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.         

The big story behind Port Talbot

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