THE COMMON MARKET
The EEC: a prescription for disaster for the British Steel Corporation
By an Economist in the British steel industry
Less than three months ago the size of the British Steel Corporation was still an apparently insuperable objection to EEC entry. The Community's ' competition' policy forbade the emergence of any steel producing firm or organization (not country) which would account for more than 13 per cent of the EEC's total output of crude steel. Since the BSC with its present output of 25 million tons a year would account for 20 per cent of the enlarged Community's production, the UK government was given clearly to understand towards the end of last year that unless the BSC was broken up into at least two entirely separate and competing units, Britain's prospects of achieving EEC entry would be greatly reduced. Spurred on by this pressure, the Government, which had hitherto not responded sympathetically to claims being made by rightwing politicians that the Corporation is too large to operate efficiently and that the original ' merger ' of thirteen separate steel companies into a single unit needs to be undone, undertook an extremely detailed appraisal of the case for breaking up the Corporation. This inquiry, carried out by the Department of Trade and Industry, lasted several months and when it reported in March this year, came to the firm conclusion that any policy of fragmenting the BSC would be against the national interest. (This conclusion did not, however, rule out some 'hiving off' in peripheral areas, which could include Special Steels.) As a result of the DOTI enquiry the Government dug its toes in and refused to accept BSC fragmentation as one of the sacrifices required in return for joining the Community. Somewhat surprisingly, the Community relented and announced early in May that the size of the BSC was no longer an obstacle to admission. There is no doubt, however, that this concession was grudgingly given, or that the British steel industry will face a number of highly damaging consequences of UK entry, which have so far received remartably little publicity. But before these damaging consequences are examined, let us concentrate on the all-important question of size. In an article by Professor Kennedy Lindsay in the Guardian it was claimed that while the present size of the BSC had been accepted by the Community, the Corporation would be prevented from pursuing its expansion plan intended to increase its output to 43 million tons by 1980. The Government's reaction to this article, and to the hullabaloo which followed, was somewhat confused (Mr Rippon did not seem to be aware of the points at issue) but the Foreign Office later came out with a firm denial, which was reiterated by the Prime Minister. This denial was based on the fact that there is nothing in the Community's rules which restrains a steel producer, once admitted, from undertaking "internal structural reorganization or expansion measures." Or is there anything? When the evidence is considered, it is difficult to decide whether the Government is being ingenuous or disingenuous in issuing its categoric denial. In fact, the ability of a steel producer to expand by internal growth is distinctly qualified by the Community's dominant position' doctrine as enunciated in Article 66 (7) of the Treaty of Paris. This gives the Commission powers to intervene if an enterprise occupying a dominant position in a " substantial part of the Common Market" acts in such a way as to "abuse its position" in a manner " contrary to the general intentions " of the Treaty. What is involved here is not the absolute size of the BSC (which has now been conceded) but the extent of its market share in individual steel product groupings. The words "a substantial part of the Common Market" can certainly be construed to apply to the UK by itself, where, of course, the BSC is dominant in all the main steel product groupings. (It has, for example, no less than 100 per cent of the tinplate market.) There can, thus, be little doubt that the BSC's expansion plan will not be allowed to proceed unfettered, but will be rigorously examined by the Commission from the point of view of the steel products involved. At least the Government cannot claim it has not been warned. A document entitled 'Outlines of a Policy about Competition involving the Structure of the Iron and Steel Industry" promulgated in Brussels in January 1970 has not been withdrawn in the very recent negotiations which led to the extraction of the concession on the BSC's existing size. And this document spells out the following highly important qualification of the rule which exempts "internal expansion" from the Community's supervision and control: "Nevertheless, internal expansion of a company can change the conditions of competition on the market of its products and be a major factor in the assessment of operations planned by other companies to re-establish balance in the competitive situation. In fact, in the assessments that the Commission makes on operations put before it for its approval it 'takes into account the size of similar companies existing within the Community.' It follows naturally that internal expansion of companies can create new conditions for assessment in the matter of competition."
So Professor Lindsay could prove to be substantially right in his main inference. While the BSC may be admitted in its present form, the directions in which it expands are only too likely to be restricted. Its ambitious in vestment plan will certainly require the Community's approval which, if the Community sticks to its ' competition' policy, will equally certainly be withheld.
So much for ' internal ' expansion. Even more specific, and ominous for the BSC, is the Community's embargo on so-called 'merger operations ' which constitute ' external' expansion. Mergers cannot take place without prior authorization of the Commission and are held under Article 66 to include substantial acquisitions, as well as mergers in the more ordinary sense of the word. This is the area in which the BSC's size may militate against it most. There can be little doubt that the Community will look much more favourably on mergers and acquisitions involving smaller steel producers than those involving the BSC. Hoesch, for example, was far more likely to obtain permission to acquire interests in Hoogovens than the BSC would ever have been. On the other hand, while Britain remains outside the Common Market there is nothing (except the British Government) to stop the BSC making bids for European steel interests. Indeed, one of Lord Melchett's earliest moves was an abortive bid to acquire the successful Dutch steel producer, Ho ogovens.
Realizing that whatever may be said in public to the contrary, EEC entry would militate strongly against both the ' internal ' and ' external ' expansion of the BSC, Lord Melchett's numerous critics in the Government have already been actively suggesting that Britain should bow to the inevitable, withhold the funds required for the BSC's ambitious development plan, and accept that an increasingly large proportion of the country's steel requirements should be provided by Common Market producers setting up works in this country, or alternatively exporting steel to Britain from the Continent. The BSC's current inability to earn any kind of return on capital is grist to this particular mill, which has been grinding extremely hard in recent weeks while the Government's " deep-seated review" of the BSC has been in progress.
The BSC's deplorable financial position is also likely to have repercussions — should entry take place — on the whole system of government financing of the Corporation. Here again, it is not as if the Government has not already been warned. The Community has already objected, during the negotiations, to the degree of " subsidization" that the BSC receives as a nationalized industry. Both " subsidization " and " discrimination " are prohibited by the Treaty of Paris (Article 4 'C' and also Article 67). A Labour government would not be able to restore investment grants at any rate as far as the BSC is concerned, because the Community would object to the " privileged" position that this would bring about. Before investment grants were abolished by the present government the Community complained that they were available to the BSC but not to other UK nationalized industries. As if the withdrawal of investment grants (which provided a third of the BSC's cash flow) is not enough, the BSC faces the prospect, if its trading losses continue, of the Community objecting to the Government advancing loans to cover its losses. This, after all, is a clear contravention of the "no subsidization " rule.
Let us now consider the other adverse consequences of EEC entry. The fundamental principles of the steel nationalization Act will be undermined in a number of serious respects. The Minister's power of giving general directions is incompatible with the Paris treaty. So also is his power to give specific direction on prices which he is now entitled to issue if he wishes to accept the advice of the Consumer Council. Indeed compliance with Article 61 would remove the main source of influence and raison d'être of the Consumer Council.
Much more serious, the Government would not be able to apply any kind of prices and incomes legislation' to the steel industry. This would contravene Article 67. The Minister's hands would also be tied when it came to exercising his important powers (under Section 15 of the Iron and Steel Act) in the coordination and control of investment by both the public and private steel sectors in this country. (Control of steel investment in Britain has been exercised in one form or another since 1932.) As far as the BSC investment is concerned, the Minister would have to behave exactly like a controlling shareholder, act on 'commercial' principles and not be allowed to take the UK public interest into account. He could examine only general programmes of investment; if he were to concern himself with individual investment projects, however large, he would be ' poaching ' in the Community's area of jurisdiction. Moreover, the Community's doctrine of "freedom of establishment" (Articles 52-66) means that when the Minister receives an application for investment approval from a private sector steel producer he may no longer consult the BSC (as he is required to do at present) before making up his mind whether to approve or reject the application. There is, indeed, considerable doubt whether he would be able to exercise any power over a Community producer who wished to build a steelworks in this country.
The BSC, after suffering acutely at the hands of politicians and civil servants in its pricing and investment policies ever since it was set up, no doubt sees the Common Market as its only effective hope of liberation. It is extremely reticent about the current stage of negotiations. Lord Melchett himself, however, is known to be very favourably disposed to the principle of UK entry. He is, perhaps, more sanguine than he has any right to be about the prospect of achieving his major expansion plans if UK entry, in fact. Occurs.
Quite apart from the Community's attitude to its size, the BSC's apparent optimism about its commercial prospects if entry takes place is difficult to explain. the Community's pricing arrangements, which the BSC used to condemn so unreservedly, are now being swallowed almost whole. The adoption of the 'basing point' pticing system (which takes transport charges into account) in place of uniform delivered prices, is bound to have an adverse effect on the BSC's Scottish and Welsh steelworks, and will militate against the building of new steel plants other than in the south eastern region. Pending the construction of a new works at, no doubt, somewhere like Foulness, steel users in the London area will be wide open to the products of the French and Dutch coastal works which have been kept out hitherto, partly by the tariff and partly by the British uniform delivered price system. • As another heavy new burden on the commercial side, the UK steel industry will also have to give up its unique advantage of cheap scrap. For more than a generation the scrap market in this country has been ' managed ' by the imposition of export controls. Scrap prices in Europe have always been much higher. But scrap export controls will offend against the 'free movement ' rules and will have to be abolished, with the result that UK scrap prices will rise by at least 20 per cent. When it reported the likely effects of entry. soon after the UK application was made in • 1967, the Iron annd Steel Board had no doubts what the result would be. Its report, which was never published, came to the pessimistic conclusion that the UK's direct steel trade, both with the Six and with the rest of the world, would be adversely affected both in the short term and the long term and that the situation would not be offset by compensating gains in the UK's ' indirect ' steel trade (i.e. engineering exports based on steel). Since then, it is true that the Community's faith in some aspects of its pricing arrangements has waned, and the BSC perhaps hopes to convert it to a more sensible system. If Lord Melchett really were in a position of strength, he might be able to use the BSC's size to influence the Community not only on pricing, but in a number of other directions. But the fact is that the economic conditions in which the Iron and Steel Board report was published in 1967 have now returned with a vengeance. The market is no longer buoyant. British steel is no longer, as it was in 1968-70, considerably cheaper than Community steel. Indeed for some products it is a lot more expensive. And as for profitability, the BSC is right at the bottom of the European league. Heading for a loss of £100 million in the current year, and almost certainly an equally heavy loss in 72-73, the BSC is about as vulnerable as it can be. (This is surely the main, reason for the Community's sudden change of heart about the ineligibility of its size.) The BSC desperately needs tariff protection, and its own pricing system, as well as the various measures of " assistance " and " subsidization," including the right to have its losses underwritten by the Government, which are possible outside the Market, but forbidden by the Treaty of Paris.
If UK entry takes place, the BSC may well see the UK market flooded by continental exports, while its own exports to commonwealth countries, which have been larger and more valuable than its exports to Europe, will be subject to the removal of preferences. Any hope of a new 'green field' site in a development area, like say Scotland, can be abandoned. The new UK steelworks will probably be set up, if it set up at all, by a consortium of German and Dutch firms in the Thames estuary, with the BSC perhaps being offered a small face-saving share, assuming it can legitimately find the money to pay for it. By 1980 there is every likelihood that the BSC will be producing 20 instead of 43 million tons of steel. The Common Market for the BSC could turn out to be a prescription for disaster, and it is amazing that the Corporation should apparently be so oblivious of it.
Previous page
