Re­bal­anc­ing the UK into an ex­port econ­omy will need painful changes

The Daily Telegraph - Business - - Business Comment - JULIET SA­MUEL

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

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