In today’s print
edition of the New Statesman I have a brief review of Yanis
Varoufakis’s new book.
(The review also looks at Piketty’s newly published collection and
translation of newspaper articles. I’ll talk more about each when
the review appears online, but for now you can read a similar (in
parts) double review
by Paul Mason.) The organising macroeconomic theme in his book is the
need to find systems capable of successfully dealing with current
account surpluses. In my review I say I’m not sure whether this
framework is really capable of holding up everything that the author
wants it to support, but there is no doubt of the importance of the
issue. For example, it seems to me this is the framework, albeit at a
more industry specific level, with which to see the current crisis
over the threatened closure of the UK’s steel plant at Port Talbot.
The surplus in question here is the surplus Chinese capacity to
produce steel. Ambrose Evans-Pritchard in the Telegraph, who has a
similar perspective, reports
an OECD estimate that China's excess capacity is over twice the size
of total European Steel production. Because China is able to
subsidise production in various ways, this means this steel can beat
UK production on price. The US department of commerce is reported
as thinking that the subsidy on some types of steel justifies a
tariff of 236%!
If this is correct, then this story is not about neoliberalism
or the free market, but a story of a rigged market. To put it
another way, it is a market where one set of producers have the
ability to eliminate their competitors by flooding the market at a
loss because they have the ‘deep pockets’ of a state behind them.
The EU have been
trying to raise tariffs against Chinese steel producers for three
years, but have been blocked
by a coalition of countries led by the UK. The UK Business minister
Sajid Javid has been quite explicit
about this: he prefers cheap steel because it helps
other parts of UK industry. It may also have something to do with
wanting to curry favour with China because of other matters (which
was the point of John McDonnell’s Little Red Book stunt, if only he
hadn’t started reading from it!). This is not Javid upholding the
principles of a free market, but instead allowing a large state to
rig a market. The irony in this case is that the state in question is
not the one he works for.
Postscript (11/4/16) For more detail, see this from Ben Chu
Postscript (11/4/16) For more detail, see this from Ben Chu
The predatory pricing framework you're trying to use as an analogue to the Port Talbot situation would require that:
ReplyDelete1) The predator is pricing below some measure of marginal cost - i.e. LRAIC or average avoidable cost; and
2) The predator has the ability and incentive to increase prices substantially after its rivals have exited the market.
Neither condition is satisfied in this case. Hence, there is no economic rationale for implementing tariffs against Chinese steel.
How do you know neither condition is satisfied?
DeleteHow do you know either is?
DeleteLoosing over £7.7 bn sound like selling bellow cost to me.
DeleteSource: http://www.theguardian.com/business/nils-pratley-on-finance/2016/jan/18/only-stiff-tariffs-on-chinese-steel-will-reinforce-uk-producers
You're abs right in almost everything you say here. But anyone who (unlike me) takes a soi-disant progressive or leftwing view must surely welcome the rigging of a market in favour of Chinese workers at the expense of UK workers whose standard of living is far far higher? After all, we send aid to China, don't we?
ReplyDeleteNot a good way to achieve equality, as much more likely to lead generalised trade protection, which would be very bad for China.
DeleteHow much is Javid in fact serving his 'own state' of the finance industry in the UK by thinking he can get future expected Chinese investment into the City by ignoring Chinese economic abuses elsewhere, especially ones with strong trade unions?
ReplyDeleteRegardless of your views on Javid's motivation, you don't address whether Chinese subsidy of steel benefits the UK on net or not. As we are net importers of steel basic economics would suggest the UK on aggregate benefits (a loss which would be undone if we implemented higher tariffs, EU or not). Or are you suggesting that the Chinese gvt has some master plan to establish a monopoly on steel and withdraw their subsidies and raise prices after European steel mills have closed?
ReplyDeleteOf course, even if the UK gains on net from Chinese policy, we need an active government to spread these gains evenly and to compensate those in Port Talbot/ Redcar and elsewhere, perhaps through use of ALMPs.
I doubt its a master plan, but I also doubt these subsidies will last very long. More likely transitional measures to smooth employment losses in China's steel industry. So the argument that it benefits UK as a whole is a very short term perspective.
DeleteAFAICS, the Chinese government's master plan is just to manage its economy strategically, which is something that Javid (an admirer of Ayn Rand) is ideologically against. As Mariana Mazzucato said on Newsnight a couple of days ago, the situation is not static, and to state blandly that "steel is losing money and should therefore close" is at best crass stupidity.
DeleteWell, whether they're Randian clowns or Chinese sleeper agents, I expect that by the time they're done with their austerian economic quackery, ironic privatisations etc. the Tories will've made the UK look like it's been defeated by a powerful and vengeful enemy.
Delete" I also doubt these subsidies will last very long"
DeleteAnd your evidence for this is what? Why do you think Tata's commercial judgement is wrong?
Tata's commercial judgement is surely as much about the amount of support that they think that they'll get from the UK government - especially about whether they have a strategic view for the future. You know, what Osborne is always rhetorically preaching about - a sympathetic business environment - which to him only means lower taxes, deregulation and laissez-faire.
DeleteThat's not quite right.
ReplyDeleteThe 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 German clog manufacturers.
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.
Doesn't this all relate to what we used to call the 'optimum tariff' where you tax imports that compete with home production while allowing free entry to those that we don't or can't make at home? The main drawback of that policy - which was more or less explicitly applied between the wars I believe - is that it doesn't work in a game where reciprocity is enforced. Then there's infant industry protection - but it's a bit of a stretch to apply that to steel in the UK!
ReplyDeleteWhat it maybe does underline, once again, is that there is a massive discrepancy between theory (in this case trade theory) and the real world. In theory, capital and labour are fungible and can be applied to anything else if the market fails in one sector. But the appetite for yet more call centre work is not that strong (apparently) in South Wales.
Basically, we are still confused about whether work - employment - is a cost or a benefit and this confusion (going back centuries to be honest) is at the heart of many policy inconsistencies. So you hear the IEA (who should certainly know better) arguing that a higher minimum wage will lead to higher productivity and is therefore a Bad Thing. What they actually mean, of course, is that the Living Wage threatens to tilt the balance infintesimally towards workers compared with the current thing and that is indisputably a Bad Thing.
Some observations on this from South Wales:
ReplyDelete1) Let’s have no illusions about the consequences for communities if Port Talbot, Shotton and other works are closed with impacts, not just on steelworkers themselves but on suppliers and local businesses. We have had an uncontrolled experiment for 40 years on what happens when you deindustrialise with no plan on how to transition, just an ideological belief that somehow the free market will magic up alternatives. It doesn’t happen, certainly not on a local level. I grew up in a small valley town which had a large engineering works, a clothing factory and a brewery; there will still mines lower down the valley and easy access to both Ebbw Vale steelworks and the large Hoover plant in Merthyr. Now when I go back there is nothing.
2) Whatever we might think about the EU, the evidence is overwhelmingly in this case that the British government has actively blocked any possible moves to help. That doesn’t absolve the EU Commission and I am concerned that our government will hide behind EU competition law to avoid acting. There is a general point here. Both sides of the EU argument point to measures currently associated with Europe as if they would just disappear if Britain left. That’s just false. Not only are many regulations unavoidable in the modern world but a less restrained Tory government will be as bad and in many cases worse. TTIP is an example: the EU is currently negotiating with the US but the Tories would rush into TTIP2 if we left.
3) Over-capacity in steel, especially in China, is a global issue and steps need to be taken to manage it, preferably through international cooperation but if we need protective measures then we should take them while negotiating. But there are also specific British issues here: the German steel industry has not seen the same crisis in the last year as we have. There is a broad failure to modernise in British manufacturing, Osborne’s “march of the makers” has turned into lemmings off a cliff, and the current account deficit in balance of payments grows and grows, a major driver of the government’s own deficit. We need to restart industrial and regional policies, and public ownership in a case like steel should not just be about short-term jobs but modernisation.
4) The FT has noted that the risks associated with the British Steel Pension Fund are a barrier to another company taking over the Tata works. The fund itself is well run but disproportionately large for the current workforce, which makes its financial future overly dependent on markets. It is impossible for companies carrying such legacies to compete with others than do not. An immediate step the government should take is to guarantee the fund. We were happy enough to do that when banks, profits and bonuses were at stake. Now let’s do it for jobs and pensions.
"Because China is able to subsidise production in various ways, this means this steel can beat UK production on price."
ReplyDeleteWhat is your evidence for that claim please. As China has lower labour costs, lower energy prices, and larger scale production, why do you think they would not beat the UK on price in any event?
What are the competitive advantages UK blast furnace steel production has over China? It is relatively old technology, and there is a declining market. Why do you think China would not beat UK production on price absent subsidies?
"The EU have been trying to raise tariffs"
You at least imply that you approve of this. Do you? If so why? If we think that the low price of steel is temporary and caused by dumping, surely the best way forward is to subsidise the industry directly, rather than impose the cost of this directly on to steel consumers (like the car industry).
Why do you think the low price is temporary? What is your evidence for this? If it isn't temporary, why not just let China sell us steel at below cost?
If it is temporary it may well be worth taking the short term loss to keep UK production going, but why do you think Tata's commercial judgement on this is wrong?
Where is your cost/benefit analysis of whether the lower price of steel (with consequent loss of UK steel jobs) is not a price worth paying?
Aren't these all obvious questions?
ReplyDeleteI think that the assertion you made about the unfair competition in the globalised steel market being rigged rather than neoliberal is true, but this is so often the case. On reading Ha Yoon Changs' “23 things they do not tell you about capitalism,” he states that there is no such thing as a free market.
He states that to become world class and very rich, companies have always had and needed the deep pockets of the state. Microsoft, he says, had a 70% subsidy for many years. We can see in this country, that the so-called liberalised railways are now receiving a much higher subsidy than they did when they were nationalised, as this service certainly cannot manage without state help, and is even subsidising EU trains, indirectly.
I recently read an article by Thomas Palley regarding free trade. One of the comments he made which is relevant to China is that for Post Keynesians, the social costs involved in trading with a country that has much lower standards with regard to pay and conditions, lack of social overheads, and the environment carries a cost both to the workers in the importing and exporting country. He states that to correct this, a social tariff should be charged. I assume that this is because where a country off shores jobs to get cheap labour, the importing country will create unemployment – this is totally rigged therefore, not free. The social tariff should incenitivise countries to improve conditions of employment in the country exporting and encourage them not to offshore jobs unless there is another very good reason.
Link to T Palley:
http://www.thomaspalley.com/docs/research/TRADE_Left%20Keynesian%20-%20SOCIAL%20RESEARCH%201994.pdf
What do you think should be done about the Port Talbert steelworks? Do you think it should be allowed to close, or be nationalised or some other solution? Also do you think higher tariffs should be implemented at the European level against Chinese steel?
ReplyDelete