Gavin Rice is Director of the Future of Conservatism Project at Onward and a former Special Adviser.
“Trump doesn’t get the basics. He thinks his tariffs are being paid by China. Any freshman econ student could tell you that the American people are paying his tariffs”.
So tweeted Joe Biden in 2019, after Donald Trump announced $80 billion worth tariffs on a wide range of Chinese-manufactured goods.
Yet Biden, now President, recently announced 100 per cent tariffs on Chinese electric vehicles (EVs), 50 per cent tariffs on semiconductors, and 25 per cent on aluminium and steel, saying: “I’m determined to ensure America leads the world in them”. What is happening to globalisation?
Whether sovereign states should pursue interventionist economic strategies in the national interest is a question as old as political economy itself, with Sir Robert Peel battling against Tory protectionism in the 1840s and, before this, Alexander Hamilton favouring domestic industrial production in the so-called “American System”.
While radical Ricardians insist free trade is always for the best, the great father of classical economics Adam Smith was more cautious, arguing that trade with states which themselves do not respect economic freedom or which could undercut your own production through lower wages could be distortive.
If Britain has an economic religion it’s free trade in goods – that’s the legacy of Gladstone, operating at the height of Victorian manufacturing exporting prowess.
Sadly that world, in which Britain was a surplus nation, is long gone. And although as an economy it has has been slow off the mark, there are positive signs that it is catching up as the rest of the world pivots to a more hard-headed economic pragmatism – if our competitors are playing chess, it’s no use insisting on the superiority of draughts.
The current Government’s identification of “Five Key Technologies” for public support and investment is promising – AI, quantum computing, semiconductors, engineering biology and future telecommunications. But two things stand out.
First, the sums committed are small if the objective is genuinely to build sovereign capacity and convert the UK’s R&D into industrial output; second, the focus is very strongly on technologies rather than industries. So far, Conservatives have been happier supporting innovation than with actually supporting production.
As Nick Timothy and I argue in our recent report, A Conservative Economy, backed by Michael Gove, Britain needs to go beyond supporting innovation and develop a real strategy for wider private sector reindustrialisation and export-led growth. Rather than allowing the supposed law of comparative advantage to erode Britain’s remaining industrial base away to zero, a more active role is needed for government in stimulating and facilitating industry.
Why is this change of direction necessary?
Britain already possesses some of the highest-quality manufacturing in the world. This means life sciences, pharmaceuticals and chemicals as much as it does aerospace and automotive. But it no longer does enough of these things, with manufacturing declining to less than nine per cent of GDP.
This disproportionately hurts regions that rely on manufacturing output for growth. Manufacturing tends to be more productive than comparator service sectors, growing faster in total factor productivity than the rest of the economy over the last 20 years. The less we do of more productive things, the worse Britain’s economic performance will be.
Moreover, the state already intervenes economically, as it did over Talbot Steel or with the Advanced Manufacturing Plan – just not in a joined-up way.
But there is a another reason, too: security. The UK was indisputably caught short during the pandemic, with major shortages in PPE, pharmaceuticals, semiconductors, and other manufactures.
The global economy is now entering a period of “fragmentation”, where Western allies with relatively open economies seek to “friend-shore” strategically sensitive production, and straight out on-shoring where possible. Some of this has already been happening in the wake of Brexit, with British manufacturers bringing supply chains home.
Next, manufacturers tend to be significant net exporters. As of March, the UK operated an impressive £38 billion trade surplus in services. But this is overshadowed by the £46 billion deficit in goods. When combined with other sources of national income offset against liabilities, the UK runs an overall deficit on the current account over three per cent of GDP.
Although we have become used to this as a feature of our economic life, it is not normal – the large structural deficit only emerged under New Labour, when Britain’s deindustrialisation really accelerated. This matters, because large current account deficits have to be financed.
Why is Britain so reluctant to intervene in foreign acquisitions of its companies, housing stock and critical infrastructure?
One reason is that it must attract inward capital flows. But because we don’t make or do enough of what the world wants to buy, we have to sell houses, equities and debt instead; Britain can’t afford the risk of capital flight.
Such a dynamic produces regressive effects here in the UK. As cash flows out of regions beyond the South East – all significant net importers from the rest of the world – it flows back not into those regions but into London and the Home Counties, in the form of capital investment in assets.
This exacerbates regional inequalities, creating demand for further subsidies; everywhere beyond the South East is a net recipient of public money.
Finally, there is the impact on employment. Economic strategies should not, of course, seek to expand employment for its own sake, or to prop up industries that are inefficient.
But governments with one eye on the national interest and the common good should not be indifferent to employment outcomes for citizens; the loss of manufacturing industries beyond the South East has been bad for wages and living standards as production work has been replaced by low value-added services and public sector jobs.
Britain is a small island, though still the world’s sixth-largest economy. It does not have the fiscal firepower of the Biden Administration, the EU, or the People’s Republic of China to bring to bear.
But it can and must do more to support domestic industry in sectors where sovereign capacity matters, where offshoring or loss of control is dangerous, and where the right level of targeted support could generate a profitable and productive industrial base. The Pohang Iron and Steel Company and the TSMC in Taiwan would not have emerged as world leaders without significant political support.
Those successes can’t be replicated – but Britain must find its equivalent, and pursue dominance ruthlessly once it has.
Gavin Rice is Director of the Future of Conservatism Project at Onward and a former Special Adviser.
“Trump doesn’t get the basics. He thinks his tariffs are being paid by China. Any freshman econ student could tell you that the American people are paying his tariffs”.
So tweeted Joe Biden in 2019, after Donald Trump announced $80 billion worth tariffs on a wide range of Chinese-manufactured goods.
Yet Biden, now President, recently announced 100 per cent tariffs on Chinese electric vehicles (EVs), 50 per cent tariffs on semiconductors, and 25 per cent on aluminium and steel, saying: “I’m determined to ensure America leads the world in them”. What is happening to globalisation?
Whether sovereign states should pursue interventionist economic strategies in the national interest is a question as old as political economy itself, with Sir Robert Peel battling against Tory protectionism in the 1840s and, before this, Alexander Hamilton favouring domestic industrial production in the so-called “American System”.
While radical Ricardians insist free trade is always for the best, the great father of classical economics Adam Smith was more cautious, arguing that trade with states which themselves do not respect economic freedom or which could undercut your own production through lower wages could be distortive.
If Britain has an economic religion it’s free trade in goods – that’s the legacy of Gladstone, operating at the height of Victorian manufacturing exporting prowess.
Sadly that world, in which Britain was a surplus nation, is long gone. And although as an economy it has has been slow off the mark, there are positive signs that it is catching up as the rest of the world pivots to a more hard-headed economic pragmatism – if our competitors are playing chess, it’s no use insisting on the superiority of draughts.
The current Government’s identification of “Five Key Technologies” for public support and investment is promising – AI, quantum computing, semiconductors, engineering biology and future telecommunications. But two things stand out.
First, the sums committed are small if the objective is genuinely to build sovereign capacity and convert the UK’s R&D into industrial output; second, the focus is very strongly on technologies rather than industries. So far, Conservatives have been happier supporting innovation than with actually supporting production.
As Nick Timothy and I argue in our recent report, A Conservative Economy, backed by Michael Gove, Britain needs to go beyond supporting innovation and develop a real strategy for wider private sector reindustrialisation and export-led growth. Rather than allowing the supposed law of comparative advantage to erode Britain’s remaining industrial base away to zero, a more active role is needed for government in stimulating and facilitating industry.
Why is this change of direction necessary?
Britain already possesses some of the highest-quality manufacturing in the world. This means life sciences, pharmaceuticals and chemicals as much as it does aerospace and automotive. But it no longer does enough of these things, with manufacturing declining to less than nine per cent of GDP.
This disproportionately hurts regions that rely on manufacturing output for growth. Manufacturing tends to be more productive than comparator service sectors, growing faster in total factor productivity than the rest of the economy over the last 20 years. The less we do of more productive things, the worse Britain’s economic performance will be.
Moreover, the state already intervenes economically, as it did over Talbot Steel or with the Advanced Manufacturing Plan – just not in a joined-up way.
But there is a another reason, too: security. The UK was indisputably caught short during the pandemic, with major shortages in PPE, pharmaceuticals, semiconductors, and other manufactures.
The global economy is now entering a period of “fragmentation”, where Western allies with relatively open economies seek to “friend-shore” strategically sensitive production, and straight out on-shoring where possible. Some of this has already been happening in the wake of Brexit, with British manufacturers bringing supply chains home.
Next, manufacturers tend to be significant net exporters. As of March, the UK operated an impressive £38 billion trade surplus in services. But this is overshadowed by the £46 billion deficit in goods. When combined with other sources of national income offset against liabilities, the UK runs an overall deficit on the current account over three per cent of GDP.
Although we have become used to this as a feature of our economic life, it is not normal – the large structural deficit only emerged under New Labour, when Britain’s deindustrialisation really accelerated. This matters, because large current account deficits have to be financed.
Why is Britain so reluctant to intervene in foreign acquisitions of its companies, housing stock and critical infrastructure?
One reason is that it must attract inward capital flows. But because we don’t make or do enough of what the world wants to buy, we have to sell houses, equities and debt instead; Britain can’t afford the risk of capital flight.
Such a dynamic produces regressive effects here in the UK. As cash flows out of regions beyond the South East – all significant net importers from the rest of the world – it flows back not into those regions but into London and the Home Counties, in the form of capital investment in assets.
This exacerbates regional inequalities, creating demand for further subsidies; everywhere beyond the South East is a net recipient of public money.
Finally, there is the impact on employment. Economic strategies should not, of course, seek to expand employment for its own sake, or to prop up industries that are inefficient.
But governments with one eye on the national interest and the common good should not be indifferent to employment outcomes for citizens; the loss of manufacturing industries beyond the South East has been bad for wages and living standards as production work has been replaced by low value-added services and public sector jobs.
Britain is a small island, though still the world’s sixth-largest economy. It does not have the fiscal firepower of the Biden Administration, the EU, or the People’s Republic of China to bring to bear.
But it can and must do more to support domestic industry in sectors where sovereign capacity matters, where offshoring or loss of control is dangerous, and where the right level of targeted support could generate a profitable and productive industrial base. The Pohang Iron and Steel Company and the TSMC in Taiwan would not have emerged as world leaders without significant political support.
Those successes can’t be replicated – but Britain must find its equivalent, and pursue dominance ruthlessly once it has.