Since 1997 Labour has taken a consistent line that the decline of Britain’s manufacturing industries is inevitable. Tony Blair, along with numerous ministers, has repeatedly articulated the view that Britain has to face up to the diminishing importance of its manufacturing sectors. The explanation is that in the current era of globalization, the closure of factories and the shift of production to cheaper overseas locations in Asia and elsewhere is an unavoidable economic reality.
The backbone of the policy response to this problem has been to embrace the service sector. In particular, this means the kinds of advanced service industries concentrated in London and the south-east, although sectors such as tourism are also seen as a beacon of hope. Furthermore, Labour has also been vocal on the (partially correct) argument that Britain needs to re-skill. Where manufacturing jobs are lost, people need to be equipped to re-train and find jobs in different sectors. Again, much is made of services, creative industries and the knowledge economy. We hear the mantra that Britain can simply no longer compete in manufacturing and therefore we must all adapt.
This month’s trade figures, however, represent an important signal with respect to these policies – Britain’s trade deficit has now deteriorated, as the headlines so gleefully stated, to its worst position since 1697. The cause is the ongoing decline in manufacturing. Despite the fact that there is a trade surplus in services, Britain had a whopping deficit of £56 billion in 2006. A very large proportion of this is accounted for by imported manufactured goods.
This strongly contradicts the received wisdom for the last twenty years – that Britain’s growth in services can plug the gap left by declining manufacturing. Last month’s figures clearly show this is not the case. It is true that the service sector – headed by London and its role as global city – is growing. And it is true that services are the leading growth engine in the UK economy. But they are not growing fast enough.
This cannot go on. If Britain’s economy is to maintain its position globally, we cannot just rely on services. No other advanced economy relies solely on services, and the evidence suggests that many service industries may also be vulnerable to relocation to India or China in the near future. Britain cannot afford to blindly roll over and let its manufacturing sector disappear. And no other advanced economy has done so either. Japan, for example, is a high-cost economy, and retains its manufacturing base.
What is needed is a complete shift in policy perspective. The first step in this is to realise that current arguments about the inevitability of decline are based on several myths around trade liberalisation and a ‘level playing field’ in the global economy. The US may preach the need for open markets and limited state intervention in industry, but it, Japan and the other Asian economies have long fostered and supported their manufacturing sectors in a variety of ways. Whether that is US expenditure on military hardware in California, or heavy state involvement in board-level strategy in large firms in Japan or South Korea, it varies. But it is an illusion to think that the rest of the world just leaves their manufacturing sectors to fend for themselves in global markets. Every major successful manufacturing region in the global economy at the moment retains the heavy fingerprints of pro-active support from governments in one form or another.
Labour has done much that is good to help manufacturing since 1997. There has been investment in education, in skills training and labour market reforms. But its policy has never fully recovered from the ‘supply-side’ dogma preached in the 1980s. Having a skilled workforce, the right infrastructure or the presence of elite university research is necessary but not sufficient for economic success in today’s global economy.
The new leader must change this approach. Policy towards manufacturing needs a radical rethink. Above all it needs to be much more directly supportive and pro-active, backing new and innovative manufacturing sectors. Of course, some types of manufacturing will not be viable, so there is also a need to prioritise those that are most likely to thrive and grow. They are likely to be in cutting edge areas. Renewable energy generation and carbon-free transport spring to mind for a start. These will be massive markets in the coming decades. And they are already ones where Britain appears to be missing the boat. We already buy our wind turbines from Denmark, and it will be Japanese-made carbon-free cars that we drive in twenty years time unless things change.
To achieve any of this, and reverse the current situation, future UK manufacturing success will require a highly active role for the state. The Government should consider direct investment in those manufacturing firms that are global leaders, along with long-term investments in research and innovation. It needs to make substantial and strategic investments in cutting edge industries, as well as in the accompanying training needs. There are also important problems to be addressed regarding the financing of our manufacturing industry. Again a new state role is required. New kinds of cheap long-term loans for manufacturing could address the inherent short-termism in the UK financial system. Tax-breaks should also form part of this package, particularly in acting to incentivise manufacturing firms to invest in production for likely new markets such as those for ‘low carbon footprint’ goods.
In a different policy sphere, the British Government could and should do much more to support the manufacturing industry to establish better overseas trading links. Rather than leaving UK firms adrift in the sea of global markets, the UK should emulate other major manufacturing economies in actively supporting UK-based industries in coordinated efforts at understanding what export markets want. And last but by no means least, we need to reconsider whether service sector growth is the only path to regional regeneration in the poorer parts of the UK.
New Labour has not been bold enough on manufacturing. It has felt more powerless than in fact it is. Policy interventions have been modest, and have not addressed the root of the problem. It is about time that changed.