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Chandler, Jr. Paul Kennedy writes that "[t]he slowdown of British productivity and the decrease in competitiveness in the late nineteenth century has been one of the most investigated issues in economic history. It involved such complex issues as national character, generational differences, the social ethos, and the educational system as well as more specific economic reasons like low investment, out-of-date plant, bad labor relations, poor salesmanship, and the rest" Kennedy [], op. In general, see the materials appended to the Report of the Tariff Commission , Vol.
I, "The Iron and Steel Trades. Chandler , op. The mere loss of sales described in contemporary reports does not by itself necessarily indicate the existence of a problem that would have warranted a change in government trade policy. The American-German onslaught might, for example, simply have reflected the emergence of more efficient competitors abroad, confronting British producers with the choice of adapting to remain competitive or getting out of the business, a point that was in fact made many times during the debate over dumping.
However, a close examination of the situation confronting British steelmakers at the turn of the century suggests that there was more at work than simply shifting comparative advantage. The combination of high tariffs, cartels, and the incentive to sell products below average cost had powerful effects both on immediate commercial positions and long-term relative competitiveness.
The tariff-cartel dumping systems of America and Germany operated in a way that lowered American and German unit costs and raised British unit costs, facilitating constant undercutting of British prices and erosion of British marketshare. The short-run cost disadvantage of the British mills was progressively translated into a long-run loss of competitiveness as American and German mills maintained higher levels of capital investment. Dumping affected this process directly by increasing British investment risk and diminishing American and German investment risk.
The aspect of dumping that most engaged the attention of contemporary steel producers was its effects on the relative unit costs of dumping firms, on the one hand, and of firms in whose markets dumping was occurring, on the other hand. It was the consensus of British, American, and German industrialists that dumping lowered the unit costs of the dumpers and raised the unit costs of the "dumpees.
In addition to the contemporary testimony of many British businessmen, a study by the U. Federal Trade Commission supports this conclusion.
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It noted that in steel, "the [British] home market may at any time be made a dumping ground by foreign producers. The iron and steel bar manufacturers of England have had to contend with a great deal of dumping on both home and foreign markets. Because of high tariffs, they could dispose of surpluses abroad without spoiling domestic prices, and in fact could maintain high domestic prices by limiting the available supply within the home market.
British "dumpees" generally could not do this; foreign markets were increasingly closed to their exports, and continuous running for purposes of serving only the home market tended simply to further depress prices in that market, without necessarily increasing sales volume.
In such industries steel, chemicals, machinery in competition between two facilities of equal efficiency, the producer able to operate at the highest rate would enjoy the lower costs, and hence, the competitive edge. The most modern and efficient production equipment carried with it very high fixed costs.
While such facilities, if run "flat out," could produce goods at a lower cost per unit than those of any competitor, if the utilization rate dropped and the works were put on halftime or quarter-time, the cost per unit could easily be higher than that of older, less efficient facilities. The ability to run plants "flat out" was one of the principal policy justifications offered for a high tariff and the "trust" form of combination that was offered by Carnegie, Schwab, and other U.
Report of the Tariff Commission , op. A British steelmaker testified in that "I should say that, generally speaking, British works are fully up to date. Some of our modern plants would be as much up to date as any foreign works. The disadvantages which we are under I attribute chiefly to our not running full time. The reason why we are unable to work full time, as compared with the Germans, is that the Germans have a protected market at home at a high price and can afford to sell their surplus production at a much lower price than we can make it, and even than they can make it" Witness No.
I, pars. Another testified that "I have worked out before my own works, the difference between the cost of production at its present rate of output, and at its maximum rate, and if we could produce to the full extent of our capacity, we could sell the extra quantity at 10 percent less than our present cost price, and should make, on the whole, an increased output twice our present profit. These figures are very startling, even to myself, when I worked them out" Testimony of Witness No.
Another observed that "[t]he additional output for their works caused by their foreign sales enables them to reduce their export price for all the additional quantity, the establishment charges having been borne by the lesser produce for their home market. A huge output is of first importance in reducing cost and this is never lost sight of by American and German manufacturers" Testimony of Firm No. I, par. President Schwab of the U. Steel Corporation testified as follows before the U. Industrial Commission in "It is quite true. XIII, p. The importance of 'dumping' in any explanation of Britain's difficulties [in steel] may well have been overstated in the Report of the Tariff Commission, but there is no question that selling below average cost gave both German and American exporters a very real competitive advantage in world markets.
The constant refrain of witnesses before the Tariff Commission was that British manufacturers were inhibited from pursuing a like policy because of 'the openness' of the home market, in which American, German, and Belgian manufacturers were making growing inroads by 'unfairly' undercutting domestic producers. If the home market—relatively stagnant though it was—wasn't reserved for native manufacturers, it was no wonder that they were slowly demoralized by being placed in a disadvantageous position in overseas trade.
In Britain possessed the most modern, competitive iron and steel industry in the world, but by it had fallen behind its rivals by virtually every standard used to measure international competitiveness. The U. Consul General in Berlin reported in that "the Steel Verband believes in dumping. They justify their position as follows: Large steel plants must work at a certain maximum capacity without interruption if they are to remain efficient and produce at a minimum cost.
It is impossible for the home market of any plant in any country to absorb a large output without interruption in the flow of orders due to periods of depression, from economic causes outside the influence of the steel industry. Also, the increased complication of the coal, iron, and steel industries, the increased use of furnace gases for industrial purposes gas engines , for running lighting plants for neighboring towns, also the concentration of all stages of production in a few large mills, have made it increasingly difficult to reduce production in any one line of all the allied processes, without causing grave losses and disorganization in other lines.
The Steel Verband therefore maintains that it is better for the entire economic life of the country in slack years at home to dispose of surplus products abroad at prices which may even cause a loss, inasmuch as the loss incurred by dumping abroad is in no comparison to the losses which would be incurred if production were reduced at home. Also, if production were reduced at home, the cost of production would rise in mills running at half the time.
See testimony of Witness No. Aldcroft, ed. See Temin , op. In the mids Britain produced roughly 36 percent of the world's iron and steel, compared with 26 percent for the United States and 17 percent for Germany; by the United States surpassed Britain, and in , so did Germany. By , Britain produced less than half the volume of steel that Germany produced and less than one-fourth that of the United States.
With respect to efficiency and productivity, the British industry was regarded universally as the world leader in the last quarter of the nineteenth century, but by the outbreak of World War I had fallen behind Germany, the United States, and possibly Belgium Payne [], op.
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In fact, at the turn of the century British steelmakers were quite aware that their competitive edge was slipping away due to their own failure to invest in state-of-the-art technology, and they said that dumping was a principal cause of that failure. One of them testified as follows in I state emphatically that, in my opinion, some fiscal provision for meeting dumping is essential to the maintenance of the trade of this country.
I may explain the above statement further—continual changes and improvements are being made in the manufacture of steel. I know of no trade which of late years has been subject to so many changes and improvements in the mode of manufacture.
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All these changes involve enormous outlays. If the manufacturers in this country are unable, from the instability of their market and from the liability of being overwhelmed from the stuff being dumped upon them at prices with which neither they nor anybody else can compete, if they are deterred from making the necessary improvements from availing themselves of new inventions, and if the foreigners, by reason of their protected market and of the certain large returns which they get from their home trade, are enabled to make these outlays, they will place themselves in such a position that, even if we got a free market and a free interchange, we should be some years before we could overcome them.
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I fear that if this state of things goes on for a considerable time longer, we never shall get on equal terms; they will attain so much superiority, and, when we are driven out of the market, our competitors would raise their prices to us. Alfred Chandler writes of the British iron and steel industry in the s that it is "clear why the British steelmakers were unable to carry out the plans that all agreed were needed to modernize their industry and make it competitive in international markets.
Essentially they were paying the price [in the s] for the earlier failure to make an investment large enough and to recruit a management organization large and effective enough to exploit fully the new technologies of mass-producing steel" Chandler [], op. Testimony of Witness No. Another manufacturer made a similar observation: "Taking the whole of this country, I do not consider the plant and equipment of British works are, as a whole, as up to date as those of the United States and Germany. This is due to the Americans having made very rapid strides in recent years, and having never been burdened with much original plant, such as existed in this country.
They have been compelled to introduce many improved economical labour-saving machines, whereas this country could not apply similar methods to existing machinery; consequently, we have been unable to adapt ourselves to these new conditions, but the advantage, which is slight, is only a temporary one; there is certainly some truth in the statement that a sense of insecurity with the British manufacturer prevents him from laying down new plant. We are so alarmed and disheartened at the approaching foreign competition that we fear to spend money" Testimony of Witness No.
For British entrepreneurs, the decision as to whether to invest in the latest steelmaking technologies turned, in large degree, on their assessment—and that of the capital markets—of the risks involved. Although large new mills could produce goods at lower average costs than a collection of smaller facilities, because of the higher fixed costs of the biggest facility, its losses were potentially larger if demand fell and it could not be utilized adequately. If demand were sharply and continuously cyclical, the biggest facility might not have the lowest average costs even over the long run because its unit fixed costs would be so high in each recession.
Alternatively, if cyclicality were somewhat less sharp, the biggest facility might suffer higher losses in recessions, but enjoy lower average costs over the long run, and thus be more profitable. In either case greater variability in demand can make it rational to invest in less capital-intensive plants, even if those plants are less efficient in terms of minimum average cost. Only if demand fluctuations were reduced would the most efficient, capital-intensive technologies always be the most attractive.
First, for the Germans and Americans, by reducing competition and enhancing profitability in the home market, dumping diminished cyclicality and reduced investment risk, making it less hazardous for entrepreneurs to invest in the most advanced capital facilities.
The foregoing argument was summarized by Stevan B. XL, No. German scholars conceded that cartels and high tariffs protected some inefficient firms from competitive pressure, but argue that this was more than offset by the role played by protection and restraints on competition in reducing investment risks for the most modern equipment, thus fostering the rapid growth of large, efficient firms Max Krawinkel, Die Verbandsbildung in der Deutschen Drahtindustrie [Cologne, Germany, ], p. All references in this note are cited in Webb , op. The tariff-cartel system could keep domestic prices high enough to cover fixed costs, while firms added to their profits by selling at marginal cost on the depressed world market.
In ten of the years between and the average cost Selbskosten of rails from the Krupp firm exceeded the average export price, the world price with which the British had to contend. The domestic price, on the other hand, always exceeded average cost by over 10 marks per ton. Thus, the tariff-cartel system kept the German mills like Krupp profitable through times of recession.
The national statistics also reflect such a pattern. In , , , and , when international trade crisis struck, British pig iron output declined 10 percent on average from the previous year, and the number of furnaces in blast fell 14 percent. German pig iron output fell only 6 percent, and the number of furnaces in blast dropped only 5 percent. Given the greater riskiness of their market environment, British steelmakers may have been rational to use less capital-intensive techniques, even if that meant slightly higher average costs. Second, the British confronted not only the loss of sales in protected foreign markets, but more violent cyclical swings in their own market as a result of intermittent incursions of dumped products, which exacerbated the intensity of recessions.
This was the nub of the British strategic dilemma—investment risk was higher for them than for the Germans or the Americans. Now, there is no reason to expect that the plant erected to meet an average demand would reach the exact size most conducive to economy of manufacture. Neither is it practicable to arrange that the plant shall always be kept working full time. If it is, there must evidently be recurrent period, during which over-production. Such is the ordinary position of the manufacturer under free trade.
Compare it with the position of his protected rival, who controls his home markets. He is not haunted by the fear of overproduction. Another steelmaker commented that, "Owing to insecurity of trade at home, we do not spend as much money on plant as we would. The manufacturing capitalist [in the free trade country], when investing his money in costly plants has, in any case, many risks to run—new inventions, new discoveries, new fashions. Add to these his loss, actual or anticipated, through the operation of foreign protection, and his burden becomes insensibly increased. Will the hostile combination keep together long enough to ruin him?
Can his credit stand the strain? Is it worthwhile holding on in the face of certain loss and possible ruin? These are questions which the lenders of the threatened industry cannot but ask. And surely the mere fact that they have to be asked must shatter the buoyant energy which is the very soul of successful enterprise. Balfour's diagnosis was corroborated by the contemporary testimony of many British steelmakers.
No action was taken to curtail dumping or to open the foreign markets from which dumping was occurring. The immediate cost disadvantages and loss of sales confronting British steelmakers as a result of dumping were gradually translated into a loss of competitiveness that would, in the years to come, prove to be irremediable. During the British dumping debate, free trade advocates argued persuasively that dumping of intermediate products had actually enhanced the international competitiveness of British industries that used those products as inputs.
Thus, although dumped sugar may have weakened England's sugar refining industry, cheap imported sugar fostered new food processing industries—jam, confectionery, biscuits, condensed milk—that employed far more people than the sugar refining industry had ever utilized.
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British shipbuilders reported that they bought dumped German castings and forgings, "built them into ships and machines, and sent them back to Germany. As one British steelmaker summarized his situation, "companies hitherto prosperous can keep a certain measure of trade by enlarging their works, and thereby reducing the cost of production, but it is becoming more and more difficult to entice the requisite capital into the trade, either for that, or for introducing more labour-saving appliances.
My company, as I have stated, largely increased their works recently, and, speaking personally, I should be exceedingly chary of investing anything more in extensions, unless we get some measure of security against the foreign dumper.