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The debate is once again heating up around the future of the UK’s steel sector and it has now turned to the question of the EU, with some arguing that the UK's steel sector would be better off outside the EU. Open Europe’s Raoul Ruparel investigates.
30 March 2016
The first point to note is that the UK’s steel sector has been in decline for a number of years, if not decades. It experienced a sharp decline in output in the late 1990s and has continued to struggle since (chart via the House of Commons library).
However, the UK’s steel sector is not alone in facing challenges. The industry more broadly has struggled to recover since the financial crisis. This has been exacerbated by the recent slowing demand from emerging markets (China in particular) and the simultaneous increase in low cost exports from those markets (more on this below). Globally this has created a glut of steel, driving down prices and applying pressure to producers everywhere.
The UK’s steel industry has struggled to remain competitive, even relative to its European counterparts for some time. A key factor in this is the high energy costs facing industrial producers in the UK. It is likely EU regulations play some role in this; however, UK energy costs remain high relative to the rest of the EU (see chart below via EEF UK Steel key statistics). This is down to the fact that in many areas the UK has gone further than the EU – for example in the Carbone Price Floor which sets the price of carbon well above that of the EU’s Emissions Trading Scheme, currently £18 per tonne compared to €4.80 per tonne respectively (via GWPF). Other factors are likely in play as well, for example underinvestment in energy infrastructure which has also played a role in curtailing long term energy supply in the UK.
Furthermore, a number of plants have been struggling to make any kind of profit for some time. For example, the Redcar plant which it was announced would be ‘mothballed’ in September last year had been loss making since 2010 and played a role in its owner SSI accumulating debts of £1.4bn. The Port Talbot plant, owned by Tata Steel, which is in the spotlight currently is reported to be losing £1m per day. The Financial Times has today reported that peopel close to Tata estimate it would take £2bn to revive the plant and that the company has written down the value of its UK steel operations to “almost zero”.
It is also worth noting that, the UK still imports substantial amounts of steel from the rest of Europe, so it’s not a case of the industry just struggling to compete with low cost exports from emerging markets. In 2014, 69% of UK imports of steel came from the EU, while 52% of our exports went to the EU.
The points above notwithstanding, there is no doubt that there has been a significant recent increase in Chinese exports globally and specifically in UK imports from China (charts via EEF UK Steel Annual Review).
However, it is worth noting that the imports from China have not led to a huge increase in our trade deficit or led to a significant increase in overall imports, at least not significantly more than exports have increased. To some extent this suggests that cheaper Chinese imports might be substituting for other imports, notably from Europe – this would be of benefit to UK consumers. Though on the margin this will also apply pressure to UK producers (but they were already under pressure from competition from elsewhere).
Of course, it must be kept in mind with all of the above that cheaper imports ultimately mean lower prices for consumers of steel, this means lower input/production costs for many other industries, which can eventually be passed onto everyday consumers and potentially also boost their demand for employees.
Both the UK government and the EU have taken some action in response to these concerns. The UK government has announced it will compensate energy intensive industries for the high energy cost and will look into a review of business rates to promote investment in plants and machinery.
The UK, along with six other countries has pushed the EU to take action on the tariff front against Chinese dumping of steel products into EU markets. As of February the EU had 37 “trade defence measures” in place on imports of steel products with nine investigations on going. Specifically, it has imposed provisional tariffs on cold rolled steel of between 13.8% and 16% for Chinese firms. It has also imposed tariffs on steel rebar of between 9.2% and 13% for Chinese firms.
It has often been pointed out that these are far lower than the tariffs imposed by US which can reach as high as 236% on corrosive resistant steel from China. The duties on cold rolled steel can reach 266%. Though even in the US many firms complain that these remain too low.
Finally, it’s worth keeping in mind that the while the UK has called for action it has been hesitant to support much higher tariffs. For example, it refused to support plans to remove the “lesser duty rule” (which allows duties to be set at the level which would see the domestic industry recover rather than the level which is punitive based on the dumping), on the basis that it would raise costs for other businesses which use steel.
With this background in mind we can examine what difference being outside the EU might make to the steel industry. The two points most often mentioned are that the UK would be able to impose higher tariffs and that it would be able to provide more state aid to the industry.
There is no doubt that being outside the EU would in theory give the UK more flexibility in these areas, however, this also needs to be balanced against practical realities and the cost of such policies.
Firstly, imposing higher tariffs might be possible outside the EU but it would come with a number of costs. Importantly, it cannot be argued that we would impose tariffs on steel from China (and potentially other low cost products from China and other emerging markets) but also at the same time strike free trade agreements with these countries. As we have pointed out at length, in order to fully prosper outside the EU the UK would need to take an open and liberal approach, such tariffs are antithesis to such an approach. Taking on a more protectionist approach outside would undoubtedly involve economic costs. This can be seen specifically with the steel sector where higher tariffs would mean higher costs for consumers of steel. Importantly, for a number of other industries which use steel inputs, from cars to construction, costs would rise and this may mean higher prices and/or lower demand for employees. This highlights that protecting employment in one sector could potentially shift the problem to another sector.
Secondly, in terms of directly subsidising the sector a number of questions arise. It is not clear how this would fit in with the government’s broader deficit reduction approach and, as has been demonstrated by the recent budget debacle, spending money in one area may mean cuts elsewhere. Direct subsidies could also provide some constraints in negotiating trade deals as well, since they often look to promote fair and equal competition. Finally, on the competition point, the UK has long pushed for strict antitrust/competition rules and this incudes being cautious about state aid. As such, moving to direct industry subsidies would be a big shift of domestic policy as well.
Of course, some might decide that these costs are worth bearing for broader reasons – for example if the steel industry is seen to be a vital long term economic interest or a vital security interest for the UK. In any case, the fallout of policy choices needs to be considered.
It’s clear that challenges for the steel industry extend beyond just the UK. While there is no doubt that low cost imports from China are part of this, there are also a number of other factors which have made the UK’s steel industry uncompetitive over the longer term, not least energy costs.
Overall, while life outside the EU may present more options, these options come with costs and challenges, which have been under discussed in this debate. The UK could impose tariffs and subsidies but this could come at a high cost to consumers and other producers as well as a fiscal cost. It is also impossible to both argue that we will strike free trade deals with emerging markets and that we will impose tariffs on their low cost exports to protect our domestic industries. This final point is the most important for me, ultimately, as we demonstrated in our Brexit report, it is certainly possible for the UK to prosper outside the EU but adopting protectionist policies is not the way to do it. This speaks to the broader question of what sort of country the UK wants to be outside the EU, something which we are now seeing there are a huge number of differing views on.