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Industrial Strategy: what about Brexit?
08 Dec, 2017

The Government’s Industrial Strategy does not address the specific challenges of Brexit. 

Michael Romberg, a former HM Treasury senior civil servant and a member of the Committee of London4Europe considers the changes in economic structure implied by Brexit.

On 27 November 2017 the Government published its new industrial strategy. It’s OK for if we Remain. We need to improve the country’s people, innovation, infrastructure, business environment and places - the White Paper’s foundations for improving productivity. I would just point out that it is not the first time that Government has tried to do that. And of course a government tackling Brexit will not have the bandwidth to do anything else.

But the white paper does not address the changes in our economic structure that we will experience and need to respond to if Brexit takes place. It refers to how its proposals acquire greater importance under Brexit. But that is rhetoric, not analysis. It is also an indirect statement that Brexit is harmful.

We do not yet know what Brexit means – apart of course from Brexit. The Cabinet does not dare to discuss that for fear of falling irreparably apart. We can be sure that Brexit will have unforeseeable effects. Perhaps nothing much will change – but the social stresses amongst disappointed Leavers induced by that would be awful. For sure, forces like technology will have a bigger impact than Brexit.

The effects of Brexit on the economy

But – allowing a wide margin of error in this forecast - we should be able at a high level to work out what Brexit will do, given the decisions to leave the single market and the customs union, to focus on trade opportunities far away, and to cut down on immigration.

Shift away from services to manufacturing

We will no longer major on services. Services are where we have a positive trade balance. They are what we are good at. As developing countries grow richer they have a rising demand for sophisticated services. But while the single market allows pretty seamless cross-border trade in many services, free trade agreements do not. So it will be harder to sell services to EU countries and no easier to sell them to the rest of the world.

Services depend on the free flow of people. That might be students coming to the UK as customers of universities or it might be people coming to work here. Any knowledge-intensive activity, including manufacturing design and research, needs interactions between people. One cannot set out all one’s knowledge in an e-mail; it requires working together – we do not know what we know.

Although the White Paper promises that some highly skilled people will be prioritised in the immigration system that elite focus is not enough. Nor do the warm words about EU citizens count for much given the hostile messages that nativist Brexit Britain sends. The tighter control of immigration that is promised for after Brexit will reduce the flow of ideas and hence the quality of our knowledge industries.

That means that we will have to sell more manufactures. We are not much good at them – we have for a long time run a trade deficit in manufactures. So it will need big changes.

Rejection of international supply chains

Moreover it is not just a shift to manufacturing. Brexit is a rejection of the complex global supply chains that characterise modern industry. We will no longer be part of the EU single market and customs union so we will gradually drop out of the EU supply chain system. 

Integrating with supply chains in Asia or America will be more awkward given the distance. Professor Minford of Economists for Brexit believes that distance is irrelevant; but it seems hard to credit and most trade economists now include geography in their models. Rules-of-origin requirements in trade agreements will narrow the attractions of international supply chains (the origin would have to be the UK, not the EU as now).

Brexit will make the UK less attractive as a European base.

That shift to manufacturing with domestic supply chains requires changes to our education and training system, to our transport infrastructure, to our energy supply system and to many other aspects of society.

A different sort of competition

Much of Britain’s productivity problem is the long tail of underperforming companies. They have survived the competitive pressures of the single market – and will now be exposed to less competition from the EU, so will have less of that incentive to improve.

On the other hand they will face increased pressure from firms in whichever country we sign trade agreements with – and many of the fast-growing parts of the world that Leavers are keen to trade with are strong on manufacturing and have low labour costs.

So how is that going to play out?

Places

The White Paper is keen to ensure that no place is left behind. Good. The impact of Brexit will not be evenly spread across the UK. Some places will be hit harder than others, the policy response should vary too.

Conclusion

The industrial strategy document is silent on all that.

That silence is yet another harm from the Government’s inability to decide and discuss with the electorate options for what Brexit  might be about.

Finally, nothing in the policy is contingent on Brexit. That is, we could do all of the good things it promises if we Remain. This is another area where taking back control just allows us to do what we would have done anyway.