Wednesday, 17 February 2016
Chinese dumping
A friend of mine has a little round dish which looks like an ashtray but is in fact, as it says round the edge, "a round tuit." I believe it was given to him by his wife on the assumption that now he had got around to it, he had no further excuses for not doing all those little jobs that she felt needed attention.
I have been intending to write a post on dumping in relation to Britain's steel industry for some months, but somehow never got around to it. To prevent dumping is about the only reason or excuse for interfering with international trade by tariffs or other devices which is undisputedly regarded as legitimate even by the most neo-liberal of economics text books.
Dumping is the selling in a foreign markets of a product at below its cost of production in order to get rid of a surplus of domestic supplies, or, more sinisterly, to put the producers of that product in the foreign market out of business, and then, once the competition is eliminated, hike up the prices. Dumping is not to be confused with selling a product at a lower price than the foreign market can manage because the exporter is more efficient or, in the jargon, has a "comparative advantage." That's the basis of all legitimate international trade and from which we all benefit considerably. (Just think how much bananas would cost if we had to grow them here in greenhouses.)
So if, as seems certain, China is dumping steel at below cost on the world market, we have every justification of putting up a higher tariff, or other restriction, in order to stop them and preserve our own steel industry, and I have wondered for months why on earth we didn't do it.
The answer is revealed in last Sunday's Observer. Other steel producing countries in the EU wish to impose a punitive tariff against Chinese steel similar to the 256% duty the US charges but this is being blocked by - guess who - the UK. Rather than respond with a punitive tariff, the EU is limited to a puny increase from 9.2% to 13%. The reason appears to be that the UK is anxious not to upset China or other arrangements may be derailed.
As a result, Tata, the Indian company now responsible for the production of what remains of British steel production, may be forced to further closures. Tata's domestic government, India, is not so timid, and has slapped significant tariffs on steel imports from both China and Korea.
In Britain it seems that, whereas there is no limit to the measures and finance necessary to rescue and preserve banking and finance, the steel industry, and the workers in it, are dispensable.
So much, yet again, for all being in it together.
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I don't get this: effectively, China is giving us money by selling us steel for less than it cost to make.
ReplyDeleteWhy do we not say, 'Thank you', buy as much of this implausibly-cheap-steel as we can, and use it in building projects which should now be able to either come in under budget, or spend more on other areas?
Getting cheap stuff is a good thing, isn't it?
(And there's no reason why we need a domestic steel industry. It's not vital for national security, it doesn't involve skills we need to keep alive, unlike, say, the nuclear weapons / power industries, and it's not like if the steel industry is of such structural importance to the economy that if it goes down it will take the rest of the economy with it, which is why the banking industry had to be saved. The entire British steel industry could close and it wouldn't really be much of a problem, on a national scale.)
In fact this is a good example of how being outside the EU could benefit Britain. If we were outside the EU, then the EU would put a 256% tariff on Chinese steel, while we would continue to import it cheap.
ReplyDeleteThat would raise the prices of cars produced in Germany, Poland, France, etc, making our cars more competitive compared with theirs.
Therefore our automotive industry, and any other industries for which steel is a significant raw material, would receive a massive export boost as other countries would buy from us instead of from EU countries.
So in this case, being outside the EU, so they could suicidally cripple themselves without us, would be a massive benefit to the British economy.
As always you put a plausible case, but I suspect you would take a different view is you were a Tata employee or shareholder.
DeleteInternational free trade does not imply trade without rules, but, to be of benefit to all (or maybe just most), trade must be rules-based. One of the rules is that there should be a very minimum, and preferably no, protection. Subsidising, of which dumping is an extreme case, is just as much protection as is a tariff or quota.
A related example might make thins clearer. At first sight it appears to make sense for food surpluses in the rich world to be given free to countries struggling to feed their populations. In an emergency situation this is true (though the sort of food it is not always appropriate. But if such "gifts" are given in the long run, they put local producers out of business and so damage the recipient countries' long run ability to feed themselves.
It is a good point that this situation has only come about because of Chinese state subsidy of their steel industry leading to over-production.
DeleteHowever, the point is that we have no control over what the Chinese do. We can't stop them from crippling their own economy by misinvestment (which, make no mistake, is what they have done: the very fact they are selling us steel at a loss shows that they wasted all that money they sank into producing too much of the damn stuff). And neither should we; they are a sovereign nation and if they want to pursue foolish policies of subsidising unprofitable industries, well, that is up to them.
All we can do is control how we react to it. And the correct reaction cannot be to cut off our nose to spite our face. Cannot be to say, 'well, the didn't do the right thing and ended up with too much steel so we shall hurt ourselves by not buying their cheap steel'.
In effect, we now have the opportunity to profit from China's mistake. To enrich ourselves to the tune of their foolishness in subsidising too much steel production. Should we not grasp that opportunity with both hands?
Would it not be stupid to turn down a golden opportunity like this? Especially if others are determined to take the nose-cutting-face-spiting route, and therefore we can enrich ourselves not just at the cost of China's stupid mistake, but theirs also?
Again, I suggest that your view would be different if you actually worked in the UK steel industry.
DeleteThe other problem with your "why turn down a free gift" philosophy is that it is very short term. In the longer run, once it has put the steel industries of the rest of the world out of business, it could then use its monopoly powers to hike up the prices (cf supermarkets and predatory pricing.)
China has joined the World Trade Organisation (WTO) and the UK government should join in the pressure to make them obey the rules
Again, I suggest that your view would be different if you actually worked in the UK steel industry
DeleteLike I wrote, though, there's no need for the UK to have a steel industry. It's not like it's important for national defence, or like it facilitates other sectors of the economy so that it's structurally essential. If the UK steel industry were to end, and the resources it uses (including human resources) were to be redeployed into other, more profitable areas, that would not be a bad thing.
The other problem with your "why turn down a free gift" philosophy is that it is very short term. In the longer run, once it has put the steel industries of the rest of the world out of business, it could then use its monopoly powers to hike up the prices
But if that happened, that would mean the price of steel would rise, so we would just start producing steel again, at the higher prices, because it would then be profitable to do so. It's not like steel production is a 'use it or lose it' industry where if you don't keep the skills alive you can't regain them (in the way that, say, nuclear engineering is).
And in the meantime we would have enjoyed a serious competitive advantage over our trade rivals in the EU and elsewhere. That's a lot of money coming into the economy to be re-invested, which has got to be good. Even if that money only comes in for five or ten years, surely it's still better to have it than not?
(And trade relationships are often sticky, so the benefit might even last longer)
I'm really not seeing the problem. We get a boost to our competitiveness, the only possible downside is the closure of an industry that isn't vital to the national interest and that can be re-started if it becomes economic again to do so, and all this is paid for by China.
It is all good.
Or if you want to look at it another way, the point of a steel industry is to produce steel.
DeleteBut thanks to the Chinese over-producing, there is now more steel in the world than we have use for. Supply exceeds demand. That's why they have to sell it at a loss.
In such circumstances, we should shut down, even if only temporarily, our steel industry. What is the point of producing steel that nobody has any use for? You might as well just employ people to dig holes and fill them in again. In fact that would probably be better, because although I am not an expert on steel production, I'm guessing that it takes a lot of energy and produces a fair amount of polluting waste products as a by-product. Certainly more than digging useless holes.
So to use tariffs to make Chinese steel more expensive than domestic steel in order to keep the British steel industry going, at the moment, means using energy, and generating pollution, in order to produce steel which nobody needs because there is already too much steel in the world.
How can you justify that?
Yet again I feel you would think differently if your livelihood depended on the steel industry. In addition I think you are wrong on three counts.
Delete1. Steel is sill a "core" industry for the British economy. We still produce cars(in fact we're now, with foreign management, rather good at it); we need to maintain and are about to improve our railway network; and we have an armaments industry that produces tanks,armoured cars and weaponry. All of these require steel. For all I know it may even be required for nuclear submarines, which I suspect you're also keen on, though I have my own doubts.
2. It is not so easy as you imply to switch either the capital or the labour involved in the existing steel industry to other uses. Steel mills have huge sunk costs without any obvious alternative uses. Maybe they can be mothballed for a while, but I suspect they would be out of date when the time came for their re-opening. Similarly with labour, much of which is highly skilled. Skilled or not it is not easy to find alternative employment in the present economic circumstances, and skills not exercised regularly are quickly lost
3. But the real issue is a question of fairness. International trade, to be of benefit to all (OK as I've already admitted, most) must be rules based to make it as fair as possible. Dumping is against the rules and the UK government as a member of the WTO should be acting with others to enforce the rules, not, for perceived national advantage, permitting China to evade them.
All of these require steel
ReplyDeleteBut this is exactly my point. They all require steel, so the cheaper the steel can be had, the better for these industries. The cheaper we can get the steel, the more competitive our cars are in the international export market; the less it will cost us to improve our railway network; and the more tanks we can build.
So your first point actually makes the opposite case to the one you think it does.
Steel mills have huge sunk costs without any obvious alternative uses
The thing about sunk costs is they are sunk. If you spend three million on a factory, and discover that every day you operate it you make a ten-thousand loss, you don't keep it running because of your sunk costs, you shut it down as soon as possible to stop yourself from losing even more!
So if we have steel mills which are operating at a loss, we don't want to keep them open just because they cost a lot to build. That money that it cost to build them is gone, unrecoverable. All we can do now is take the right decision based on current and future profitability. Sunk costs are sunk; they cannot factor into our decision, they are irrelevant.
Maybe they can be mothballed for a while, but I suspect they would be out of date when the time came for their re-opening
If the would be out of date, then they would still be out of date if they had been in use. Things don't become out-of-date any slower because they are in use. If something needs to be upgraded or replaced because it is out of date, then it needs that whether or not it has been in use or mothballed for the last few years or decades. So this again is irrelevant.
Similarly with labour, much of which is highly skilled. Skilled or not it is not easy to find alternative employment in the present economic circumstances, and skills not exercised regularly are quickly lost
Again, I'm not convinced steel manufacturing is a highly-skilled trade; how long does it take to train a steelworker, from scratch? China has managed to build and run so many steel factories in such a short time that they have glutted the market, so it can't be that hard top build and train the staff.
But more than that, again, would it be a great loss to us if the skills were lost? As pointed out, we don't need to make steel on-shore. We need a supply of steel to turn it into cars, railway tracks and tanks, but there's no reason that the steel has to come from the UK.
I mean, we also need oil to run the machines that make these things, and petrol to drive the trucks which take them from place to place; but there's no way we could be self-sufficient in oil.
Heck, there are too many people here for us even to be self-sufficient in food!
We are a nation of islands; we are going to import stuff. There's no shame in that. We do not need to make everything on-shore, and to do so out of sheer stubbornness when it is available cheaper by buying it in would be just stupid.
But the real issue is a question of fairness
I don't know why you keep saying 'fairness' as if somehow buying steel at below-cost-price is somehow 'unfair' to us, as if China is somehow befitting from this deal. If anyone should be complaining of unfairness it should be the Chinese, who are losing money on ever tonne of steel they are having to unload at underneath what it cost them to make it, just to recoup partially some of their losses.
We are not being hard-done-by by this deal. There is no issue of unfairness. We are befitting by getting an essential raw material for our industries, cheaper than it would cost us to make it ourselves. How can you possibly think that is unfair? It's great!
Dumping is against the rules
ReplyDeleteAlso, you keep writing this so I looked it up and the relevant section appears to be here:
https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm
I quote:
'If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product'
In this case, the Chinese over-production, combined with the slow-down in their economy leading to lower-than-expected demand, has led to a global collapse in the price of steel. That is, China is not selling us steel at a lower price than they are selling it in their home market.
They are not, therefore, 'dumping' as defined by the WTO; and what they are doing is not, therefore, against the rules.