The British government might be taking the first steps towards what many considered unthinkable, the part-nationalisation of a manufacturing industry in the interests of the nation; specifically, Tata’s UK steel business.
The UK’s supposed uncompetitiveness in the steel industry has been put down to global oversupply. China, Japan and South Korea are all seeking to protect their own capacity through so-called dumping of cheap steel on world markets. But there is a deeper context – and steel is but one of the many victims in the long sorry story of the decline in the UK’s manufacturing capacity. It would seem the government is unable to achieve the long-touted goal to “rebalance” our economy – at least, under current policies.
One sign of our unbalanced economy is the persistent balance of trade deficit – we buy more than we sell. This deficit does not indicate UK manufacturing is intrinsically uncompetitive compared to foreign competition, rather that our exchange rate with other currencies is over-valued. In theory, market forces should force currency devaluation on a nation with a trade deficit – but such forces keep the pound “high” because we attract sufficient foreign exchange to meet our needs (and prevent depreciation). We do this, not through exporting, but through the capital account.
For example, the UK attracts foreign currency by selling off domestic industry. Since 2004, more than £400 billion worth of UK companies have been sold to foreign owners; all things being equal, this inflow of foreign exchange strengthened the exchange rate, “crowding out” an equivalent amount of UK exports from world markets.
We should bear in mind that, in some cases, Britain is better off as a result of foreign investment in UK companies. It cannot be denied that foreign ownership has been good for the UK’s car industry. Conversely, foreign ownership is harming the aerospace sector and the overall benefit of increasing foreign ownership is disputed to say the least.
We might also consider the perverse effects of foreign investment in the UK. For example, if China invests hundreds of millions in Manchester Airport, or in the HS2 rail project, or in nuclear power, this inflow of foreign exchange will cause the exchange rate to appreciate, once again disadvantaging our exports.
There are issues at stake here beyond mere economic concerns. Much of the EU referendum debate relates to whether the UK is in charge of her own destiny, yet it is not clear how sovereignty is served through the sale of our industry overseas.
It is not only the title deeds of industry we are inclined to export, we also sell our residential property overseas. Estimates of the precise amount vary, though Transparency International estimates that anonymous offshore companies own one in ten London properties and £120 billion worth of English and Welsh properties are owned offshore. In many cases such “investors” keep their purchases vacant, thus exacerbating the national housing shortage. That London property is seen as a (relatively) safe haven for international “dirty money” does not help this situation.
Looking back at oil
Our passion for disadvantaging our manufacturing industries is longstanding. In the 1980s and 1990s, the UK generated foreign exchange through the export of North Sea oil and gas. When a nation “earns” money selling such non-renewable resources, the exchange rate appreciates and this relatively disadvantages other exports. It’s a phenomenon known as “Dutch disease” – a term coined during the 1970s when the Netherlands struggled to manage the impact of large gas reserves.
As Sir Michael Edwardes of British Leyland argued in 1981, if the cabinet of the day could not devise policy to keep oil revenues from hurting the UK economy, it should “leave the bloody stuff in the ground”.
If the UK had learned from the Norwegians and established a sovereign wealth fund, we might have prevented excess appreciation of the currency by investing overseas. Depending on which estimate you look at, by now, the UK’s wealth fund could have been worth £400 billion or as much as £650 billion. As it is, hundreds of billions of pounds worth of UK exports have been priced out of world markets.
Stopping the buck
Ultimately, it is reasonable to conjecture, that the relative uncompetitiveness of the UK’s exporting industries has less to do with how hard we work and a lot more to do with our national and political ideology. Oriented, as we are, to favouring the short-term over the long-term, we could do more to make sure our businesses and property serve British interests.
Other governments seem to be happy enough to invest in the UK for the benefit of their citizens and foreign businesses seem to be more than keen to invest profitably in the UK. Can it be that our political leaders feel they lack the ability to do the same – until they are faced with a distressed asset of questionable value, as seems to be the case with steel.
We haven’t even attempted here to assess the level of foreign capital attracted to the UK by increasing levels of household debt, underpinned by quantitative easing. But one thing remains clear: if we want to earn our way in the world, we have to break the bad habit of “selling the family silver”. If we hope to rebalance the economy and achieve balanced trade with the rest of the world, it’s not just manufacturing we need to address: we must learn to balance the capital account too.