The case for protectionism as sun sets on British steel
Britain's special relationship with China is becoming more expensive by the day. It now threatens to destroy the British steel industry, a foundation pillar of its manufacturing economy.
Britain is not alone. Most of Europe's steel foundries are heading for annihilation under the current EU trade regime, with unthinkable consequences through the network of European and British supply chains.
It is hard to pin down the moment when British Chancellor George Osborne's love affair with China turned into a Faustian Pact.
What we know is that the British government has for the last three years been blocking efforts by the EU to equip itself with the sort of anti-dumping weaponry used by Washington to confront China.
The EU trade directorate has been rendered toothless by a British veto. So much for the canard that the UK has no influence in Brussels. "The British are sacrificing an entire European industry to say thank you to China for signing up to the nuclear power project at Hinkley Point, and pretending it is about free trade," said one official in Brussels bitterly.
What they are blocking is a change to an EU regulation intended to beef up Europe's 'trade defence instruments' (TDI), enabling it to respond much more quickly to Chinese dumping and to impose much tougher penalties. The British have cobbled together a blocking minority in the council, much to the annoyance of the French, Italians, Spanish and Germans. The UK view is that the Commission mixed up good changes with bad changes, and that punitive tariffs merely hurt your own consumers.
Yet the outcome is that it still takes Brussels 16 months to crank up full sanctions, twice as long as it takes the US. It is why the EU limits itself to a 'Lesser Duty' regime that often fails to reflects the full injury. While Washington has slapped penalties of 267pc on Chinese cold-rolled steel, the EU peashooter has so far managed just 13pc.
Redcar has already paid the price for this ultra-free trade ideology, and the Port Talbot plant in Wales is about to follow. There will eventually be little left if the current drift in trade policy is allowed to continue.
China's share of global steel output has risen from 10pc to 50pc over the last decade. It has installed capacity of 1.2bn tonnes a year that it can never hope to absorb as the construction boom deflates. On OECD estimates it has built up 400m tonnes of excess capacity, twice the EU's entire steel production. China's unwanted steel is finding its way systematically into Europe, greased by export subsidies, tax breaks, cheap state credit, and the panoply of measures used by a mercantilist power to rig global trade.
China has captured 45pc of the UK market for high fatigue rebar steel, from near zero four years ago. The price of hot rolled steel in Europe has fallen to $369 a tonne from an average of $650 from 2009 to 2013.
This is why Tata Steel has been losing £1m a day in the UK, not helped by Britain's punitive power costs.
Germany shelters its energy-intensive industries by cross-subsidies under its 'Energiewende'. The UK left its steel mills to face the full shock of green taxes, until a partial rebate was agreed in December.
China's Communist Party plans to slash steel capacity by 100,000-150,000 tonnes and eliminate 400,000 jobs over the next five years. The steel-making heartland of Hebei around Tianjin and Tangshan aims to shut 240 of its 400 mills by 2020, and has banned all new plants until the province slims down to 200m tonnes (alone equal to Europe). That at least is the theory.
Premier Li Keqiang may genuinely want to purge the Chinese economy of its excesses before the country crashes into the middle income trap, but his views are routinely ignored by the Politburo whenever they clash with party imperatives. The fact remains that China is still adding extra capacity, albeit of a greener kind than the dirty micro-mills of the smog bowl.
The giant state producer Sinosteel - with $16bn of debts - was rescued from bankruptcy in October. The reforms failed their first big test. UBS estimates that the 100 biggest steel producers in China lost $11bn in the first ten months of last year. The state plugged the hole.
The politics of trade in Brussels are complex, and it is not just Britain that is rolling over.The Commission is oddly pushing ahead with 'market economy status' (MES) for China at this delicate moment, and doing so on the quiet, prompting an angry reaction from MEPs who have launched their own MES China Action Group.
"China is not a market economy. It has chosen a dumping strategy that is ravaging European industry. The EU itself risks imploding if Europe persists with the error," says Edouard Martin, a French MEP leading the revolt. A report by the Economic Policy Institute concludes that unilateral MES status for China would endanger 3.5 million jobs in EU industry by limiting anti-dumping tariffs. Almost all the EU's 350,000 steel jobs would be a risk.
If this is correct, and if allowed to run its course, Europe would be finished as an industrial and military region. It would be civilisational suicide.
One can applaud Mr Osborne's push for amicable trade with China as a general principle, for to do otherwise risks turning the world's rising superpower into a hostile challenger. Yet the suspicion in Brussels is that he has become a Fifth Columnist for Beijing, either because he is dancing to the tune of London bankers angling for yuan trade, or because he thinks China can breathe life into his Northern Powerhouse, or because the UK government has painted itself into a corner over Hinkley Point.
The steel crisis has in any case gone too far. It was possible to look other way when China destroyed the European solar industry - with pirated German technology. There was a larger prize to think about. Steel is another matter. It is strategic.
Britain's Labour Party has floated the idea of a temporary nationalisation of Port Talbot and Tata's UK operations to keep British steel alive until the cycle turns. But the problem is not cyclical. The sheer scale of Chinese excess capacity has turned it into a structural deformation of the world market. Besides, an intervention rescue policy runs straight into EU state aid rules. We may have to face the unpleasant truth that free trade has limits. Even Adam Smith conceded you can't disarm yourself entirely against a mercantilist power. He meant 18th Century France, of course. Anti-dumping duties are the only way to preserve our industrial core in a 1930s world.
This is the moment we have long feared. China's investment-led growth model has created a monster that's too big for the international system. Last year Chinese fixed capital formation was over $5 trillion, as much as in Europe and North America combined. The excess capacity is staggering and is likely to flood our economies with a fresh wave of deflation in the next global downturn. Protectionism is the dog that never barked after the Lehman crisis. Bark it will. (© Daily Telegraph, London)