China doesn’t care about Redcar’s steelworkers

George Osborne should bear in mind that his host’s command economy is wrecking British industry

Steel – that strongest, most durable and malleable of man-made materials. What would we do without it? Given its key structural role in virtually all mod cons, transport systems and construction, not very much.

Some date its discovery as far back as 11th-century China and Japan. It was, however, an English inventor, Sir Henry Bessemer, whose process gave us modern-day, mass production. In so doing, he helped transform Britain into an economic superpower. Even as late as 1929, the UK was still responsible for around a quarter of world steel output.

Today, that position has been usurped and surpassed many times over by a new economic leviathan, China. The sad, British remnants of this once mighty industry seem meanwhile to be in their death throes.

The Redcar steelworks near Middlesbrough is teetering on the brink of administration, with the potential loss of 3,000 jobs, while Tata Steel, which encompasses much of the rest of the industry, is haemorrhaging money at a terminal rate.

Time was when the decline of Britain’s steel industry would dominate the headlines. Today it barely warrants down-page news. Such is the already epic scale of British de-industrialisation that a little bit more scarcely seems to matter.

Well, it should, for it is symptomatic of a much wider problem. Much of the early phase of post-War decline in British steel-making was deserved. It was about failure to adopt new methods, crippling industrial relations, and related loss of competitiveness in the British car industry. Along with the closure of the car plants went much of the local supply chain. As the losses mounted, the great forges and blast furnaces of one-time British industrial prowess were allowed to cool and fall idle, never to fire up anew.

It was a brutal, Darwinian process, yet it ensured the survival of a small, but internationally highly competitive rump. Most of what’s left bears favourable comparison with the best and most cost-efficient plants in the world. Yet still it struggles to survive.

Europe’s continued slump, together with the recent strength in the pound, plainly isn’t helping, but the underlying cause is something hitherto unfamiliar – the Chinese slowdown.

In such circumstances, the sort of remedial action called for by the industry offers at best only temporary respite. These include relief on business rates, help on energy costs, further EU anti-dumping measures and direct state aid (the last an absolute no-no for a business secretary as anti-interventionist as Sajid Javid). Remedial action of this kind would be like spitting into the wind.

In the boom years of its development story, China was a godsend for European steel-makers, creating a worldwide shortage in supply that put a rocket under prices. But now the boom is over, and China’s substantially state-owned steel behemoths are still producing as if preparing for World War Three. They do so regardless of price, or the vast losses they would be showing if subjected to anything resembling Western accounting standards.

The irony is that it is not Redcar and the rest of Britain’s beleaguered steel industry that should be restructuring, but China’s. Yet to the extent that China is addressing the overhang at all, progress is slow and reluctant.

If the problem were confined to steel, it would be regrettable but perhaps manageable. There are other industries in which Europe and America can excel. Unfortunately it applies to virtually all commodity products. China has failed to create the domestic demand necessary to support its investment binge, and likely never will. As a consequence, it has become a massively deflationary force on the global stage and completely contaminated the world market for steel, along with much else. State-owned and directed, China’s industries can withstand their own self-created glut for a lot longer than the West’s more market-driven counterparts.

Despite the growth of the past 30 years, China is still generally considered not really big enough to do serious economic damage to the rest of the world. Chinese imports as a share of global GDP are quite small, so even if there were an outright recession in China, and imports plummeted, the effect on global demand ought therefore to be limited.

Yet this ignores the impact on prices. China’s integration into the global economy means that across a broad swathe of industries it has come to dictate the global price. What’s more, the priorities of a command economy are different; the normal rules of supply and demand take second place to centrally determined political and social goals. When industries become uneconomic, they frequently don’t go bust. It matters little to the Chinese high command if the casualties of this approach are in far away Redcar.

George Osborne, the Chancellor, would do well to bear this in mind in his fawning quest for Chinese investment and friendship.