Gerhard Schnyder | May 2021
Trade deals with countries around the world have figured prominently in the UK government’s post-Brexit economic strategy. The rollover of the free trade agreements (FTAs) concluded by the EU when the UK was still a member has been remarkably successful. However, the rollover of these agreements only means that the UK does not lose any of its existing access to other countries’ markets. To compensate for any decline in trade with the EU, the UK government will need to conclude new trade deals. Here, the Government’s Integrative Review promises an ‘Indo-Pacific tilt’ through FTAs with countries like Australia, India, and New Zealand, as well as membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Yet, much of the political rhetoric around UK’s post-Brexit FTAs with countries around the world remains vague or unrealistic regarding what the UK can bring to the table in negotiations over these FTAs. Indeed, despite the political focus on exports as driver of post-Brexit growth, Britain never was an export-led growth model like Germany. According to post-Keynesian economists the UK economy is mainly driven by domestic, private consumption, not exports – which explains the persistent yearly trade deficits (the UK imports more than it exports).
Turning the UK into an export-led model would require a fundamental transformation of its economy. The first question one would have to ask is: What could the UK export more of?
An obvious answer is high-end business services. The UK is the world’s second largest service exporter and runs a service trade surplus every year (exporting more services than importing). So, could exporting business services be the motor for post-Brexit growth?
That is highly unlikely. Services liberalisation has been notoriously slow compared to goods, as the Institute for Exports also noted in a recent report. There are also doubts over whether the UK Government really will make service liberalisation its priority. The prospects of making any major progress on service FTAs seem slim. More importantly however, if the UK’s post-Brexit growth strategy were to rely on high-end services exports, this would directly counteract another post-Brexit priority: ‘levelling up’ the country. Much of the business service industry is concentrated in or around London. So, a service-export led growth model would possibly reinforce regional inequalities. Such a model does hence not seem realistic or desirable for the UK.
What alternatives are there? Fundamentally, there are two ways in which a country can compete in the global product markets: The ‘high road,’ whereby a country specialises in the production of high value-added goods that are not cheap but can be sold in the high-end markets. Germany has chosen that road. The alternative is the ‘low road’ strategy of competing on price, i.e. a country specialises in the production of cheap goods for low-end mass consumer markets.
The latter strategy would mean competing with countries like China. It is doubtful, that British manufacturing could rival the low production costs of countries where the average wage is a fraction of the UK’s wages. If it tried, that would put further pressure on those who already are aggrieved by stagnating wages and falling living standards.
What remains is a strategy to reindustrialise the country by (re)creating a competitive high-end manufacturing industry. This is indeed in line with the promise to bring back well-paying manufacturing jobs to areas that have suffered from the “China shock” (i.e. declining living standards amongst manufacturing workers due to competition from cheaper imports from China). In the US similar promises have and been criticised as ‘economic nostalgia.’ Yet, setting that criticism aside, such a reindustrialisation would primarily depend on two things: Non-university educated British workers’ productivity and skills. To make Britain an attractive location for high-end manufacturing would require investment in human capital so that the companies find the right balance between the high skills, high productivity, and relatively high salaries (compared to a worker – say – in China). Investing in vocational skill formation is an important strategy here, with which Britain has struggled for a long time. Although, some politicians have recently reiterated their commitment to ‘skills, skills, skills.’
More fundamentally, however, the key point is that any successful trade policy needs to be supported by a domestic industrial strategy. Yet, as the IOE recently lamented: “there is no truly joined up trade and industrial strategy that is capable of boosting UK competitiveness and unlocking export potential.” To the contrary, the government has recently decided to abandon the industrial strategy developed in 2017 by then Business Secretary Greg Clark.
This is a risky approach. Eliminating trade barriers without a strategy to support the competitive advantages of domestic industries will hardly bring back decent jobs to Britain’s former industrial heartlands. Rather it will end in more tears and misery.