International Trade Opportunities

Lord Mendelsohn Excerpts

Thursday 7th July 2016 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I draw attention to my entry in the register of interests, which currently holds a balance of winners and losers from the post-Brexit crunch. I congratulate the noble Baroness, Lady Mobarik, on her accomplished and comprehensive speech, in which there was much to agree with. It was very valuable to have the debate introduced and such an effective case made. I shall try to be helpful. I am hoping, in this moment when we have suspended animation, to try to make a case—and to convince the Government that it is necessary—for being bold and expansive. We are in a very different place, but we are where we are, and we have to think about our challenges and the right prescriptions. In that regard, I thought the speeches of the noble Lords, Lord Stoneham and Lord Green of Hurstpierpoint, were outstanding. Both identified that we need to be bold and that our plans need to be based on a correct estimate of our challenges. It has been clear for a long time that our trade has underperformed. One simple measure is how Germany’s trade with countries such as China has rapidly grown, way outside our own capability. Those sorts of things are great illustrations of some of the challenges that we face.

I shall touch briefly on three areas. First, there is the Government’s performance on promoting exports. Secondly, there are some of the challenges for exports, which we must address, as a consequence of the decision to leave the EU. Then I shall make some final observations on the risks ahead for our country.

We on this side of the Chamber had high hopes that, when the noble Lord, Lord Maude of Horsham, became Trade Minister, we might at last see some serious progress in addressing clear structural weaknesses in government that were holding back our capacity to perform effectively compared to our peers. I am not suggesting that it made us believe that we would hit £1 trillion, with a doubling of trade, but it certainly gave us some expectation that the whole of government could be galvanised. Traditionally, we have expected UKTI and UK Export Finance, admirable though those organisations are, to carry the sole burden of supporting exports. A consensus had formed that the whole of government needed to be mobilised, and the increasing engagement of the Foreign Office illustrated only how our performance lagged and how much more we could do. We can do better and we need all our overseas posts to show the laser-like pursuit of Britain’s commercial and economic interests—and, across government, all the departments that deal or engage with business sectors can encourage, support and help businesses to explore overseas opportunities. We were pleased that someone who had the ability to galvanise Whitehall was chosen to make this happen, and we are disappointed that there seems to be a gap. This is not to criticise the current Trade Minister, who, as I read in my Bloomberg stream, is doing a very fine job of flying the flag in his role. But we need an expanded group of Ministers to take on all these challenges. The noble Lord, Lord Green of Hurstpierpoint, made the right point about how we have to expand, and on the level of expansion that is required. We need to make the most of all those willing to fly the flag for British business abroad, and I thank all those Members of both Houses who act as unpaid trade envoys. Our business ambassadors also play an important role. But the case is clear that we have to scale up, and scale up massively.

We must look at what is on the agenda. It is not just a small amount of trade promotion; in the round, we have to look at how we will approach the WTO framework and the multilateral negotiations, the 100 or so renegotiations of trade agreements, as well as how long they take and how they are covered. The EU is in the midst of arrangements, for both implementing and discussion, with Canada, Singapore, the United States, Japan and Vietnam, India, Mercosur, Australia and New Zealand, Mexico and Chile. That is as far as I could work it out—I suspect that it is a whole lot more. So what are we going to do bilaterally? That is a huge challenge, and we will have to make sure that we are prepared to address it with the right resource.

On the second series of issues, we are concerned about the size of challenges ahead in dealing with the consequences of Brexit. There are myths about our current circumstances. First, on the argument that a decline in the pound’s value could stimulate exports, offsetting any downsides from leaving the EU free trade area, the evidence suggests that, at best, the answer is “not enough”, and by some distance. The stimulating effects of currency depreciation have been gravely overstated. A fall in sterling merely compounds the problem. It is no solution. We are import-dependent for food, drink, raw materials, semi-manufactures and finished consumer goods. Imports are relatively inelastic with respect to price. A depreciation merely generates domestic inflation or damages margins in manufacturing, wholesale and retail. Although weak currencies typically present an opportunity for increased output, this luxury is not available to the UK. Our exports concentrate on highly sophisticated services and goods, such as financial, legal and IT services, as well as pharmaceuticals. The economy’s core exports naturally suffer from low price elasticity. In volume terms, therefore, a 1% depreciation of the pound increases the UK’s exports by a mere 0.12 %. Meanwhile, a widening trade deficit, caused by a falling pound pushing up import prices, casts uncertainty on the UK’s capacity to substitute its large import values with domestic production. The result is rising consumer prices with little or no improvement in exports in return.

What is more, as the UK manufacturing sector continues to decline—we had an outstanding speech from my noble friend Lord Bhattacharyya on manufacturing issues—any further depreciation of the pound will lead to price increases. Currently, the UK’s trade deficit is experiencing its highest levels in eight years. With a lightweight manufacturing sector, the UK is unable to plug the widening trade gap domestically, causing price elasticity of supply to remain at zero. We have been far too relaxed over the decline in manufacturing and we are suffering the consequences.

There is also a fallacy that there will be some deregulatory boost from all this. I shall not go into that in too much detail, but those things are specious and we have to understand that we need some regulatory push to ensure that we have effective markets. I look forward to later in the year when the Minister introduces the better markets Bill. I think we may be able to accomplish some things there.

We also need to address the fact that, as a result of the shocks and challenges in our position, we need to institute some form of industrial policy, using our advantages to support industries while we have a competitive advantage, with a strategy to ensure that nothing makes it less attractive for large multinational companies to favour the UK over other countries, support for domestic clusters of industries, and connected ecosystems to drive innovation. Where we have capabilities in industry and science and technology, we need a larger global presence, and we must focus policy—on skills, infrastructure and other areas of capital and financial support—to make sure they can prosper. These things are essential.

We have two critical sectors on which we must keep a close eye. Before the referendum, the motor industry was the UK’s second largest export industry, worth £3.2 billion, an increase on 2015. Our automotive industry produces an average of 1.6 million cars each year, of which 77% are exported abroad, of which 58% are sent to EU countries. That is absolutely critical. In addition, the pharmaceutical industry is of major concern. I hope the Minister can give assurances that the EU regulatory approval system that aids the faster dissemination of drugs between the EU and UK will be a priority discussion in future negotiations. I would be grateful if the Minister could also address the question of the EU Medicines Agency, and our role in and view of it, and whether it is likely, given that it is based in London, that it will have to relocate in the circumstances of our exit.

There are some major issues that confront us. The noble Lord, Lord Green of Hurstpierpoint, made the speech that I wish I could make, but he set the context for the issues around the current trade deficit. Can we pay our way? Can we make enough from exporting to pay for our imports? Can our invisible exports, whether they are services, tourism, or things such as insurance—or even income generated from our overseas investment—help us to deal with this? We are now in the worst position in our history. Never has the Government’s inability to meet their objective and balance trade been starker. There are two serious crises. Our weak export performance, no matter what we have done, no matter what gloss we put on it, does not address where we need to be. Foreign direct investment is hugely underperforming.

There is one matter to which we must turn our attention. The money that we earn from British-owned overseas businesses minus the outflows to overseas owners of foreign-owned businesses located here is now negative. There is now a £250 billion deficit in the value of UK assets owned by foreign companies compared to foreign ownership. This number is only going up. FDI is now likely to sharpen the current account deficit. When I read the Government’s April press release headed:

“UKTI reveals record number of UK businesses looking to export”,

I raised a glass. Notwithstanding my scepticism when I read such things about when the records began, what they are and the nature of the data that were collected, I raised a glass, but it is nowhere near enough. Even before the decision to Brexit, trade, our current account deficit and FDI meant we were facing huge underperformance and there were conditions for major problems to our GDP, so we need the Government to rise to this new level of threat as well as to the opportunities. I appreciate that the Minister cannot provide the answers required in our current political circumstances but, most importantly, are she and the Government prepared to accept the level of the crisis we face? At a time when we can do something about it, I hope she is.