Is the nostalgia surrounding the Button Steel Plan misguided?

In late August, BlueScope Steel announced it would close a blast furnace in Port Kembla and a hot strip mill in Hastings, southern Victoria, as part of an operational restructure that would see the company withdraw from the export market.

Citing a number of factors including a strong Australian dollar, high raw material costs, the continuing economic stagnation following the global financial crisis and low prices commanded for its steel, the company is cancelling its export business and scaling back its operations to fit the needs of a smaller Australian client base.

It is fair to say that BlueScope's decision has come across as an unpopular one, especially given that up to 1,000 jobs are envisaged to be lost from the company as a consequence.

But one of the more intriguing elements of the BlueScope move is that it has enlivened the debate about the role of manufacturing, and even the merits of free trade in Australia.

The national secretary of the Australian Workers' Union, Paul Howes, cried foul on the announcement of the BlueScope restructure by suggesting, "we are now facing a major crisis in Australian manufacturing. Base metal manufacturing, downstream manufacturing – everything is under pressure at the moment."

The Australian Manufacturing Workers' Union national secretary Dave Oliver endorsed Howes' crisis memo, calling for "government intervention to guarantee that we've got a viable manufacturing industry in this country."

It is instructive that the two union bodies have not explicitly called for a return to the dreaded high customs tariff regime that existed prior to the 1990s, a false prophet of economic policy which harmed the long term viability of the Australian manufacturing sector like no other.

However, the manufacturing unions have not been shy in suggesting that government implement a suite of non‑tariff policies with the intention of shielding domestic steelmakers from global competition. For example, Howes has suggested that "we need to get serious about a sectoral support plan – one that includes tough local content policy, currency changes and a stronger anti‑dumping regime."

It is intriguing, and indicative of their longstanding 'us versus them' culture, that the unions have targeted the Australian mining industry as something of a culprit for the manufacturing industry's woes, even though Rio Tinto, for one, has indicated that its existing operations comprise as much as 86 per cent local content with expansion projects using 75 per cent.

In what can only be construed as a worrying sign for the mining sector and the Australian economy more broadly, the federal Industry Minister Kim Carr stated in a recent speech that "everyone … knows there are disputed claims about the level of local content in resources projects. My position is, whatever the level is, it's not good enough."

The problem posed by an imposition of regulations conscripting local miners to purchase additional Australian steel, where cheaper inputs could be sourced overseas, is that it would simply drive up the input cost base of mining operations and weaken their cost competitiveness in global markets.

This would in turn compromise the economic viability of a mining industry that reputedly has a capacity, and in some instances a desperate need, to absorb a number of the 1,000 BlueScope employees to be made redundant, and other labourers with valuable skills.

What is less surprising than the local content policy ambit is the repeat of the oft‑stated cries of anti‑dumping by domestic industries, or unions representing workers in domestic industries, whenever it loses a contract to cheaper imports.

And so the process has been repeated, this time concerning the case of cost‑competitive steel imports entering Australian markets.

But we shouldn't make the mistake of falling into the trap that anti‑dumping isn't the rank protectionism that it is, that would deprive industries that use steel as part of their inputs to furnish final products at the most affordable prices to Australian consumers.

The yearning for a big Plan to rescue domestic industries from the continuous‑improvement logic of markets, or to curiously substitute structural change sponsored by a caring, subsidy‑sharing government for the structural change facilitated by markets, also still runs deep within the veins of the union movement and sections of the Labor Party and some industries.

This has been aptly illustrated by Dave Oliver's recently expressed approval of the fact that during the 1980s "the government worked with the unions and the employers and came up with plans like the Button plan for … the steel industry."

There is unquestionably a great sense of nostalgia within the labour movement about the Button steel plan, with many claims that it transformed the Australian steel industry once before and a modern iteration could do so again.

In exchange for acceptance of the Hawke government's agenda for tariff reductions, then Industry Minister Senator John Button marshalled BHP and the unions to guarantee BHP 80 per cent of the Australian market if it invested $800 million in plant upgrades and agreed to no forced redundancies.

The unions committed themselves to restraining wage claims, a climate of industrial peace and accepting productivity improvements in the production plants.

For its part, the federal government committed initially to dole out bounty payments over a five‑year period to BHP encouraging domestic production of certain cold rolled products, pipes, tubes, high alloy steel bar products and stainless steel flat products.

BHP certainly appeared to invest more than what they initially agreed, as well as providing skill upgrades for its workforce. However, productivity improvements over the five years from 1985 under the plan did not succeed in closing the productivity gap between BHP and the best practice Japanese and Chinese steelmakers.

From 1986 there was also evidence of renewed industrial disputation, with strike action occurring in Newcastle and Port Kembla, leading to a substantial increase in the numbers of working days lost due to industrial disputes within the steel industry.

While improvements in production occurred during the life of the Button plan, the Industries Assistance Commission astutely noted in its 1986‑87 Annual Report:

"There is a natural tendency for recent improvements in the steel industry's economic performance to be attributed to the steel plan . . . however, a number of signs of improvement were evident before commencement of the plan. The Australian economy moved back into growth in the September quarter of 1983, as did manufacturing production and domestic steel production . . . The sustained depreciation of the Australian dollar since the end of 1984 has been another significant factor in the improved competitive position of the Australian steel industry in both the domestic and export markets."

One might plausibly add the prevailing policy of tariff reductions, and the about‑face of the Hawke government that saw bounties cut, to the list of factors aiding the steel industry's recovery.

To put simply, many policy deliverables or aspired outcomes under the Button plan were not achieved. Any improvements in the steel industry's fortunes during the 1980s could be more plausibly attributable to a general improvement in the economic climate prior to the 1990‑91 recession.

Moving back to the present, the government has already responded to union and industry calls to defy the economic gravity of market circumstances, including by doling out an advance of $300 million on the steel industry's envisaged carbon tax compensation and announcing a manufacturing jobs summit.

The Gillard government has also appointed former Queensland Premier Peter Beattie, who presided over the ineffectual 'Smart State' strategy and a failed $1 billion Gladstone magnesium project, as a spruiker for local manufacturing business in resource projects.

But policy ideas of every hue that violate the freedom of Australians to contract with steel suppliers, wherever they may be situated, and thus attain the best economic deal for themselves should be strenuously resisted at every turn.

With the renewed calls for a retreat from free trade resembling a vampire once again rising from its crypt, economic reformers will need to equip themselves with wooden stakes if costly steel socialism is to be averted.