Tuesday, 10 November 2015

Tim Worstall on top form

He has written this so many times he can probably write it in his sleep, but hey.

From City AM:

With calls to tackle “unfair dumping” should more be done to block cheap Chinese steel imports?


Far from rejecting cheap Chinese steel, we should thank the oppressed Chinese taxpayer for making us all richer. Subsidies are a distortion to a market and we normally don't like such distortions. But think through what the allegation here is.

The Chinese government is subsidising the price of the steel which is flooding out of China. Some call this a subsidy to those steel producers: it isn’t, it is a subsidy to steel consumers. That’s us, of course – we are all consumers of steel in tin cans, cars, fridges and the skeletons of lovely high rise buildings. This can indeed be seen as unfair on other producers of steel. But we don’t run the economy for the interests of producers; we run it for us, the consumers.

The Chinese government is, quite literally, sending us free money that it has taken from its citizens. This might not be a bright idea for the Chinese, but what else should we do but say “thank you. May we have some more?


Rich Tee said...

Yes, but what could happen is that all the steel industries everywhere except China are put out of business by the low prices. This then allows the Chinese to put their prices up as they are the only producers now and can set the price. And they have done that with state assistance.

Tim Worstall said...

I'll confirm that I was in fact awake when I scribbled that.

Lola said...

RT. That's just fine and dandy. Once that happens, if it happens, as it is every unlikely to do so, as trying to do so would likely bankrupt China and even if they did succeed and put the price up again then that would make production elsewhere in the world profitable at the new 'market clearing price plus a bit of rent' and new or re-awakened suppliers would come back into the industry with more supply so bringing the prices down again. And further it may be that non-Chinese individuals find a way to make steel below the cost of production less subsidy that China is banking on.

Generally, absent state coercion an cronyism, monopolies are impossible to maintain. (Except land, of course. But that's another story)

Anonymous said...

Rich Tea, good point. The same argument could have been [was] made over a hundred years ago regards the predatory practices of the so called 'robber barons'. 19thC US. Rockefeller = Chinese predatory pricing today. If we lose what remains of our high quality steel production to these practices the Chinese taxpayer will in due course be the recipients of a massive ongoing rebate from the UK consumer, just as Rockefeller was back then.

Anonymous said...

Lola. When these skills go and the plants close the upfront investment to restart them is prohibitive and the skills to man them absent. see the effects over a couple of decades in our nuclear industry We are now reduced to paying massive subsidies to the Chinese and French states in order that they construct our nuclear power stations. Those skills we lost might come back in another twenty years.

Lola said...

p156. Don't agree with that. There is very little inertia like that. if the margin is there then people will enter the market. As to loss of skills, again not really relevant. The whole point of people is that we have a cognitive ability and an opposable thumb; we can learn. In any event it is probable that skilled people will migrate - look at the lead miners that went from the NE to South America with their skills.

Nope, don't buy that argument.

Lola said...

P156 And the Nuclear industry example represents the exact crony / government interference problem I was talking about. It's all the regulationism around nuclear that's killed our indigenous industry - not subsidised foreign completion.

Lola said...

P156 I should say not JUST foreign competition.

paulc156 said...

Lola. Migrating workers? Yes Chinese and French technicians and engineers will be migrating in their thousands as already pointed out...and in return our cash will migrate back to China and France for a few decades.
Nuclear regulation killed the industry? Well I can't imagine why we'd need to regulate that so fussily...hmm. Have to think about that one.

Lola said...

P156. Of course French and Chinese workers would emigrate. Our engineers have been going the other way for decades. In fact that is exactly want is happening with the Chinese building a reactor here. If an indigenous supplier had been able to win the build he'd have gone to wherever the skills were and bought them in. Those skills would then transfer to the locals. I have actually seen this happen in Civil Engineering generally.
Nuclear regulation is generally considered to be the greatest reason for the decline in our nuclear industry, That and various pressure groups like FotE.
I have a client who is a very senior and experienced nuclear engineer (that is he engineers nuclear installations - he's not nuclear himself, obviously...). He is my go to bloke for trying to figure out the newsflow on nuclear. It's regulationism again I'm afraid.

Andrew S. Mooney said...

"That’s us, of course – we are all consumers of steel in tin cans, cars, fridges and the skeletons of lovely high rise buildings. This can indeed be seen as unfair on other producers of steel. But we don’t run the economy for the interests of producers; we run it for us, the consumers."

Funny. I have not seen a reduction in the price of tinned food off of the back of these surpluses.
I have not seen a reduction in car forecourt prices.
I have not seen a reduction in the price of white goods.
I have not seen reductions in the value of property, residential or commercial.
I have not seen a change in the Baltic dry index that reflects increased international shipping capacity from all of the extra cargo ships hauling goods about.

As this article notes:

"...The central government wants cheap steel, so it is unwilling to take radical steps to curtail overcapacity. Meanwhile local governments are encouraging more steel mills to set up shop. They are a vital source of direct and indirect employment, and tax revenues. To these enterprises, profits are unimportant ...."

What kind of a business practice is that?

The industry tends towards over capacity, is it really sensible that a sector has so many companies in it?


US/Asian protectionism aside, when you notice steel making going on in that bastion of low cost manufacturing, Austria, you frankly start to wonder why this country so slavishly obeys the edicts of this religion substitute and it's priesthood at all. It is clear no one else does.

Lola said...

ASM - I am confused about your comment. Are you pro or anti Worstall?

Andrew S. Mooney said...

Lola: Inexpensive Chinese steel has not translated into lower consumer prices for the subsequent goods Tim Worstall is talking about.

Tin cans aside, the auto and appliance industries are locations where the cost of raw materials surely must affect prices, and so the only conclusion you can draw is that the corporations that make these goods have pocketed the difference. They have not passed these savings on.

I subsequently fail to see why an industry that is fundamentally unprofitable in it's current arrangement (The Chinese produce very basic slab steel and little else, you clearly need higher value added steps and grades to make a profit) should actually exist at all.

As the Economist article notes, because slab steel is a bulk commodity, with one supplier's product being just like any other, it is a buyer's market for the final product, stuffed full of superannuated Asian suppliers that should have disappeared or been merged years ago, save for the fact that mid-level bureaucrats at Japanese companies are like nuclear waste: Once created you cannot get rid of them.

"... Are you pro or anti Worstall?"

Surprisingly, neither. I think he's daft to be defending this whole affair simply upon the grounds of economics.

It is like being actively in favour of firetrap factories in the garment industry, or the use of Asbestos in fireproofing. Just because something is capable of lowering prices it doesn't automatically mean it's good.

Furthermore, defending an industry where Chinese producers are not acting out of the profit motive is arguably completely contradictory to the convictions he professes to espouse. I am pretty sure that the plant at Redcar could carry on if it was operated upon a not for profit basis, with some UK government official burbling melodiously that this is "because there are important social considerations to consider."

Trouble is, how likely is that?

The Stigler said...


There's always this weird idea that companies can own a market. There's a few odd things where you get monopolies from network effects, like eBay or Facebook, but there's plenty of evidence of new competitors going into a market.

Firefox is probably the best case: Microsoft had wiped out the competition with Internet Explorer. They then did no development on it, and just let it rot. So, a bunch of people got onto taking the old Netscape code and making Firefox, which then started taking Microsoft's share and made them rather nervous, so they then started improving their browser. The idea that you can wipe out the competition and then clean up is a fallacy. It's one that I suspect is keeping Amazon's share price so high: their investors think they can dominate e-commerce and eventually profit from it.

Mark Wadsworth said...

Good comments.

Not much to add to most of those comments.

But for those with whom I disagree...

DBC. Competition between businesses is always good - it keep prices down and quality up for consumers; even if it duplicates jobs, so what, that's good for wages; and it prevent monopolies getting super-profits. That is what I say to you every time you run that argument.

ASM, nope. See my subsequent post. Steel costs are a tiny percentage of final selling price.

R, PC, I don't think the Chinese could ever hollow out the rest of the world's steel industry and corner the market. While very capital intensiveness and requires a lot of skill/experience, it is not rocket science. We all nicked the basic concept off each other, they nicked it off us, we can nick it back of them.

Nuclear is not a fair comparison for the reasons that Lola explains. And paying the French and Chinese inflated prices is just the Tories being 100% totally incompetent and wasteful. There was no need for that.

paulc156 said...

Nuclear is a fair comparison. Obviously it's heavily regulated as Lola says, but that's because of the potential for accidents and a patchy safety record. That and the issue of waste. Oh and the rise of north sea oil and gas might just have had something to do with its demise.

Mark Wadsworth said...

PC, I heartily agree that nuclear needs constant supervision from a safety point of view.

But can you now tell me which of the following factors apply also to steel:

a) It's heavily regulated. Only via the greenie CO2 emissions permits nonsense.
b) The potential for accidents and a patchy safety record (compare a few deaths in a steel plant with theoretically billions of pounds of damage if a nuke goes *pop*).
c) The issue of waste (slag heaps?).
d) The rise of north sea oil and gas might just have had something to do with its demise. Can you name a few close substitutes for steel?

Lola said...

p156. The safety record of nuclear is - absent external issues - pretty good, except where it has been operated under authoritarian regimes - Chernobyl is probably the best known example of that. And in the UK the waste disposal regime by the government run reactor in the NW whose name escapes me, was appalling.

Bit elsewhere, even including Three Mile Island, it's done pretty well.

Now, that is not to say that something will happen somewhere. These things are built with low incident probabilities of (i think ) 1 in ten thousand year events. Of curse that could be tomorrow.

Random said...

Lola - sellafield I think :)
Look, the nuclear issue is different from the 1980s. Waste is not dumped.
Let's take the fukushima disaster in 2011, it was a 40 year old power plant hit by an earthquake and tsunami. And the reason why it was not replaced - eco loons campaigning against its replacement. So they only have themselves to blame.

Random said...

Agree with Tim, but we need to be crafty.

Mercantile policies extract tokens from the target nation. You have to put those tokens back into circulation by buying up other things the target nation is offering for sale to overseas holders and you have to do that increasingly over time (since any earnings from those assets generally come in the form of a flow of target tokens).

In addition you have to create your own tokens and swap them for the target ones as required so that there is sufficient domestic circulation. So you avoid the deficit issue by ensuring overall you hold more target tokens than the targets hold yours.

The problem is that eventually you run out of things to buy - unless the target nation is crafty, just issues more tokens and prevents you from owning other things beneficially.

paulc156 said...

MW. Your points are well made. I don't disagree but in your previous post you stated that nuclear was a bad analogy due to the reasons Lola had already given. His only substantive point was to blame regulations for nuclear's demise.

Lola said...

@ R - My nuclear client is very informative on Fukashima and how all the safety systems were overwhelmed by a 1 in 10,000 year (I think) event. But even then the disaster was mostly contained.

DBC Reed said...

@MW I do not want to shock your honest soul, but is not true that, as you say" Competition between businesses is always good". If you are not convinced by the examples I give, you had better look at a very modern mega industry that went down the pan in ten years through its major firms Panasonic,Sony etc indulging in wasteful competition i.e (Wikipedia)the Electronics industry in Japan see section on 21st Century:"The relative decline has been ascribed to factors including high costs, the value of the yen and too many Japanese companies producing the same class of products causing a duplication in research and development effort and reducing economies of scale and pricing power."
In fact these last remarks are lifted from the more straightforward original : "From summit to plummet"in The Economist Feb 18th 2012, which goes on to say ,"Too many Japanese (electronics) firms made similar things. No fewer than eight cranked out mobile phones. More than ten made rice cookers and six made televisions".
Just like British car production in the 50's and 60's: competition not the answer ; more the problem I'm afraid.

DBC Reed said...

@MW I always find the competition is always good argument very strange on a Henry George influenced forum : George was quick to point out that building a competing railroad next to an existing line would do no good whatsoever, would split the traffic between them and because the overheads were doubled ,increase fares and freight charges on both.
In his time the existence of natural monopolies impervious to the effects of competition was recognised across the political spectrum which is why the British state constituted by heroes who helped the Russians beat Hitler and then rounded on the narcisstic Churchill and booted him straight out, included rail nationalisation and the nationalisation of energy production in the post-War GB to which I remain loyal.Dunno about the rest of you.

The Stigler said...

DBC Reed,

"George was quick to point out that building a competing railroad next to an existing line would do no good whatsoever, would split the traffic between them and because the overheads were doubled ,increase fares and freight charges on both."

Where did he say that?

Bayard said...

"George was quick to point out that building a competing railroad next to an existing line would do no good whatsoever, would split the traffic between them and because the overheads were doubled ,increase fares and freight charges on both."

Henry George subscribed to the cost-plus fallacy? I am surprised. Indeed, I remember reading somewhere (long before search engines were even thought of) that the US railroad comapnies were quite open about charging "whatever the market would bear".

DBC Reed said...

@S Direct quotes are hard to find because, I should think, they come from his earlier journalistic period on the Post. ( I remember seeing some forty years ago,though).
But there are plenty of secondary sources: "Land and law in California" Paul W Gates
"When writing for the Post, Henry George had favoured tax reform, free trade, public ownership of railroads, telegraph lines and utilities but not socialism"

"Henry George" Encyclopaedia com.
"...concerning the new natural monopolies which had been created by the new technology , he felt differently. He demanded in the Post that the latter be transferred from private to public ownership-railroads and telegraphs to be owned by national government and gas and water systems by the cities"

"Henry George" Wikipedia
Other proposals :
"to have government own and manage all right of way and 'natural' monopolies such as utility companies and mass transportation."

The theme of public ownership of the natural monopolies, particularly railway lines, comes through pretty clearly here.

Lola said...

DBCR Ah, so George was wrong about some things although right about LVT then? And there is no such thing as a natural monopoly - well except land, of course.

DBC Reed said...

George got quite a lot wrong-especially his vile racism to the Chinese in California "A population born in China, expecting to return to China, living here in a little China of its own---utter heathens, treacherous, sensual, cowardly and cruel"(New York Tribune May 1869).He made his name with this stuff, the land tax ideas, plagiarised from John Stuart Mill, coming through ten years later.
However he is right about the railroads and telegraph lines.No greater production will come from breaking their monopoly of the strips of land they occupy, as it would from breaking any monopoly of farm or urban land .The explanation I give above is entirely his as I don't go in for originality of thought.
(Oh I did add the idea that you couldn't relieve the monopoly of one supermarket in a small town by building another one right next to it but I admit this is just an extrapolation of HG's spatial economics theory.)