9 October 2018

“Build it in Britain”: the problems with Corbyn’s Trump-lite protectionism

by Brian Sturgess

Jeremy Corbyn’s aim is crystal clear: that taxpayer’s money would be used to intervene directly in the economy to promote the production of domestic as against imported goods and services. Protectionism by another name.

Apart from the evidence before my eyes that I am not writing this article on a Commodore PET computer with a memory of 4 kilobytes, sometimes it is difficult to read Jeremy Corbyn’s speeches without dreaming that I have time-travelled back to the 1970s.

The Labour Leader’s commitment to a ‘Build it in Britain’ industrial policy make’s one want to check the calendar date to see what era of failed government intervention is being referred to or how it is intended to be implemented: tariffs, subsidies, strategic stakes in the ‘commanding heights’ with easy access to capital or by creating privileged access to the domestic market for British firms, all forms of protectionism with significant economic costs raising prices and damaging competitiveness.

In July last year the White House branded the 29th week of the year to be ‘Made in America’ week and officials were wheeled out to promote American products. But the core of Trump’s ‘Buy American, Hire American,’ strategy has been the imposition of punitive tariffs against China and a major renegotiation of NAFTA with Mexico and Canada. Given the size of the United States and the Chinese economies retaliatory tariffs threaten a trade war which would severely damage global trade and welfare.

Since Jeremy Corbyn’s policy on Britain’s future relations with the European Union remain strategically and electorally ambiguous, the Labour leaders has remained silent on the role of protectionist tariffs in his ‘Build it in Britain’ programme. But Jeremy Corbyn’s aim is crystal clear: that taxpayer’s money would be used to intervene directly in the economy to promote the production of domestic as against imported goods and services. Protectionism by another name.

‘Build it in Britain’ as dreamed up by Jeremy Corbyn and his team of Shadow-Chancellor, John McDonnell and Shadow Business Secretary Rebecca-Long-Bailey, is a nostalgic heady brew fermented with old mercantilist yeast: it is Trump-lite, in that no mention is made of tariffs as a form of protecting British manufacturing; but it is Lenin-heavy in that it seeks to make the state, not markets, the main driver of investment, industrial structure and jobs. The main components of ‘Build it in Britain’ were laid down at Corbyn’s speech at the EEF Technology Hub in July. He trotted out Labour’s commitment to “reprogramme” the economy “so that it stops working for the few and begins working for the many,” but blamed Britain’s failure to “build things here again that for too long have been built abroad because we have failed to invest.”

Corbyn’s definition of investment seems odd and is quaintly nationalistic. Lack of investment, of course, is why the United Kingdom’s car industry exported 1.34 million cars last year, 80 per cent of total production and a historic high! This followed years of collective capital spending of nearly £6 billion by Nissan and Toyota, in plants at Burnaston in Derbyshire and Sunderland in Tyne and Wear. Or does Jeremy Corbyn’s definition of investment mean only investment by British-owned firms producing products consumed in Britain? Is the £199 billion of foreign direct investment into the United Kingdom in 2016 irrelevant?

Investment, á la Corbyn means what it has always meant to the Labour left: state directed investment funded by taxpayers. In his EEF speech he stated that the £200 billion plus that the state spends on the private sector, on out-sourcing and acquiring goods would be directed towards British firms particularly those operating in heath, defence and railways. Since my first job after University in 1975 was working for the poorly run socialist inspired British Railways Board, it is fitting to take railways as an example. In his EEF speech Jeremy Corbyn complained that “if you go to Germany you’ll struggle to find a train that wasn’t built there” an accusation implying that most, if not all the rolling stock on Britain’s railways, was imported. Perhaps the Labour leader should get his speech writers to carry out some research instead of going train spotting in Europe.

Let’s consider a few examples. In the last few years the train manufacturing sector has been reborn thanks to the British economy’s openness to foreign direct investment. In 2015, Hitachi opened a new manufacturing plant in Newton Aycliffe in County Durham which has since received over £100 million in investment in a facility to build intercity and commuter fleets. Hitachi’s first order was for the government-led Intercity Express Programme (IEP) and it is already producing rolling stock for the East Coast and Great Western main lines. Last month Hitachi was employing a workforce of over 700 in the factory, but has spent nearly £628 million over the last few years supporting a supply chain of 1,166 British companies.

In July of last year Spanish train maker CAF announced plans to build a train manufacturing plant in South Wales. In March of this year German rail train maker Siemens, signed a long term agreement for a lease of land in Goole, East Riding of Yorkshire, with plans to establish a new state-of-the-art factory to manufacture and commission trains with an estimated investment of up to £200 million. Siemens has already created 200 new jobs in Hampshire to expand its train refurbishment works, und so weiter, as they say in Berlin.

It would be tedious at this stage to carry out a similar analysis of the health and defence sectors, but the main point displayed by ‘Build it in Britain’ is a complete lack of understanding of the benefits of trade and in the need for an economy to be open to foreign direct investment and not merely state directed investment. There is a great need for Jeremy Corbyn’s younger supporters to learn some history. The investments made by the Industrial Reorganisation Corporation by Harold Wilson’s government in 1966 and the National Enterprise Board created in 1975 by the same premier contributed significantly to the declining competitiveness of the car industry, computers and microelectronics and shipbuilding to name just a few cases.

The recent revival in railway manufacturing in Britain would not have occurred if choice had been denied to the rail industry by protecting a domestic supplier with a buy-British policy. Jeremy Corbyn’s belief in an all-conquering German rail manufacturing industry bolstered by a form of a lack of national preference in Britain can probably be traced to 2011. In that year Siemens won the Thameslink train renewal contact beating Bombardier Transportation putting the future of the company’s Derby based train manufacturing facility in doubt. As a result of the closure of French company Alstom’s Birmingham plant in 2005, this left the manufacture of Canadian owned Bombardier’s Derby facility as the sole location for the manufacture of rolling stock in Britain.

With news, as with policies, the Labour leader sees no need to reboot his database. The acceptance of foreign direct investment to manufacture in a country to serve the domestic market and to participate in world markets means that British jobs are secured. The ownership of assets is irrelevant.

The real reason for Siemen’s success is that its products appeal to rail buyers across the world. In 2016, the German rail industry’s domestic equipment sales fell by 12 per cent year on year to reach €5.7 billion, while exports rose by 5 per cent to €6.1 billion. Free trade and producing for larger markets creates jobs and makes countries wealthier in the long-run. The evidence for this is overwhelming, but at a seminar recently I was asked how long is the long-run and was it not preferable to protect industries in the short-run. The answer is that the protected group might raise its income in the short-run, but only at the cost of other industries and consumers, but in the long-run even the protected industry itself suffers. Tariffs will eventually have a negative effect on competitiveness protecting inefficient firms and removing the incentive to innovate lowering growth rates and the return on capital.

The apparent short-term success of Donald Trump’s backing for Made in America may have impressed Corbyn. He was not the first politician to be swayed by the lure of domestic preference. Oswald Mosley, a rising star in the Labour Party during the early 1930s, before he founded the British Union of Fascists, also discovered what he thought was the secret formula of ‘make it at home’ after visiting the United States. But America’s domestic industry then and now is cosseted by the size of its immense domestic market meaning that the short-run gains from protection will give its economy a sugar-high that will last longer than in more open economies.

Britain does not have that luxury. External trade, exports plus imports, in the United Kingdom is over 60 per cent of GDP whereas for the United States it is less than 30 per cent. Trade is essential to Britain and the best role of government is to facilitate trade by opening the economy up to global markets by negotiating good trade deals.

Brian Sturgess

Brian Sturgess is Managing Editor and Chief Economist at World Economics, and worked as a consultant to the Competition Directorate of the European Commission.