Things have got serious in the iron ore negotiations in China with spurious ‘espionage’ charges levelled against domestic steel producers and Rio Tinto executives – or here if you don’t have an FT subscription. It’s a stretch to call any iron ore information a state secret, so what might have prompted Chinese officials to take such drastic steps?
However it might look, China doesn’t care about iron ore. China cares about iron ore’s impact on the steel industry and steel’s impact on Chinese economic growth. The concern is understandable, but the latest move is misguided and will likely backfire. The charges are clumsy and extreme and because they’re international in scope they are dangerous. Besides such strong arm tactics don’t work as other governments have found out.
In April 1952, Harry Truman siezed control of the American steel industry because he thought a strike would hobble the Korean war effort. He was overruled by the Supreme Court a month later and had to give the industry back.
The Kennedy administration had a fractious relationship with the steel industry as this remarkable presidential press conference about rising steel prices illustrates:
And LBJ carried on the feisty (and profane) tone of that relationship when in 1965 he threatened to hold industry and union leaders hostage in the White House until they came up with a labor agreement. Though he won that round, (China officials take note), the industry reasserted itself the following year.
There are many other examples around the world of the steel industry and governments getting in each other’s way. Governments will always be frustrated when trying to bully any industry into submission. In the end the economics of the industry will assert themselves no matter what government does. One of the major reasons for the great improvement in steel industry performance in the recent past has been the general retreat by governments (outside China) from ownership of steel industry assets.
If Chinese officials want to improve the prospects of their steel industry they shouldn’t be locking up iron ore executives on trumped up ‘espionage’ charges. The raw material input price will be what it will be and any forced benefit will be only temporary (as LBJ found out). A much better idea is to privatize all steel industry assets in China and, in doing so, let foreign producers own some of them. There is no faster way to improve the performance of the steel industry, unify it on a global basis and support the growth of the Chinese economy and global trade.
And a note to Western steel industry lobbyists. This is a much more important issue than either currency or trade.