Trade and Investment in Scotland

Philip Hollobone Excerpts

Tuesday 24th June 2014 Westminster Hall

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to serve under your chairmanship once again, Mr Hollobone.

I begin by praising the contribution that exporters of services and manufactured goods in Scotland make to our economy and the jobs that they sustain and support. Scotland, as part of the United Kingdom, is an open economy that is welcoming to investment from overseas, but it is also self-confident in expanding its role as a source of exports. When I speak to manufacturers in my constituency, whether Promat, engaged in exporting construction materials to the US and the rest of the EU, or Gaia-Wind, the fastest growing small or medium-sized enterprise in Scotland and the eighth-fastest growing SME in the UK, I see for myself the potential that exists in our country to rebalance our economy as a trading powerhouse and to rebuild our jobs market to grow the construction and skilled manufacturing sectors that suffered hugely in the global downturn from 2008.

I pay tribute to the continuing role that the Scottish Food and Drink Federation plays in growing our export markets. The industry has an annual export turnover exceeding £5.4 billion, employs nearly one in four of the Scottish work force and sustains 1,200 businesses. Four fifths of that contribution was made by whisky exports, which generated £4.3 billion for the Scottish economy last year, with 140 million cases of whisky exported to 200 markets across the globe. There is a good story to tell about how, against the odds in recent years, Scottish manufacturing exports have been an economic success story, growing by 1.9% last year.

Notwithstanding that, whether it is in Piketty symposia in the Houses of Parliament or on the doorsteps of Blackhill, Springburn, Robroyston or Roystonhill in my constituency last weekend, the message is the same: something is wrong in our economy. It is not working as it should, as is shown by its failure to return the effort that people put in at work to their pay cheques at the end of the week or month, and the insecure nature of the jobs that are being generated.

The UK’s balance of trade position, when compared with key EU and non-EU trading partners, has worsened in the past year, with strong performance in financial and other services offset by a weakening in the position on goods. There are important lessons to learn on improving the support that the Government provide to exporters, as well as on the need for certainty about Britain’s place in the world, principally through the pivotal role we play as a member state of the European Union, but also in the decision that people in Scotland will make in just over 90 days’ time: whether or not to remain part of the United Kingdom. I will address each of those in turn.

The most recent economic commentary released by the Fraser of Allander Institute identifies an unbalanced recovery as one of the key threats to the recovery being sustained in Scotland. It confirms that household consumption, through a decline in the savings ratio and the bundling on of more private debt, is driving a large portion of GDP growth. Business investment remains patchy and the prospects for export growth are mixed. Even allowing for the summer’s disruption at Grangemouth, net trade made a negative contribution to Scottish GDP last year in comparison with 2012. With the pound appreciating in value and demand in the eurozone remaining weak, it is clear that the Government, through UK Trade & Investment, should be doing more and working more proactively with small and medium-sized companies to help expand their export markets.

The Fraser of Allander Institute also finds that investment spending stagnated in Scotland in 2012 and 2013. Although confidence among small businesses in Scotland is rising, and the intent to invest more is evident, that is not yet translating into actual higher investment by firms in new plant machinery, research or technology, which are all required if we are to end a low productivity crisis in the Scottish economy. Many exporting manufacturers find access to finance remains among the biggest impediments to expanding their businesses. In a recent round table on finance, to which I contributed, Professor John Kay put forward the argument that since 2008 the pipelines in the financial system by which capital can be invested for productive economic purposes have not been functioning as they should.

We have seen one rabbit after another pulled out of the hat by the Chancellor, but we do not see investment actually rising. If we are to match the record on long-term investment enjoyed by countries like South Korea and Germany, we need to adopt some of their thinking about the pipelines needed to boost investment. The Government should be reforming our banking sector to create a proper infrastructure investment bank, modelled on the successful KfW in Germany, or similar institutions in South Korea and the US, and capable of financing long-term productive business investment. It should draw on the example of the Sparkassen in Germany to create regional banks focused on lending to small and medium-sized enterprises. It is only by constructing proper pipelines for capital that we will we see a long-term expansion in private sector business investment for Scotland and the United Kingdom.

Scotland is second only to London within the UK in its attractiveness for inward investment, but Ernst & Young’s latest survey found that the number of jobs created in the past year was lower than the year before, principally in manufacturing. There is more that this Government and the Scottish Government should be doing together to improve Scotland’s position, particularly in relation to inward investment from emerging economies.

As well as the skills of our work force, among the most important reasons for our strong position on inward investment is our membership of two connected, successful single markets: the United Kingdom and the European Union. Our membership of the EU sustains nearly 4 million jobs in the UK, according to the latest assessment by the CBI, and provides access to and influence over a single market of 500 million people. Our exporters would benefit from a successfully negotiated transatlantic trade and investment partnership because of our position at the heart of Europe. When the Prime Minister launches his increasingly unsuccessful short-term forays into EU diplomacy, for all the short-term defeats that he suffers, he puts at jeopardy long-term investment into this country because of weak leadership on Britain’s opportunities and our destiny within Europe.

Similarly, Scotland at the heart of a reformed United Kingdom is good for our exporters and best for investment. Nearly 340,000 people in Scotland are employed by companies based outside Scotland. Exporters benefit from an unrivalled network of diplomatic and trade links with the United Kingdom, with 270 diplomatic outlets and 169 for trade, compared with only 70 to 90 envisaged by the Scottish Government in their White Paper for independence.

We also enjoy the strength of 29 votes on the Council of the EU, required to drive the changes in fisheries policy that will benefit the fishing industry in Scotland, and we are able to shape decisions on international institutions from the G7 to the World Trade Organisation. WTO membership matters hugely to our exporters, because it guarantees low or no-tariff trade with 170 countries—no ifs, no buts and no need to negotiate individual bilateral trade agreements.

Just imagine if there were a yes vote in September. What would the practical consequences be? If it wanted to be in the EU, Scotland would have to adopt a different currency, creating an immediate barrier to trade and investment from the United Kingdom. The potential loss of hard-won VAT exemptions and zero ratings on food, children’s clothing and books, as part of the conditions for joining the EU as a new member state, would create further barriers for Scottish exporters and investors from elsewhere in these islands. A 1% fall in exports by Scotland to the rest of the UK equates to £450 million in reduced sales.

Scotland would have to replicate, at great cost, institutions that we currently share with people across these islands, adding costs for businesses protecting intellectual property, to provide just one example. Scotland would have to reapply for membership of the World Trade Organisation. The shortest recorded period for entry was Kyrgyzstan, at just under three years to conclude its chapters of agreement. An independent Scottish Government would have to negotiate its way back into the WTO, while our competitors used that period of uncertainty to promote their own domestic products against ours. What would tariffs applied by some of our major non-EU markets to Scottish goods in the period we were outside the WTO mean for jobs in our exporting industries in Scotland?

If we want the best future for exports and investment in Scotland, we are strongest within the United Kingdom and the European Union. If we make the right decision in September and follow long-term policies to boost exports, Scotland can have a prosperous future that will bring the fruits of economic growth to all its people.

[Mr Philip Hollobone (in the Chair)]

I understand that the Minister has flown back from Scotland especially for the debate. He will be delighted to know that he has 20 minutes for his response and the debate will finish no later than 5.15.