Saturday, April 02, 2016

Shooting holes in both sides of the ship.

The news that Tata Steel is proposing to sell all their steel-making operations in the UK is potentially devastating to the communities and people affected, potentially putting up to 40,000 jobs at risk.

The additional news that China is imposing a new 46% tariff on imports to China of some steel products from Britain, the rest of the EU, South Korea and Japan will be seen by many, given that one of the factors which has affected the viability of the British steel industry has been competition from Chinese steel,  as adding insult to injury, particularly as some steel produced at Port Talbot in Wales will be affected. It is not in the least surprising that many have called on Britain and other EU governments to retaliate.

But bear in mind that if either side is foolish enough to start a trade war, there is no policy we could follow which would not have dire results for at least some British companies.

As David Cameron said,

"It's a very difficult situation and people who pretend there's some simple answer in a world of massive overproduction and collapsing prices are not playing straight with you."

Suppose Britain and the EU retaliated by imposing 46% tariffs on the Chinese steel involved. (At the moment the tariff on those Chinese steel types which  the EU accuses China of dumping is 9%) What would be the impact of that measure on British industry.

It might or might not save British Steel producers by reducing the amount of competition they face. For the rest of British industry such tariffs mean higher costs when they buy steel: potentially 37% higher.

I'm sure that there are people who would like Britain and/or the EU to copy the USA and impose tariffs of up to 266%  on Chinese steel. But those tariffs put the cost of steel to the American companies which buy steel - car makers, the construction industry, makers of many of products ordinary Americans need to buy - by up to 266%.

Let us be absolutely clear about this. Putting up tariffs on steel may or many not save the jobs of British steelworkers but it is absolutely certain that it will COST jobs in other industries and put up prices in the shops.

"Trade wars" in which two or countries or groups of countries try to block each others' imports using tariff or other barriers may seem like a good idea to the workers in the industries which are supposedly "protected" but the measures taken by both sides harm everyone else in both economies and the overall effect on the economy of every nation concerned usually varies from bad to dire.

It's like people on different sides of a ship, who see the ship is tilting away from them because people on the other side of the vessel have been shooting holes in the bottom, and retaliate by shooting holes in the bottom of their own side of the ship.

There can be a case for limited anti-dumping measures but putting punitive tariffs on Chinese steel imports is as stupid as trying to balance a ship by shooting holes in the bottom on our side.

I hope that British and EU ministers will be talking to the Chinese about how we avert a trade war which would be damaging to both sides.

I hope and understand that British ministers are looking hard at what measures we can take to help the British steel industry. This should include a hard look at the impact of energy costs on the steel industry and how government policies (some of them introduced during the last Labour government by Ed Miliband and others) are affecting the industry: according to The Times today the cost of energy paid by the British steel industry is nearly double that in the rest of the EU.

But a trade war will help nobody.

ADDENDUM: Steel and the EU.

Here is a follow-on point about how the debate about steel relates to the debate about Britain's EU membership.

There will probably be people who want to leave the EU so we can put  higher tariffs on Chinese Steel than the EU would agree to, or give higher subsidies to British steel than EU rules would permit.

There are also a few very distinguished economists like Professor Sir Patrick Minford who think that leaving the EU would make Britain richer and cut prices.

You can argue for a "leave" vote based on either a wish to pursue that policy, or citing the evidence of people like Professor Minford in your support, but not both.

The reason you cannot argue for both those things is that people like Patrick Minford and every other distinguished economist who thinks Britain will be richer outside the EU is basing that view on the assumption that after a "Leave" vote Britain will have LOWER external tariffs, not higher ones, and intervene less in industry, not more.

In other words the "we will be better off if we leave" argument is diametrically opposed to the  "vote Leave to save the Steel industry" argument.

I would never have been able to argue for the referendum we are now having if I thought that either a decision to stay in or a decision to leave would be a disaster. That's one reason I find the frequency of suggestions by too many people in both "Leave" and "Remain" camps of utter doom if their opponents win to be so irritating.

But one thing that concerns me about the failure of the competing "leave" camps to put forward a coherent exit strategy is that people might vote to leave based on incompatible promises from different Leave groups which could only be delivered by mutually exclusive policies.

a) "If you vote leave we will be able to have higher tariffs to protect our steel industry" and

b) "If you leave  we will make you richer and cut prices by cutting tariffs" are a classic example of such incompatible promises.

Another example of two incompatible arguments is b) above and

c) "If you vote leave we can take control of our borders, cut immigration, and wages will be higher"

High wages delivered by greater productivity are an excellent thing, but high wages which came about because you created a labour shortage are likely to be offset by higher prices and that labour shortage is also likely to be associated with other significant harm to the economy.

The really annoying thing is that I think you could build a strategy for a non-EU Britain which was internally consistent and for which a decent case could be made, but it isn't coming from any of the main campaign groups for "Leave" at the moment. If David Cameron falls after a Leave vote I am very uncertain what his successor would try to do.

If that successor tried to deliver everything that any of the leave campaigns has promised this would prove entirely unachievable and probably unnecessarily harmful.

There is in fact one pro-Brexit group, the "Leave Alliance" which has attempted to put forward a responsible exit strategy. To date I have not seen a single mention of that group in any part of the MSM and I only know of it's existence because one of its' supporters regularly posts comments on this blog.


Jim said...

Hear, Hear.

A note to the Official "Campaigns"

If people want to talk about trade deals and then great, lets talk about it. If people want to talk aobut how its effected by our Membership of the EU, then, ok great, lets talk about that.

Lets talk about anything, but for the love of god, don't just say something, then run away, then 7 days later say something that totally contradicts what you said 7 days ago.

Its a bit like running into the middle of the floor of the house of commons and shouting "we should ban Chocolate" then leaving before hearing a single reply, then a couple of weeks later running back in again and saying "there is not enough chocolate on my choc ice" then running back out again.

Chris Whiteside said...

You've got it in one, Jim.

What depresses me about the Remain campaign is that they have been so overwhelmingly negative.

What depresses me about the main contenders to be the "Leave" campaign is that when they are not being negative they behave exactly as you have described.