When we joined the Common Market in 1973, about one third of our national income came from manufacturing. Now the ratio is less than 10%. Is there a connection here? There is, although it is not that straightforward and the links need a bit of untangling.
The main reason why the UK has deindustrialised to the extent it has is that the monetarist and neo-liberal policies introduced from the 1970s onwards were very largely responsible for the UK exchange rate being far too high during recent decades for most industries to survive. Between the late 1970s and the early 1980s, the pound strengthened by around 60%. It then went up a further 50% in the late 1990s and 2000s as the UK, driven by “the market knows best” philosophy of the time, sold off its companies, bonds and property right left and centre. No wonder most UK industry, faced with unmanageable competition, collapsed and manufacturing migrated to the Pacific Rim.
It was not, however, just the UK which adopted neo-liberal economic policies. So did the EU, but in some respects in different ways from the UK. In particular, by putting control of inflation and government borrowing constraints centre stage, right across Europe, economic growth slowed down . Some countries, such as Germany and Holland, still have strong manufacturing bases but generally, the effect of the establishment of the Eurozone has been to lead to deflationary policies, discouraging investment, slowing down productivity growth and producing high unemployment.
So what effect is Brexit likely to have on UK manufacturing? Tying ourselves into staying in the slow-growing Single Market and the Customs Union is unlikely to help us much, if at all. We have an enormous visible trade deficit with the EU27 - £96bn in 2016. We will no doubt continue to sell high-tech products such as arms, aerospace, vehicles and pharmaceuticals abroad , but not many low- or medium-tech goods. What a contrast to Germany where less than 20% of their exports are high-tech, with an even lower ratio for Holland. The EU is unfortunately not a buoyant market for UK manufacturers.
There is, however, an alternative scenario. We fail to agree a deal which keeps us in the Single Market and the Customs Union and we opt to trade with the EU27 on World Trade Organisation (WTO) terms – with or without a free trade deal. The result is that the pound plunges, like it did immediately after the June 2016 EU referendum. All the pundits will then predict disaster for the UK economy but they will almost certainly be wrong, just as they were when we came out of the Exchange Rate Mechanism (ERM) in 1992. Inflation then went down and the economy grew every year for the next 15 years. This might be exactly the opportunity which UK manufacturing needs.
To get the UK economy rebalanced, we very badly need to get the proportion of our GDP coming from manufacturing up from less than 10% to at least 15%. This is the only way to get the economy growing again at a reasonable pace, to provide hope to the regions of the UK which have been impoverished because they do not have enough to sell to the rest of the world, and to stop the UK bleeding from its huge foreign payments imbalances. It could just be that Brexit will provide us with exactly the chance we need to get all of this done.
Labour Leave shares a number of viewpoints from external commentators, both Leave and Remain, without necessarily endorsing any of the viewpoints therein.
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