Queen’s Speech

Lord Tugendhat Excerpts

Monday 13th May 2013 Lords Chamber

[Lord Tugendhat]

My Lords, I will focus on one of the biggest disappointments of our economic reforms over the past few years. I refer to our failure to expand our exports as rapidly as had been hoped, and in particular to expand them outside the eurozone, despite the 20% devaluation of sterling on a trade-weighted basis since 2007. Ministers invariably place the blame for this on the sluggish performance of the eurozone. Certainly the eurozone’s sluggish performance has played a significant part, but as an article on UK export performance in the February issue of the Bank of England’s Inflation Report points out, UK exports have increased by much less than those of several eurozone members, including Spain, Italy and Portugal, for whom the eurozone is also their major export market.

The Bank of England suggests that part of the reason for this is the weakness in demand, since 2007, for financial services provided by banks and other financial institutions. Devaluation cannot do much about that—which, given the composition of UK exports, shows the limitations of devaluation as a means of boosting British exports. However, devaluation should have given a boost to British manufactured exports beyond the eurozone, and our failure to make progress on that front is particularly disappointing.

The contrast with Germany is particularly striking. Against the background of rising trade with both eurozone and non-eurozone countries, the balance of Germany’s trade has shifted in favour of the latter. In 1999, when the euro began, some 45% of Germany’s trade was with other eurozone countries—now it is 37%. The fastest-growing partners for German foreign trade include China, India, Korea, Indonesia and Brazil. Within the next few years China is expected to become Germany’s biggest trading partner.

I accept that the quality and composition of German manufactured goods are such that overall they are always likely to outperform ours in that sphere. This is a sad fact, but, I fear, true. None the less, why are we so stuck in the eurozone, as Ministers keep pointing out, while they are so much more successful at breaking out into markets in other parts of the world? The single market is meant to be a launch pad for selling to the rest of the world, not a contemporary equivalent of imperial preference. Germany and other countries have achieved that break-out, and I wonder why we appear to have so much difficulty in doing so.

This is a complex subject, and there are many reasons for this situation, but I ask the Government—if they cannot reply tonight, perhaps they will do so later—whether they feel that ownership has anything to do with it. The great bulk of German industry is German-owned, and free to seek markets wherever its management sees fit. By contrast, Sir Alan Rudge has recently pointed out:

“The UK is home to 228 large manufacturing companies … and only 93 are UK-owned”.

I have always been a great supporter of inward foreign direct investment. Many foreign companies have made a huge contribution to modernising the British economy, improving the quality of its management and introducing new ideas. The spectacular revival of the British motor industry, thanks to Japanese and German investment, illustrates this point very vividly. Where British ownership failed, Japanese and German ownership has succeeded and the United Kingdom has benefited enormously.

However, it cannot be gainsaid that much of foreign direct investment into Britain has been made to supply European markets rather than markets outside Europe. The companies that have made those investments see their UK plants as part of a worldwide network in which plants in different geographical locations are aimed primarily at different markets. The same would be equally true of FDI in, for example, Spain or other European locations against which we compete to attract investment.

I do not mean to be absolutely black and white about this. Corporate trade patterns shift in response to changing circumstances. As I have said already, this is a complex matter in which many factors come into play. None the less, it would be helpful if the Government launched a review to determine to what extent the subsidiaries of foreign-owned companies in this country have the flexibility to take full advantage of opportunities opening up in markets beyond Europe, and what can be done to encourage them.

I know that many people will say that I have focused on the largest manufacturing companies, and that is true. However, the supply chains depend on those companies and, generally, in this country the largest manufacturing companies account for the greatest proportion of exports. Therefore, if the largest manufacturing companies are concentrated in one part of the world, it will follow that the supply chains that service them will equally be concentrated on that part of the world. Rather than look to the red tape and the other things people talk about that supposedly hold us back in the eurozone, we should see why it is that Germany and other eurozone countries appear to be so much more successful.

I will refer to the remarks of the Mayor of London, who has pointed out that if we were to leave the European Union, which I personally would deeply regret and regard as very counter to British interests, we would find that many of our problems arise from inadequacies within our own economy.