Rebalancing the UK into an export economy will need painful changes
Liam Fox is out to drum up business. The trade secretary continued his trip around East Africa solo after his colleague, Priti Patel, was forced out last week. Patel’s departure was unfortunate, because the expedition was the first of its kind for Britain: a coordinated, cross-departmental attempt to promote British exports.
Fox is on a mission to rebalance the economy by tackling the UK’s chronic current account deficit through trade. The current account is a measure of how much a country borrows and spends versus how much it sells and makes from its assets. Britain’s current account deficit is one of the largest in the world: each year, we borrow more than we make to the tune of about 5pc of our GDP. On the plus side, this means we benefit from lots of cheap imports, improving our living standards. But in the long run, this deficit erodes national wealth and might also dampen Britain’s appetite for investment.
Tackling the external part of the deficit involves two tasks: raising exports and raising our investment abroad. Both activities provide revenue streams that offset what we spend on imports and the loss of income from selling our assets to foreign buyers.
Fox’s strategy for achieving these ends is based on two explanations for why Britain exports and invests so little abroad, given its size and influence. The overarching theme is that our government doesn’t help British businesses to do either. Firstly, for companies wanting to invest overseas, our government provides relatively little in export finance subsidies (usually in the form of insurance for credit risk) compared to others. Secondly, for those companies that would like to export more, the UK does not provide a complete “package” in the way that other countries do. We do not coordinate bids for large foreign government infrastructure projects, for example, or plan skills training around foreign requests.
There are very good reasons why Britain doesn’t do these things: we don’t believe in the top-down, government organisation of trade. If it’s worth it for our companies to bid for foreign contracts, we believe, they will invest the time in working out how to do it. In the British outlook, government involvement is only likely to push companies into places they would not otherwise – and therefore should not – go.
The problem with sticking to this philosophy too religiously is that other countries don’t work that way. When Saudi Arabia or Japan consider foreign suppliers to build and operate a new motorway, for example, they tend to assume that the suppliers’ government will be somehow involved, whether it’s in helping to protect their companies’ investments or linking up contacts between executives and ministers. Whatever we think of it, this is how a lot of valuable trade is done. It’s therefore not a bad idea for Fox to carve out more space for UK plc by using government to grease the wheels, assuming we don’t take it too far. However, promotional trips and meetings can only achieve so much. If the government is serious about shifting Britain towards an export-led model, then that involves major structural changes to our economy and many of them will be unpopular. There is no sign yet that ministers grasp this or would be prepared to inflict the pain it will involve.
The reason for this is that our economy is currently geared up for consumption. The UK plc way is for households to borrow and spend. Effectively, in order to fund this, we sell off our assets to foreign buyers who are keen to access this highspending domestic market. It is of course a good thing to attract foreign investment, but coupled with the low investment rate of both our government and our firms, the whole thing amounts to mortgaging the future on a grand scale.
Economists disagree on what chain of causation is at work here. The most widely held view is that, in order to rebalance an economy in this situation, governments need to encourage consumers to save. We need to be more virtuous and stop spending money we don’t have. Saving more will provide a larger pool of capital to be borrowed and invested by companies. Countries like Japan and Germany that are export powerhouses tend to tilt government policy towards favouring savers and away from wage growth and consumption.
If this is right, it would involve a painful transformation of the economy. Currently, for example, UK energy policy is almost entirely focused on keeping down costs for households. British consumers actually benefit from some of the lowest energy costs in Europe. The counterpart to this is that energy costs for companies have risen, putting many energy-intensive manufacturing businesses at a big disadvantage compared to their rivals in Germany, say, where energy policy favours the opposite mix of burden-sharing.
However, there is also a body of opinion (call it the Donald Trump outlook), which argues that this explanation has things the wrong way around. The reason Germans or Asians save more than Britons is not because their virtuous government policies encourage saving, but because they hold down their currencies and subsidise their exporters to such a degree that it is impossible for more capitalist economies, like the US and UK, to compete. The result is that our exports are crowded out and savings go down because workers can’t find high-paying jobs anymore and simply cannot afford to save.
The truth might lie somewhere in between. It is increasingly difficult for Britain and other capitalist economies to compete with those countries that allow their governments to steer their credit systems and spending patterns towards exports and investment. But our own large current account deficit is also a result of populist policies that always seek to impose costs on businesses before consumers.
Whatever the explanation, the hard truth is that rebalancing the economy is a painful process. It means relying less on cheap imports and borrowing. It’s good that Fox is getting out and about (although we should not forget what happened during his over-active travel schedule last time he was in government), but becoming an export economy is about more than good PR. It requires major structural changes. The real question is whether voters are ready for it.
‘It’s good that Fox is getting out and about, but becoming an export economy is about more than good PR’
Liam Fox visits Pittards Leather Factory and Ethiopian Airlines Academy in Addis Ababa, Ethiopia’s capital, during his trade trip to east Africa