Dumped steel

International dumping of steel has been in the news again recently, this time with particular regard to Chinese steel imports into New Zealand. John Nowlan (general manager of NZ Steel) wrote in the New Zealand Herald last week:

Many New Zealand domestic industries built up in the past 50 to 100 years are in jeopardy because of inadequate trade remedies that favour importers over local producers.

Steel production is in that boat.

It is easy to talk changing trends and globalisation, but the risk of closure of NZ industries inevitably means the loss of jobs and essential skills, and the possible disappearance of some of our smaller communities...

Now of course, you would expect the general manager of a steel producer to complain about cheap steel imports. After all, if you are an importing country it is typically because overseas firms can produce at lower production costs. If inefficient New Zealand firms have to compete with more efficient foreign firms, then the inefficient New Zealand firms must either become more efficient, or shut down (with consequent costs as I have noted in this post from earlier this year on dumping and tariffs). The flip-side to that is that our more efficient producers benefit from exporting (this is part of the reason that our dairy industry is such a large exporter).

However, the problem is not just imports, but 'excessively cheap' imports being 'dumped' into the New Zealand market. Nowlan explains:

Dumping is the exporting of goods cheaper than the products are sold in their own domestic market and is dealt with under WTO guidelines.

The guidelines also cover the subsidisation of products, where an uncompetitive business is paid to stay in production...

For a small country like New Zealand, dumping and subsidisation can have major adverse effects not just on an industrial sector, but also our entire economic fabric. More so, where an industry is one of a kind. Steel making is a pertinent local example.

Monday's New Zealand Herald editorial also makes valid points:

The answer from policy makers would be it helps to lower our high costs of building and construction, which have been identified by the Productivity Commission as a contributor to high and rising house prices. Many might not be convinced the benefits of lower construction costs would outweigh the possible loss of a local industry and jobs. But on that argument we would have maintained the protection that saddled us with a high-cost economy of a previous era.

It made sense to expose all industries to international prices so we might be left with those that are truly competitive and consumers could buy more of the world's goods.

It makes less sense when international prices are artificially low as a result of subsidies or dumping. The World Trade Organisation permits member states to impose countervailing duties on imports coming in at prices below their cost of production.

Is 'dumping' an issue? Here's what I wrote earlier this year:

So countries create additional tariffs to apply when foreign firms are thought to be using otherwise free trade to 'dump' their products into the domestic market. However, as Gary Becker has noted (for example, in this book), this type of predatory pricing is probably not sustainable. If you drive competitors out of the market and raise your prices, then new competitors will enter, assuming that the fixed costs of production aren't high enough to constitute a barrier to entry (which is arguable for some industries, such as steel production). However, even if there are high fixed costs, if you have relatively free trade then competitors from other countries can also step in when the predatory pricing stops.

That line of argument still applies, but so too do the results of Autor et al. that I note in that post (see here, or ungated here). The short-term pain (in terms of lost jobs) from free trade can persist for a longer time than we previously thought, or is conventionally argued. So, when this pain is created by unfair competition from abroad, this may provide a clearer case for some limited protectionism.

The Herald editorial concludes with:

...provided the quality meets the standards required, dumped steel can be an economic benefit. Larger countries may be able to protect their own steel makers but New Zealand needs to think carefully. Is Glenbrook vital?

Glenbrook may not be vital (in the sense that its closure would make the wider economy vulnerable), but we do need to think carefully about the costs and benefits of importing excessively cheap imported steel. The costs of foregoing cheaper steel (lost consumer surplus, higher construction costs, etc.) should be weighed up against the benefits (retaining jobs in the steel industry, option value, etc.). We certainly don't want to find ourselves in the position of having $750,000 steel workers.

Read more:

• New arguments against free trade