AMERICAN PERISCOPE. The crisis in steel

Tata, trying to sell its steel unit in the UK, first went to the government for help. Cheap imports from China were making the unit unprofitable and jobs were at stake. On the face of it, problems of the steel industry stem from excess supply due to a slowing global demand.

Thus, the argument goes, we cannot blame China for the problem. Chinese spokespersons have also made threatening remarks about what they will do if western economies restrict imports with quotas or tariffs.

World production doubled between 2002 and 2014, while China’s production quadrupled; China is producing about 50 per cent of the global demand now. The Chinese steel industry grew by state-owned enterprises receiving cheap land, subsidised credit, and continuing subsidies for operations in power, coal, natural gas and so on. This model was replicated across several industries.

Developing countries resort to government subsidies when markets do not efficiently allocate resources to meet social objectives.

India also resorts to subsidies to meet the needs of the underprivileged, or to help industries considered critical for the domestic economy. China’s objective for subsidies is to dominate world markets.

The huge capacity and subsidised inputs provide scale economies that drive prices low enough to cause other producers to exit the market and then dominate the market. The next target is the aluminium industry.

So what’s the solution? Hillary Clinton who was an ardent supporter of trade agreements is now reversing her stand. Bernie Sanders also opposes trade deals. Donald Trump wants to levy high tariffs. The preferential trade deals that countries are signing work towards trade diversion rather than levelling the playing field and increasing global trade.

Arguments about global free trade do not work when you have a big elephant in the room like China that mouths market economics but does not practice it. There is one response we can learn from history. When the inflow of low-priced and high-quality cars from Japan were causing ruin to the US auto industry, Ronald Reagan negotiated a voluntary export restraint with Japan to reduce the number of cars being exported.

This was unusual because the Japanese government was not doing the exporting, but was expected to pressure their private manufacturers to reduce exports, which they did. The scheme continued for about four years.

Here we have a situation where China subsidised its steel industry to build excess capacity in order to dominate world markets. So, the major economies hurting from Chinese steel dumping should sit across the table with their Chinese counterparts and deliver an ultimatum to institute a voluntary export restraint.

If that does not work, they should designate only one port in their countries to deal with steel imports, nominate only one clerk to process the papers, and send him on leave. The Chinese leadership will get the message.

The writer teaches at the Jindal Global Business School, Sonipat, and Suffolk University, Boston