Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday 3 April 2016

Port Talbot and Neoliberalism

Brief synopsis for non-UK readers. Port Talbot is the latest UK steel plant to face closure at least partly as a result of dumping by Chinese steel producers. While the US government seems quite prepared to place high compensating tariffs on Chinese steel, the UK government had blocked EU attempts to do the same.

I used to think I knew what neoliberalism was. True it is a term that is employed far too liberally (no pun intended), but I thought neoliberals had a clear idea of what they were about. This was to keep markets free from government interference, and also to prefer almost without question market processes based on private property over state action. As a result, it was neoliberal to want to shrink the state as much as possible, as long as its role in defending markets and private property was preserved.

It was for this reason that I could say that the UK government’s actions in blocking tariffs on Chinese steel were nothing to do with neoliberalism. If China was a capitalist country where independent (from the state) producers received no state subsidies, then that would be different. But it appears that what we have instead is an all powerful state rigging a market. That couldn’t be neoliberal, surely?

I am aware that neoliberalism has a blind spot when it comes to what economists would call market imperfections. That seemed to me one difference between neoliberalism and ordoliberalism, with the latter seeing a clear role for the state in restricting monopolies. The way you could characterise this is that neoliberals started Econ 101 but skipped before the lessons on market failure, while ordoliberals held out a little longer to hear about monopoly.

That, at least, is how I saw it. I had also seen the Institute of Economic Affairs, a London think tank, as being a bastion of neoliberalism. Although often a supporter of Conservative government actions, they were not in favour of caps on immigration or Osborne’s hike in minimum wages. I was therefore rather surprised to hear its director say that the EU government would have been wrong to impose tariffs on Chinese steel. True, the idea that a producer in an oligopolistic market with high entry barriers could use its deep pockets to drive out other producers by temporarily cutting prices, and subsequently use its new monopoly position to raise prices by much more, might have been one of the economic lessons that were skipped. But when one of the most powerful states in the world does it? I would have thought that would have raised alarm bells for any neoliberal.

Either I am missing something, or I am being a typical academic (economist) in expecting an ideology and those who uphold it to be internally consistent. After all, another major example of large states interfering with markets is the implicit subsidy provided to ‘too big to fail’ banks, but I do not remember neoliberals attacking that much either. Neoliberalism is whatever neoliberals do?!

Or maybe not. I think critics of this UK government miss a trick when they call its failure to defend its steel industry as the actions of a “failed, laissez-faire Thatcherite ideology”. That gives it a kind of respectability it does not deserve. Instead it is a government that seems to have decided that defending the interests of China are more important than its own steel industry. When China announced on 1st April that it was imposing high tariffs on a type of steel produced in the UK, the only thing that looked like an April fool were the actions of the UK government.         


  1. Heavy industry has been declining in Western Europe for decades as China (and other Asian countries) are able to produce such goods at a much lower cost independent of subsidies. What makes you think that subsidies, rather than structural change are key in the Port Talbot case?

    1. There's a few reasons come to mind, the heart of it all we need to consider whether the Port Talbot situation is temporary or permanent. A lot of the problems at Port Talbot look as if they are down to recent fluctuations in the price of steel rather than the result of some inevitable process. If the steel price rebounds from it's low base, the decision to let Port Talbot go to the wall will look short sighted. On a similar note there is also the question if there are changes that could be made to the plant's operation that could return it to profit.

      Once you need to consider some of the politics. First, there's the impact on the town of Port Talbot, it would take decades for the local economy to recover from closing such a major source of local employment. Reskilling and enterprise zones are really not going to plug the hole. Second there are broader considerations of the UK's 7% trade deficit, can the UK run such a deficit ad-infinitum, this seems unlikely and you have to wonder what the result of a correction might be and whether it would be pleasant. Losing an industry that contributes positively to the UK's trade balance would be bad in this context.

  2. "Instead it is a government that seems to have decided that defending the interests of China are more important than its own steel industry."

    The clarity of this very important sentence is affected by a grammatical glitch, so I was wondering if you would be so kind as to rephrase it. The intended frame could be something like the following:

    "Instead it is a government that seems to have decided that defending the interests of China is more important than [ V-ing ] its own steel industry."

    It seems that a verb or verb phrase is wanted in the bracketed position above.

  3. I think the treatment of Port Talbot compared with the UK banks will be obvious to all in the run up to the EU vote. Interesting to see what are the consequences as Cameron needs external support as the Conservative dogfight continues.

  4. One thing you have neglected to explain Simon is why exactly the government wants to defend China. Yes, they've been pursuing Chinese investment in projects such as Hinkley. But Hinkley is essentially off-balance sheet. More expensive, but a price Osborne is willing to pay to avoid borrowing.

    So surely the reason the government is tying itself in knots is because they want to reduce the size of the state. Blocking tariffs to attract foreign investment wouldn't be required if Osborne just invested (not in Hinkley necessarily) himself.

    The steel industry is just the latest casualty despite being privately owned. If no buyer is interested (has Tata missed something?) then the government faces nationalising steel or putting its workers on welfare. Self-defeating austerity perchance?

  5. Until the donor list of the IEA is revealed we are all free to think conspiratorially about its motivations.

    Are they funded in part from businessmen with interests in not offending China? Or from China itself?

    We should ask as the BBC won't.

  6. You can see some of the neoliberal's point though. If the Chinese government wants to be stupid and subsidize steel, then that's a benefit to those non-Chinese who buy the steel. After a (possibly long) while, the Chinese will realize that they are simply giving money away to foreigners, and quit it.

    The problem is what to do with your own steelworks until then, because you'll need them when the Chinese eventually wise up. This is the problem with the neoliberal point of view - they would say let the steelworks fail, but that mistakes short-term subsidies for long-term prices.

    I'm sure there is a way of keeping the steelworks running and fully staffed, while enjoying at least some of the benefits of cheap steel from China, if we thought outside the market.

  7. A view from the left. Philip Mirowski's 'The 13 commandments of neoliberalism':

  8. Still, Chinese jobs and communities deserve protection as much as do British ones. Don't they?

  9. I don't really think you can describe steel production as an oligopoly. China produces (but also consumes) half of steel production in the world. There is still very large steel production in Europe... I guess it's a matter of opinion, but I don't really see China as cornering the market at this point... Demand for shipping is waning, which affects steel consumption badly.
    Given that Chinese production has been going down (just not fast enough), it seems like a strange way to corner a market. It's not like British steel industry has been profitable in the last few decades... It has been losing money for decades now, isn't it? And the blast furnaces seem to be obsolete technology...
    I think the banking analogy is quite weak: large parts of the banking system was effectively decommissioned as it had proved unprofitable. Job losses have been large (as was to be expected).
    Also Chinese tariffs were a reaction to increased tariffs from the EU: the EU could have raised them higher, but they did raise them.

  10. In order to understand this it's necessary to grasp the technical question at the heart of it. We are not talking about "steel", we are talking about blast furnaces. That is, the production of virgin steel from (imported in the UK) iron ore, coking coal and limestone. This is a shrinking part of the steel industry in all advanced countries. Also nothing to do with China at all, nor liberalism neo- or otherwise.

    We simply recycle more steel through arc furnaces than we used to (as Teddy Goldsmith told us we all should in Blueprint for Survival).

    More that 50% of all European steel is now produced through this recycling. It was exactly the same point that led to Arcelor Mittal closing the Florange plant. The blast furnace was closed, the rolling mill remains and is fed by arc furnace produced steel from scrap.

    It is only if you understand this point that the actions by people like Liberty House (a potential "saviour" mentioned over the weekend) make sense. They wish to buy, whatever happens to Port Talbot, certain of the downstream assets inside Tata Steel. And they're vaguely interested in PT itself. But their plan would be to close those blast furnaces and replace then with arc and scrap feeds.

    Redcar, Scunthorpe....also blast furnace sites.

    Whatever political or economic ideology one subscribes to this is the essential point that needs to be grasped. Technological change has meant that we all need fewer blast furnaces. Having fewer does not mean the end of the steel industry at all: it just means having fewer blast furnaces.

    Once everyone has grasped that then we can start to parade our ideologies again: but only after that has been grasped.

    "After all, another major example of large states interfering with markets is the implicit subsidy provided to ‘too big to fail’ banks, but I do not remember neoliberals attacking that much either."

    As a fully paid up neoliberal I'm not sure I have attacked it. But I've certainly applauded attempts to reduce it. Was entirely and vocally in favour of the Bank Levy (in its original form) as it was a Pigou Tax on exactly that, TBTF.

    And to continue on to the saving the banks line: if we saved the banks why won't we do the same for steel? The answer being that we didn't save all the banks: those that were total crocks (Lehman, Northern Rock, various building societies, Chelsea, Dunfermline, maybe Alliance And Leicester) were allowed to go. Which brings us back to Port Talbot. Is it it a crock (I think yes for the above technical reasons) or isn't it and thus deserving of being saved?

    To repeat: before ideology that's the important question to be considered. The technology of #blast furnaces and the place of that technology in the steel industry.

  11. In the "real" world you cannot lay political considerations aside so the charge of inconsistency seems absurd; the arguments resolve themselves into practical politics.

    With this government in particular it's just chapter 211 of "thinking on the hoof" and I'm surprised you expect anything else.

    At the end of the day you have to recognise that economics is a social construct and cannot be divorced from politics; to my mind it operates as a discipline which mediates actions in the context of a goal of the efficient allocation of resources.

    In these cases I'm always reminded of Plato: "justice is the interests of the stronger" and consistency is an overrated virtue.

  12. Liberal trade policies have always been an instrument of global competition. This was true of Britain, which first industrialised behind mercantilist barriers then imposed free trade through military power to destroy the Indian textile industry and force the Chinese to consume opium. Similarly, the US industrialised behind the McKinley tariffs then enforced open markets after WW2 when the world was desperate for its goods and dollars. Indirect state support, notably for finance and technology, would subsequently be critical in maintaining US economic predominance. So we should not take neoliberal proclamations too seriously. They know full well that there are market imperfections. Indeed, the whole point is to define a regulatory system that allows economic rents to be extracted from those imperfections.

    Britain is unusual in the extent to which its political establishment is relaxed about industrial decay. It’s not that Javid believes that other manufacturers will benefit from the collapse of British steel if that lets them buy more cheaply abroad, but that he doesn’t really care if they also go under once market conditions change and UK manufacturing finds itself exposed to rising global steel prices. That’s not incompetence, it’s a conscious choice that what counts is the privileged access of finance capital, represented by the City of London, to international capital flows and markets, and the rents skimmed from those transactions. I don’t want a return to competitive protectionism but we need space for industrial policy.

    Now I’m off to join a steel protest outside the Welsh Assembly.

  13. Tim once again you miss the point! arc furnaces,require getting used steel & reforging it! No new steel is ever created,So the amount of steel is maximized unless we pull down the shard,gherkin and many buildings this takes time,for every ship lost in a war we would have to destroy 3 shards the time involved alone means that a war lasting for a medium term would mean that only the nuclear option is left too us,so we start a nuclear war because of a failed stupid ideology,your right it is about furnaces but you want to save the wrong type!most steel in use could not be used,vehicles are assets in war,there will be a window of opportunity when the government could stockpile(i doubt this government has the wherewithal to do so) enough iron ore to produce large amounts of iron quickly unlike arc furnaces,So once again the ideology comes before the security of the nation,based on half data and a lack of forethought of what is actually needed & how it will come about. ps the East could now be (rather than for economic reasons) be dumping steel to weaken production in Europe to very dangerous level that will be fatal to Europe,even the USA have had the intelligence to protect themselves from such a possibility but the rabid neo-cons of Europe have fallen on their swords,ps we have iron ore in this country that yes in economic terms isn't mined but in a war situation could be! the man power & equipment needed to extract steel form buildings is far greater than mining it!detracts them from more important defence duty! it is both the most illogical and dangerous ideology to leave us so open & vulnerable all in the name of profit!

  14. Suppose we take the model as suggested in the article - that the present situation is one of an oligopolistic producer aggressively cutting prices to achieve market dominance, and not a sudden shortage of demand/long term shift in industry location or anything else. Obviously this only works in a world of high barriers to entry, which is plausible with blast-furnace production of steel.

    In such a model, surely the optimal policy response would be to
    Part I) allow domestic production to fold, and take advantage of low-cost prices
    Part II) guarantee to subsidise barriers to entry, e.g. pay 50% of start up costs for new/re-activated blast furnaces, if the market price rises to the point where it could be competitive again.

    Now it could be that £1m/day (current estimate of losses) is less than the costs of shut down/start up for the plausible period of time during which prices are expected to be depressed, but that strikes me as unlikely given global anaemic growth affecting steel demand.

  15. ps are you really believing that ships sunk in the middle of the Atlantic are going to get recovered so they can be recycled in war conditions?????

  16. I think the argument here is a little bit more complicated than you're letting on.

    In the Econ 101 analysis, a subsidy such as the one China is providing to its steel producers benefits the producers (the steel companies) and the consumers (us!) at the expense of the Chinese taxpayer.

    To argue that Chinese steel subsidies are harmful to British society as a whole, you have to make a much more complicated argument about economies of scale, agglomeration and path dependence, then weigh that against the potential negative consequences of state action. And you have to do all of this making arguments specific to the steel industry, or you end up justifying any state intervention.

    I'm not saying that such an argument isn't out there to be made. But you need to make it!

    1. 1) I have never suggested the problem is simple, or what the answer to the problem is.
      2) My point of using the example of predatory pricing as a market imperfection was to point out that this is a dynamic problem, where we cannot presume that prices will always be this low. So the Econ 101 analysis you give is only part of the answer. If there are large costs to closing down a steel industry, and costs to not having a steel industry, these have to be set against the short term benefits of having low prices rather than high tariffs.
      3) That is not a problem that I need to provide an answer to. All I need to do is point out that the justification that the government gives for not imposing higher tariffs is inadequate.

  17. As usual, it's vital to notice that Tim Worstall is trying to mislead us.

    It is not in our long tem interests to have a country with no blast furnaces, recycling has limits.

  18. Peter Dorman noted this 1997 paper by Paul Krugman where Paul was making the case for free trade even if the foreign governments subsidize things like steel:

    Of course Paul was thinking in terms of a world where all nations were at full employment. I sense you are thinking in terms of the current situation where we are not at full employment so Keynesian factors are at play. Your thoughts on Krugman's old 1997 paper in terms of this discussion?

    1. You are right that Krugman makes an important argument, but not that I do not follow it because he assumes full employment. The key point is that the subsidy may be temporary, and there are costs in entry and exit to this industry.

      To take an extreme case, if China's subsidies stopped the day after Port Talbot was shut down, and without these subsidies Port Talbot was profitable, yet it cost a great deal to restart Port Talbot, we would look pretty stupid in not imposing tariffs.

      The key question is how big these entry/exit costs are compared to the costs of imposing a tariff (and for how long that tariff would need to be imposed). If that is the calculation the government and its supporters have done, they are keeping remarkably quiet about it.

  19. Jack Sherer-Clarke4 April 2016 at 22:30

    Thank you for that post Mr.Wren-Lewis. I am not yet even an undergraduate, but the way I understand it is this. If we ignore strategic industry arguments, the main reason a neoliberal or anyone else would support protectionist measures in this case is if they believed that the threat of tariffs etc. would be sufficient to coax the protecting trade partner (China) to reverse their own trade barriers; otherwise presumably the harm of imposing tariffs on other domestic industries would likely be larger than the benefit gained to a relatively small industry like steel. However, even in the event that coaxing is unsuccessful I assume that protectionism may still make sense since China is attempting to monopolise and increase prices in the long run. However with many steel producers in Europe, would this scenario not take the form of a Chicken Game where the optimal strategy would be to let other European trading partner's take the brunt of using protectionist policies to keep their own steel industries afloat, whilst we (avoiding being the chicken) attempt to benefit from their cheap exports and keep our own trade barriers low?

  20. Could it be that the UK government's attempts to forestall the EU's wont to increase tariffs against Chinese steel highlights the internal divisions in the Conservative side around Brexit?


  21. The EU commission has corrected for all that by imposing a tariff they calculated.

    So actually, according to the wizards at the EU, Chinese steel is now on cost parity with EU steel.

    Or perhaps, just perhaps, the EU commission got its calculation wrong.

  22. "the UK government had blocked EU attempts to do the same."

    It has not though. That is an outright lie.

    The EU has been pushing to get more powers transferred to the EU trade directorate. Which it doesn't need. Steel would just be the first in a long list of goods that would end up getting clobbered with higher tariffs. First steel. The next Germans clog manufacturers. *14

    The EU commission can alter the anti-dumping tariff as it sees fit, and that will then get applied using the "lesser duty" rule.

    Again the question is why they haven't simply increased the 13% rather than pushing ahead with more power transfer to Brussels.

    The EU commission already has the power to lift the tariff if it wants to. Do a recalculation. There are plenty of 'injury' reports on its desk. And it can do it retrospectively.

    The UK, as one of *14 countries* out of the 28, blocked a transfer of more powers to the commission.


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