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Branch economy blues

Mon, 20th Aug 2018

One of the craziest things about Brexit (I know, there’s plenty of competition) is choosing to impose it on what is now a branch economy to the rest of the world.
With its chronic trade gap (a record 5.2 per cent of GDP in 2015), the UK has long been dependent on ‘the kindness of strangers’, as Bank of England Mark Carney memorably put it last year, to cough up the difference when confidence in the economy is weak and sterling under pressure.
This vulnerability has long been camouflaged under weasel words about Britain being ‘open for business’ and ‘a magnet for inward investment’ because of its free-for-all market for corporate control and ‘flexible’ labour market. Indeed, a bit like Northern Rock basing its business model on tapping the day-to-day money markets rather than doing the work of attracting long-term depositors, successive governments have made a deliberate policy of soliciting easy money from fair-weather friends by offering low corporation taxes and non-dom residence deals for individuals.
But relying on inward investment is a dangerous game. In this case, foreign investors have enthusiastically taken us at face value (why wouldn't they?), snapping up many of our most advanced, firms and leaving a few branch assembly plants and if we’re lucky localised R&D facilities behind to take advantage of the UK’s cheap labour. The family silver having long been flogged off, what remains is a few workaday pots and pans.
As a former adviser to George Osborne, Lord Jim O’Neill, recently noted, as a strategy to improve Britain’s competitiveness the policy has been a flop. Investment has remained ‘very weak absolutely and relatively to many other countries. Despite this remarkable drop in ongoing corporation tax and rising profitability’ – not to mention a weak exchange rate – ‘… it’s not done the job it’s supposed to do.’ These days the biggest manufacturing sector of the erstwhile workshop of the world is food processing.
Meanwhile, few substantial companies today are wholly domestically focused, and to that extent their loyalty to one geographical territory is limited. For some large firms (WPP, HSBC come to mind) switching nationality is barely more emotionally charged than changing an overcoat. But as President Trump has discovered, even for an entity as iconically and profoundly American as Harley Davidson there comes a point when hard economics has to take precedence over national sentiment, however deeply felt.
In the UK’s case, the City, the motor industry and suppliers to the aerospace and defence industries – in other words, some of the country’s last purveyors of traditionally skilled jobs and regular pay packets – are first in line if tariffs and border controls go up when we leave Europe, making a mockery of the idea of Brexit as a means of taking back control of our economic destiny. Rather, it reveals its fragility.
Airbus – which directly employs 14,000 in the UK and whose supply chain supports an estimated 110,000 more – has spelled out the consequences. ‘Until we know and understand the new [post-Brexit] relationship,’ it said in a recent internal risk assessment, ‘Airbus should carefully monitor any new investments in the UK and should refrain from extending its UK suppliers/partners base.’ If the UK leaves without a deal, it will be obliged to ‘reconsider its footprint in the country, its investments in the UK and its dependency on the UK’. Even a planned departure will impose a penalty in terms of red tape and operational friction.
The wider significance of this is hard to overstate. As James Bloodworth eloquently recounts in Hired: Six Months Undercover in Low-Wage Britain, his sobering account of spells working for Amazon, Uber and as a carer for the elderly, swathes of the UK’s small-town hinterland have never recovered from the last great industrial retreat in the 1980s.
What replaced factories and mines, and their supporting services, were first call centres, then retail and warehouses, now increasingly delivery and care homes; full-time jobs became part-time, then self-employed and finally zero-hour gigs; and pay packets have shrunk accordingly. For all sorts of reasons, those industrial jobs aren’t going to come back, but their careless abandonment has come back to bite us with a vengeance. The delayed price we all are now paying in terms of personal disengagement and despair, the unravelling of communities and local pride, and not least political unrest is higher than ever imagined at the time. Call it 'shit life syndrome'.
Ironically, Theresa May’s instincts after the botched election in 2017 were the right ones. Her espousal of industrial policy and workers on boards apparently aimed to address some of the long-term underlying economic discontents that were eventually manifested in Brexit. But the fraught process of leaving has sucked so much energy out of politics that none remains to do any of the things necessary to make it a success, or at least limit its failure. When Northern Rock’s access to short-term cash was cut, its business model collapsed and it went broke. The UK economy won’t fold like an insolvent building society. But make no mistake: Brexit puts its business model (such as it is) on the line. In the absence of deliberate action to strengthen it, all we have is hope that in the long term it doesn’t suffer the same fate.

 

 


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User comments

charles :: 21st Aug 18
Well said, Simon, exactly the sort of analysis that has been sadly lacking from our academic business institutions.
Henning Sieverts :: 21st Aug 18
I couldn't agree more, and would extend the thought to include the parliamentary institutions and the major business groups.
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