The Industrial Hollows
British deindustrialization provides a cautionary tale for America.
By Farrell Gregory, fellow at the Foundation for American Innovation and chief editor at the Oxford Emerging Threats Journal
On Saturday, April 12, British MPs were called into Parliament for an emergency vote for the first time since the Falklands war in 1982. Amid accusations of “industrial vandalism,” the government authorized temporary powers to prevent the collapse of British Steel’s Scunthorpe plant, the only primary steelmaking company in the United Kingdom. Despite this show of urgency, the slow disintegration of British Steel has been as predictable as it has been damaging. In the last five years, Britain has seen the consequences of allowing foreign firms to purchase critical industrial capacity. There’s a lesson for America, too.
Steel manufacturing in Scunthorpe, a town in northern England, began in the late 19th century. Through a series of mergers, nationalization, and eventual privatization, the Scunthorpe plant and other industrial assets came under control of British Steel in 1988. Further sales and purchases of the firm led to its acquisition in 2020 by Jingye Group, a major Chinese steelmaker.
The deal was initially praised by Boris Johnson’s government. The Prime Minister himself said, “as British Steel takes its next steps under Jingye’s leadership, we can be sure these [steps] will ring out for decades to come.” His Business Secretary, Alok Sharma, described it as “the start of a new era for those regions that have built their livelihoods around industrial steel production.” Looking for a win, the government mistook Chinese investment for a guarantee that British steelmaking would modernize. However, they were right about one thing: This is a new era, one of asymmetric economic warfare—and Britain is losing.
After all the hype and promises, Jingye Group took steps to shut down the plant in recent weeks, citing the economic climate and losses of about £700,000 a day. After months of negotiations and offers of subsidized raw materials from the British government, Jingye Group refused a commitment to keep the blast furnaces operational. After unions accused the company of deliberately cancelling raw material orders and selling existing supplies, the British government stepped in to direct operations on Saturday. This meant ensuring that the furnaces remained functional and received necessary raw materials. Although they haven’t formally nationalized the assets, Business Secretary Jonathan Reynolds said state control is “the likely option.”
Beyond the 2,700 workers employed at the Scunthorpe site, the failure of British Steel would have larger consequences. The two blast furnaces are the only ones in the UK capable of primary steel production—the process that separates pure steel from iron ore by using coking coal. Most importantly, if the furnaces at Scunthorpe were allowed to cool as Jingye Group intended, using them again for primary steel production would be prohibitively expensive. Britain would become the only G7 country without primary steel production capacity. Without steelmaking capabilities, Britain would be forced to rely solely on imports from competitors. British workers would lose the knowledge and network effects that accompany industrial production. As Vice President Vance noted in a recent speech, protecting dominance in advanced technology requires exposure to the inputs.
Britain’s efforts may be too little, too late. Successive governments of both parties have watched and supported Britain’s decades-long deindustrialization. Countless steel producers have ceased operations. Last year, the government allowed the closure of Port Talbot primary steel making furnaces—a site owned by Tata Steel, an Indian steel making conglomerate. After this, in an agreement with Tata Steel, the government provided £500m for the yearslong process of building electric arc furnaces. But these furnaces, if they’re built, will only be able to recycle existing steel scrap. And regardless of the manufacturing disadvantage, Tata Steel still laid off all 2,800 workers. After this, the closure of the Scunthorpe furnaces would have ended Britain’s domestic steelmaking capacity.
Britain’s steel industry is no aberration. In many of the towns and cities where the Industrial Revolution took root, industry is dying. Manufacturing as a percentage of the UK’s GDP has fallen from 30% to less than 9% over the last fifty years. On the one hand, this statistic represents the relative growth of the service economy. But at a fundamental level, it points to the diminished prominence of Britain’s crumbling industrial capacity. Over that same period, Britain went from the world’s 5th-largest steel producer to the 26th. The Midlands, Britain’s former center of manufacturing, have lost out on economic dynamism amid mass immigration and a turn towards a service and knowledge economy. The vitality in Britain’s industrial cities has diminished, leading to financial centralization in London and brain drain into the capital. Aside from a difficult history of strikes, nationalization, and privatization, it’s clear that Britain has failed to prevent its industrial base from being hollowed out.
Have British policymakers learned a lesson about the danger of allowing foreign companies to acquire critical industrial assets? It’s not clear. Aside from Jingye Group’s actions, Britain’s own zero carbon pledge would have required Scunthorpe’s blast furnaces to shutter by 2050 to have any hope of meeting the country’s climate target. Additionally, Britain’s high industrial energy costs have been blamed for business difficulties. Despite having lower gas prices than France and Germany, the subsequent cost of industrial energy in the UK is 50% more than in those countries. The problem isn’t the price of gas—it’s regulatory. It takes 15 years to connect to the grid. British policymakers are hindering their own industrial development.
Similarly, it’s unclear whether the British Steel crisis will prompt a review of Sino-British relations and the ways China’s industrial acquisitions threaten the Britian’s national security. Speaking after the emergency Parliamentary session, a Treasury official stated that “China’s not a hostile state, but China is a country with whom we have a large important relationship.” On Tuesday, the Industry Minister refused to rule out finding another Chinese investor for the Scunthorpe site.
Whether or not Britain learns from its deindustrialization and subsequent foreign capture of critical industrial assets, America certainly should.
While a Chinese spokesman warned the British government to avoid “politicising trade co-operation,” America should do the opposite. Trade cannot be separated from strategic concerns. Steel isn’t just an industrial input. It goes into necessary military applications and essential commercial products, making both the trustworthiness of its sourcing and reliability of its availability vitally important. We can no longer pretend that low costs and high output are the only measures of fair and secure trade. For those who oppose the sale of U.S. Steel to Japan, these national security concerns loom large.
Second, we should examine foreign acquisition of America’s critical infrastructure. Beyond valid concerns about jobs and intellectual property, adversarial firms can deliberately hobble production, resulting in increased imports and diminished American manufacturing capacity. For decades, CFIUS—the Committee on Foreign Investment in the United States, which examines foreign investments in U.S. businesses—has approved foreign purchases of strategic assets, such as raw material producers, farmland, and other key components of military and essential commercial supply chains. In 2018, the Trump administration indicated it would more critically examine potential Chinese deals. That won’t be enough. We should review prior foreign acquisitions and interpret our strategic interest more broadly than in the past. Briefly try on the following mindset: If a foreign owner interfered with the production of their acquired company, how devastating would it be for America? We can no longer pretend that certain areas of trade have nothing to do with national security. There might not be such a bright line between pork and semiconductors.
Finally, the blast furnaces at Scunthorpe serve as a warning about the threat of deindustrialization for America. Just as non-operating furnaces are incredibly expensive to reutilize, the more American manufacturing atrophies, the harder reindustrialization will be. Consider the learning curve and compounding effects of utilizing new technologies. The sooner America reorients itself to benefit from new technologies, including artificial intelligence, the sooner we can surmount our deindustrialization deficit.
If we don’t, the threat is far more serious than just importing goods from abroad. New technologies boost productivity of existing processes, finding ways to do more with less. But if America lacks an industrial base of sufficient size to capitalize on new tech, the productivity benefits and advances might pass us entirely. A failure to launch American industry into the coming new age would be devastating. In this scenario, there’s no maintaining the status quo. We either reassert our industrial dominance or fall behind a transformed China. Acting now to reinvigorate our industrial base may be difficult, but waiting any longer may imperil our prosperity over the next century.
Beyond the immediate national security concern, there is a broader virtue to American industry. Speaking at Nucor Steel in Berkeley, South Carolina, Vice President Vance noted that steelmakers “form the literal foundation of American society.” He wasn’t just talking about the steel they produce. The good wages, stable hours, and pride in their work that steelmaking offers enabled millions of workers to form flourishing families.
Vance also said that with their hands and their heads, steelworkers are “building the America of the future, not the America of the past.” If the America of the future retains its steelmaking capacity, it will be because we deliberately chose a different path than Britain. A thirty-year pattern of disconnecting trade from strategic interest made Britain an easy target for foreign subversion. America should be very careful to ensure that we don’t fall into the same trap.