The global economy is changing. We must change too – or face ruin

The West is waking up to the threat of China, yet we still look dangerously complacent by comparison

As Britain basks in the Coronation, businesses and investors are asking a serious question: we enjoy a long national story, but what is our future? For while Westminster focuses on the ephemeral and frivolous, the world economy is changing rapidly.

Through the CHIPS and Science Act and Inflation Reduction Act (IRA), America is throwing huge subsidies at companies producing semiconductors and developing green technologies. The subsidies are part of an industrial strategy that is encouraging innovation and growth among US companies, and sucking in entrepreneurs, innovators and businesses from other countries – including Britain.

American policy is a response, mainly, to the challenge of China, which is increasingly assertive on the world stage and whose economic development has come at the expense of Western workers. Since China acceded to the World Trade Organisation, tens of thousands of US factories have closed and millions of manufacturing jobs lost.

This is an America First policy. President Biden aims to create more mid-skilled jobs, keep the US at the forefront of technological development and build resilience vis-à-vis China. For Covid-19 might yet turn out to be a harbinger of something even more disruptive and dangerous: a Chinese attack on Taiwan would jeopardise more than 60 per cent of the world’s semiconductors, and more than 90 per cent of the most advanced ones. It might even trigger war between America and China.

The EU has asked Washington to grant some European goods IRA tax credits, with only limited success. While there are concerns that an EU industrial strategy and subsidy regime might pitch countries and businesses against one another, rather than coordinate capabilities, Brussels has its own chips strategy and green industrial plan.

Yet Britain is quiet. The Chancellor has warned against subsidising business and defended international free trade. Not unreasonably, the Treasury worries about the fiscal consequences of following America. Officials fear the danger of leakage, where foreign industry benefits more from our subsidies than British firms. Instead, they believe, we might benefit from leakage from subsidies abroad.

This is wishful thinking. America is offering $369 billion for green technology alone, and has, in effect, declared global free trade dead. With countries like China already supporting their own industries, imposing tariffs, committing industrial espionage, manipulating currencies, dumping goods and granting hidden subsidies by suppressing rights and wages at home, it is doubtful that global free trade ever really existed. The pretence that it lives on – still popular among economic liberals, especially in Britain – must end.

So, too, must the pretence that industry does not matter. Manufacturing has declined as a percentage of British GDP, and as a source of employment here, over the past half century. As it declined, well-paid mid-skilled jobs also declined, productivity growth slowed, and our trade with the rest of the world fell into deficit. As a result we desperately seek foreign investment to sustain our currency – and that investment means foreign ownership of British firms, a loss of control and a lack of interest in domestic skills and supply chains. Increasingly, it means the acquisition of non-productive assets like property, making life harder and more unaffordable for ordinary Brits.

This is not, as economic liberals and Treasury officials suggest, some unavoidable outcome, an inevitable stage of development for a “mature economy”. In Germany – richer per capita than Britain – manufacturing makes twice the contribution to GDP that it does in Britain. The US – far richer than we are – also has a bigger industrial base and government policy will soon see it grow further. British firms – from tech, energy, automotive and other sectors – are discussing relocating and investing in America, instead of at home.

The longer it takes us to discover what the rest of the world knows, more companies will leave and more damage will be done. We cannot counter a newly competitive, neomercantilist world with open borders, unilateral free trade and the same old orthodoxy of non-interventionism. We need a completely new approach based on investment, innovation and re-industrialisation.

For all the complaints that Brexit has not seen a wave of radical deregulation and tax-cutting – although the latter was attempted, disastrously, by Liz Truss – industrial strategy is Britain’s Brexit challenge. Outside the European Union, we can make our own rules for public procurement, state aid and subsidies for strategic industries.

Of course, there are many other things to do, and many might have been done within the EU, but the changes we need have become even more important after Brexit and as the world economy becomes a more competitive environment. The tertiary education system – which creates huge personal debts, fails at least half the country’s 18-year-olds, and drives a swathe of immigration – should be torn up and replaced with a model that provides the research, elite graduates and technical education we need.

We need to go all-in on an energy strategy with nuclear power at its core. We need to heavily tax foreign ownership of assets like land and property. We need radically better transport infrastructure. We need strategies for the industries where we excel, like life sciences, and for rapidly developing industries where we have great advantages, like compound semiconductors. We need to build up domestic supply chains. We need to put ourselves at the forefront of the artificial intelligence revolution.

The world is changing fast but often it feels like Britain is standing still. This weekend was a reminder of our constitutional continuity and the successes of our past.

But unless we are willing to tolerate decline and the pain that comes with it, we must face the future – with confidence but most importantly, with a plan.

We need to heavily tax foreign ownership of assets like land and property