Protecting home industry is not a steel


The amount we've heard from politicians and social commentators this week on how unfortunate the UK steel industry job losses are only goes to show how many people are still unapprised of even the basics of economics. Yes it's true, because China can produce and sell steel so much more cheaply than us, it will have a negative effect on our steel industry. But overall that's a good thing - short of wanting buyers to pay inflated prices for UK steel rather than more competitive prices for Chinese steel - which, frankly, only the most narrow Anglo-centric person could desire - it has to be realised that this is just the market's way of signalling that UK steel production is now less efficient than production in other countries, and that the people in the UK steel industry either need to be more competitive or look to do something else. But even if you can't make that argument fly - and goodness only knows why you couldn't - here's something else you should know: artificially protecting UK  industries to stave off foreign competition hurts other UK industries in the process. This was the wisdom of international trade laid down most famously by David Ricardo. Let me illustrate how impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens).

Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the executives or the government would like, due to consumers’ preference for cars in Japan. The government introduces a policy that favours car production in Newcastle over car imports from Japan. How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain.

In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition.

The Newcastle car illustration is precisely how the argument should be applied to steel in Scunthorpe and Lanarkshire. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency.