermore, steel production (as with much of heavy industry) has a high degree of asset specificity which makes upgrading facilities a serious problem.

China has an abundant labour force, and the economic cost of a human life in China comparative to the UK is low.  It might be possible for the owners of the facilities to lobby the British Government to deregulate the industry (decrease health and safety standards) or to lobby for lower taxes. This would, of course, trade one problem (unemployment) for another (higher worker mortality) or lower government tax revenues.

Given that the UK seems to have been falling behind its European competitors in terms of industry competitiveness, I have serious doubts about the strength of the industry in general.

A final option is to try to cut energy costs for the UK, as energy costs are 50% higher than the costs borne by European competitors. This would reduce the input costs of the business. The underlying structure of the British energy market would need to be investigated to see if this is even a possibility.

3.Personal Recommendations

  • I would lobby the European Union to put pressure on China through diplomatic channels and, failing this, I would consider the limited use of European-wide barriers to trade, particularly if China is pursuing objectively aggressive trade policies.
  • A short term subsidy might be in order- it is extremely unlikely that the price of steel (and commodities in general) will remain depressed in the longer term. More on this in coming posts.
  • I would not recommend nationalizing unless it was a matter of national security, this would quite likely lead to greater inefficiencies within the industry and bear significant taxpayer cost at a time when the average British worker is struggling. The UK taxpayer should not be throwing good money after bad.
  • I would not recommend using the currency exchange rate as a tool to boost the balance of trade.
  • Making the Government regulatory and compliance framework less complex for the industry would be ideal, but this is likely set by the European Parliament in Brussels.  Furthermore, this could be met with public outcry if worker mortality increased.
  • Examining the structure of the British energy sector for inefficiencies would be a necessity (rent-extraction on behalf of energy suppliers etc.)
  • Investment into new technology and modernizing the industry is likely required.

4.Government Policy Pledges

The implemented policies can be read here and are listed as follows:

Trade:

  • Improving the speed and efficiency with which the European
    Commission can begin and resolve trade defence investigations
  •  Enabling better use of policy instruments to enforce trade defence
  •  Intensifying discussions through the OECD with major steel
    producers like China, Russia and India to safeguard EU interests
  •  Improving the access that EU steel exporters have to “third
    markets”

Industrial Development:

  • Using EU funds to modernise the steel industry, including retraining and reintegration of redundant steel workers into the
    labour market
  • Engage high level stakeholders in the industry to agree a plan of
    action to modernise the industry
  • Implement the EC’s ‘circular economy’ strategy to reduce waste
    and increase efficiency in manufacturing

Energy:

  • Supporting energy intensive industries within existing State Aid
    rules
  • Reviewing the Emissions Trading System to ensure that the steel
    sector remains competitive whilst also reducing emissions
  • Implementing the EU energy union

Of course, whether any of the above pans out as planned, or whether it gets lost in the murk of European and British bureaucracy remains to be seen.

With respect to “engaging high level stakeholders in the industry” I suspect the British government will now struggle. We are entering a decade in history where investment capital will be thin, financial volatility will be quite significant, and investor risk will be high.

Ultimately this is a challenging time for the UK Government, the British people and Europe in general. Maintaining smart, lean policy and overcoming adversity in the face of the shifting global economy will be arduous and the European people will need to pull together with a longer-term view to regaining a competitive foothold in the world. Nobody likes to see hard-working people suffer through redundancy and unemployment. Hopefully sustainable long-term solutions can be proposed and successfully implemented.

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2 thoughts on “UK Steel: Can we Revive it? (Part 3)

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