Should Britain steel itself against dumping?

Convershaken Staff
April 23, 2016

There has been a lot of talk in the British press recently about the imminent closure of another steel plant. This would be an unwelcome loss of jobs and a loss of pride for those trying to recall “the good old days” when Britain was known for its steel production. A lot of fingers have inevitably turned to China, accusing it of unfair play. Currently the press have been ignoring the difficult decisions that need to be made.

There appears to be a strange little paradox. We love cheap Chinese imports, don’t we? Almost 10% of the goods bought in the UK are made in China. So why in some markets do we want higher prices for consumers? And why is everyone getting so worked up about the steel industry… hasn’t that been in decline for years?

The issue is “dumping” – that China is not really offering us a discount out of kindness, nor because the costs of production are vastly lower there, but because of China’s drive to be the only place for manufacturing. By subsidising production and flooding the global market with cheap goods, it puts competing factories out of business and increases its own manufacturing dominance.

But if we push prices higher, won’t that lead to lower welfare? In the short term, yes, we might be worse off. But in the long term, possibly not. Economists are rather split on the issues of dumping and its counterpart, “anti-dumping”, which aims to tax cheap imports in order to remove the dumping discount.

The media certainly seem to be entrenched in the “anti-dumping” camp, assigning much of the blame to China. But as some people have pointed out, most modern economies have been built on their own self-serving trade strategies, so there is certainly a lot of hypocrisy in calling out emerging economies. And the US are accused of dumping products themselves, including corn into Mexico and cotton into Turkey.

And if the point is to protect domestic industry, haven’t we already failed? The UK share of the global steel industry is miniscule and forecast to decline further. Here’s what that looks like in a pie chart.

Dumping is often seen as a type of predatory pricing: a company gets consumers hooked on cheap goods, while competitors are forced out of business. When there is no competition left, the prices are raised to the consumer’s detriment. But good examples of this are hard to come by. Many economists argue that in a flexible market this strategy won’t work. When prices are raised, new competitors will be tempted into entering the market, so there is no benefit in removing the initial contenders. We end up with a little game of chicken – will anyone enter the market, knowing that incumbent firms might lower prices again? But how long can any incumbent sustain loss-making prices?

In the case of China, probably a very long time. However, some have argued that China’s prowess – and ability to dump – can only last so long. Rising wages will force prices up eventually and other emerging economies will be able to compete on price. China’s fastest-growing exports are aircraft and spacecraft, which could signal the start of a move away from basic to higher-value manufacturing. But it’s hard to see that transition happening anytime soon.

There are costs to being dumped on. The closing of domestic factories and a temporary slowdown in economic growth, for example. Sensible investments can also be undermined, fomenting uncertainty. But there can be significant benefits to consumers in terms of cheaper prices. And those prices can boost other industries such as construction, creating jobs and driving economic growth.

We need to remember that there are basic trade-offs. Consumers want everything: a green economy, cheap goods and to keep old industries alive. Some difficult choices need to be made, rather than pretending we can have it all.