Shock news - Britain still makes things

First published in the Telegraph on 26 November 2009

As Britons, we tend to think about our economy in the same way as our national sports teams. We know we should be world-beaters, but deep down suspect we’re doomed to perennial disappointment. Lifting the World Cup is all very well, but there’s something ever so British about being trounced by opponents far inferior to yourself.

The downturn has provided an excellent opportunity to indulge in this defeatist tendency, helped in no small part by the fact that Britain is very definitely faring far worse than so many of its international counterparts. As the official statistics confirmed yesterday, ours is the only one of the world’s top seven economies still stuck in recession.

But while the economy has indeed been handled atrociously by Gordon Brown over the past decade, there is a vast difference between this and the fatalism to which so many of us have resorted. And nowhere is this clearer than with manufacturing. Over the past year, I have lost count of the number of times I have heard the moan that “We don’t make anything any more.” It is the stock rejoinder whenever anyone dares suggest that Britain will be able to export its way out of this crisis.

In a sense, this isn’t surprising. One dangerous misconception perpetuated by financial lobbyists is that without the City, we are nothing. Financial engineering, they argued, was something Britain was well placed to do, while mechanical engineering could be carried out far more cheaply by the Chinese, or with far greater quality by the Germans.

While it is a compelling narrative, and fits nicely with the British propensity for defeatism, it is balderdash. There is no doubt that Britain became overly reliant on the financial sector in recent years, both for economic growth and tax revenues. The fact that we now face a budget shortfall on a far greater scale than any other major economy is a testament to this. Likewise, there is no doubt that the manufacturing sector was “crowded out” – to use economic terminology – by banking.

Yet this is not a sign of impending doom, but a signal that the economy needs to rebalance itself towards the areas it neglected – chief among which is manufacturing. Britain does make things. In fact, it is still the world’s sixth largest exporter of goods, most of them in some way constructed in this country.

A brief glance beyond the headline figures in our trade statistics, which are skewed by our reliance on imported food, energy and raw materials, underlines this powerful fact.

You might have been aware that Britain was one of the world’s biggest chemical producers, thanks to companies such as GlaxoSmithkline, AstraZeneca and the thriving biotech firms that cluster around universities. You probably knew we sold plenty of Scotch and ale overseas. But did you know that the UK exports more iron and steel than it imports; that it has a massive trade surplus in power-generating machinery, including boilers and furnaces; that it is a prime destination for anyone who wants to order specialised technical machinery? Whether it is cars or rolling stock, computer chips or specially designed cogs or washers, much of it is made in Britain: the chip in the heart of Apple’s iPods was created in Edinburgh; the new trains being rolled out on the London Underground are made not in Germany but Derby.

There is nothing innate about Britain that makes its citizens better at finance than high-tech manufacturing. Indeed, many of those lured into the City to create the toxic debt instruments were qualified scientists and engineers who might otherwise have been creating tangible products that could have been made and sold abroad. But manufacturing has shrunk markedly, with the result that the UK now imports far more goods than it produces.

That decline was caused by three separate factors that stopped the sector flourishing over the past decade or so. The first was that the pound was so strong that many manufacturers were simply unable to compete. This has been reversed: with sterling having taken a 25 per cent dive, it is now more fairly priced, and possibly undervalued.

The second factor was that the financial boom diverted investment and employment away from the manufacturing sector; something that has been arrested by the crisis. And the third was that the government did not go far enough to encourage the expansion of manufacturing. Yes, it created research-and-development tax credits, which helped the pharmaceutical industry to boom, but it did not set up tax incentives that encouraged companies to invest in the long term – something integral to manufacturing.

With the pound weak and the City cut down to size, the conditions ought to be perfect for British manufacturers to grow. But be patient: this expansion will be a slow, silent one. Britain does not need to become a Germany, relying excessively on building goods and exporting them. But by exporting a few more goods alongside our ample trade in services, it is quite possible to envisage a bright future for Britain. Stranger things have happened: why, much as we hate to admit it, we have even won the occasional sporting tournament.