Globalisation Isn't Working

President Trumps Tariffs Are Based On The Reality Of The Rust Belt, Not The Davos Dream.

Back in the early 1980s much of the UK’s industry was still nationalised. The country was still recovering from the intervention of the International Monetary Fund (IMF), inflation was high and cash was tight. Unemployment stalked the land, not least because a cash-strapped government could not invest in the nationalised industries that it owned, so they could not modernise and thus were losing efficiency and market share. The lack of efficiency was, inevitably, exacerbated by belligerent unions.

The solution, which only Margaret Thatcher had the balls and political power to implement, was to denationalise through privatisation. Hence the industries were sold into the private sector. Some thrived, including British Airways, British Gas, and BT, as they now had access to the capital they needed to develop. Others, British Leyland, British Steel and British Coal, didn’t. Leyland had rotten products and fractious workforce. British Steel was too expensive and even then it made more sense to invest in new steel plants where there was high demand, Asia, than in the UK. British Coal’s deep mining operations delivered more expensive coal that open cast mines. And of course, they had Arthur Scargill and the miners’ strike.

Up The Value Chain We Go

The net result was the deindustrialisation of the UK and the switch to being a service economy. The pundit’s catchphrase was “climbing the value chain”. In place of a failing economy, centred on low paid blue collar work, the UK would move to a solvent one based on higher value white collar work and ingenuity. Engineers not navvies, graphic designers not printers and so on. As theories go this one wasn’t bad; in any case the UK’s finances made it imperative. The era of designer-everything was born. (Designers are cheaper than engineers).

Of course, the decimation of large scale manufacturing led to job losses. Some of the redundant were able to invest their redundancy payments into housing, privatisation shares or to start their own business. Others found themselves in a second career. The status loss for (say) a skilled rivetter in becoming a cubicle inhabitant in a customer response call centre was substantial. It might have been economically unquantifiable, but it hurt self-esteem (and often pay packets) deeply; (I write as a former CEO now driving a truck).

Look Back In Despair

The problem with unquantifiable things is that they don’t show up in economic models or company balance sheets. That doesn’t make them any less real or any less important. However it was not the unquantifiable that wrecked climbing the value chain. With hindsight, forty plus years on, the flaws are painfully obvious.

The first is technological change. Younger readers may need reminding that in the early 1980s there were no personal computers, no mobile phones and no internet. Fax machines did exist, as did photocopiers. In the 1990s it became commonplace for ideas to move at the speed of light rather than the speed of the Royal Mail. Reference works were no longer a big parcel, simply a download.

A University’s library went from being a key asset and quality differentiator to an expensive liability. Books need storage, storage costs money and yet the value of the information in the books is no more then the value of the same information stored electronically. (One could argue that today the electronic information has more value, as it is more easily searchable. The Bodleian Library’s future is as a museum, not the world’s centre of research.) This meant that establishing a well-resourced university library required only an internet connection and a few subscriptions.

The second was the ending of the Cold War. The switch from swords to plough shares across the west removed a vast amount of research and development funding from the technical sectors. R&D can be horrendously expensive. In an accounting sense it is the speculative consumption of cash to develop an asset of unquantified value. Large companies eschewed it, preferring instead to purchase survivor start-ups that had developed something interesting rather than take the blue skies risk. This left innovation in the hands of academia, where it competed for funds with student accommodation and staff salaries. New products came from the occasional genius who could both create something technically wonderful and blag enough money for a start-up. That’s a rare combination.

The third was the impact of Deng Xiaoping. Although his original statement about the irrelevance of a cat’s colour was made in 1962 (for which he got purged by Mao), under his Premiership China moved into the western commercial world. By the 2000s it was part of the high growth investment areas loved by pension fund managers. Production got outsourced, largely supported by western capital. China’s willingness to play fast and loose with intellectual property rights (IPR) jumped them into the knowledge economy too. They’re increasingly at the top of the value chain as well as the bottom.

The fourth and final factor was “globalisation” and the birth of Davos man (or woman). This made moving ideas and products across the globe commonplace, driving down the costs of pretty much everything. Stuff got made where it was chipset, software in Bangalore (as Bengaluru then was), manufactured goods in China and Vietnam, textiles in Bangladesh and so on.

The Race To Cheap Labour

This is where the problems of globalisation become most apparent. The cost of anything comes down to the cost of energy and the cost of labour. The cost of energy is driven largely by market forces and the greed of the relatively few producers. For any business therefore, the only cost in their control is labour. As machines and robots take over many tasks, both skilled and unskilled, workers face constant downward pressure on their wages.

Setting the UK’s minimum wage at £12.21 an hour is fine in a spreadsheet. Yesterday I was in the cab for the maximum legal time of 15 hours. I’m paid by the shift and I earned just over the minimum wage. That’s as an HGV1 driver with 2 years’ experience. Most days aren’t so long, but they’re seldom under 11 hours. I earn less now than I did two years ago.

Why am I paid so little? Because European firms compete unfairly. They cheat on cabotage rules, use cheaper European fuel in their vast fuel tanks and they pay less. East European countries have far lower living costs than the UK. Legal immigrant workers are also prepared to work for lower UK pay if they’re here to build some capital and then return to their country of origin.

The modern economy isn’t working for blue collar workers like me. Davos man may think that replacing me with a robot is a smart move. However if that robot isn’t UK designed and built that replacement simply exports more wealth from the UK. What does Davos man expect me to do with my time? Design robots? Already being done. Become a writer? On it already and it’s far from lucrative. Become a care assistant? Sweep the streets? These options aren’t at the top of the value chain, they’re at the bottom and still pay minimum(ish) wage.

Competition At The Top

Globalisation isn’t working for white collar British university graduates either, saddled as they are with enormous debts at usurious interest rates. Unless they are very well qualified (scientist, engineer, vet, doctor, lawyer) with very good degrees from good universities they struggle to find worthwhile employment, let alone use the degrees that have cost them so much

Globalisation is working for those who have capital (not just the Goldman Sachs gang), some of those in the knowledge economy and those who work for the state (particularly those with lavish pension schemes). Currently it also works for pensioners, with their triple lock on the legalised Ponzi scheme that is shafting my children’s generation.

Flawed Model + Reality = Populism + Tariffs

This abject failure of the socio-economic structure explains “populism”, as the Establishment choses to describe the people whom it has failed. The people for whom the economy isn’t working are an increasing proportion of the population and almost certainly a majority.

In the UK the elite witter about economic realities to explain this. They don’t understand that while economics is a theory, Reality is being strapped for cash every day. Reality is no chance of finding a GP appointment inside a fortnight. Reality is roads full of potholes so large that they verge on canyons. Reality is the whiff of marijuana on every street ,with drug dealers on every street corner. Reality is police forces and courts failing to prevent real crimes like robbery and burglary while being preoccupied with non-crime hate incidents. Reality is uncontrolled migration destroying the fabric of this nation and successive governments achieving nothing.

President Trump gets that – he understands the fury of the US rustbelt. He got elected and he’s going to do something about it. While economists may, with good reason in some cases, argue that tariffs damage the world’s economy President Trump rightly doesn’t care; he knows he represents the interests of the United States. If Chinese steel is made with cheap labour, poor environmental protections, dirty power and rotten health and safety and quality why should it be allowed to compete on price with US steel? Hence the tariffs.

While it’s true that EU steel is made at least as well as in the US, the decades of globalisation have ignored the unquantifiable costs of industrial decline to the United States; welfare dependency, drug use despair. The United States is large enough to source most of its needs internally and rich enough to pay over the odds for what it must import. Tariffs make sense to support the rebirth of their industrial base.

In the UK we have nine million economically inactive, of whom one million 16 to 25 year olds are not in employment, education or training (the NEETs) and some three million on long term sick. (Economically inactive are under 65, not working and not seeking work. They are not state pensioners, of whom the UK has about 13 million).

This untapped labour pool could make a lot of stuff were it so inclined. That would both cut the benefits bill and do wonders for the balance of payments. We import much of our food and indeed of everything else we consume.

Descending The Value Chain

In the past month I have regularly hauled loads of imported steel and imported clay roof tiles. The challenges of steel making in the UK are well known. The UK also used to make bricks and tiles – all you need is clay, which is abundant in much of the Southeast, and heat. There used to be a plethora of brickworks, (I ran one for a bit). They duly got merged or bought out by European manufacturers. Several acres of Purfleet Docks are devoted to imported European bricks and tiles. They’re cheaper because the European brickworks are bigger and the energy costs lower. Whatever else it has achieved, the UK housebuilding industry has driven brick & tile manufacture offshore, and with it the profit on perhaps 5% of every new built house.

Add in the wealth gone from legal migrants, from imported services and entertainment (Amazon, Microsoft, Google, Netflix etc.) and from overseas investors in UK projects (notably wind turbines) and it’s clear that the UK is haemorrhaging wealth, not cashing royalty cheques from clever designs. The 1980s deindustrialisation logic is no longer valid. We can no longer survive at the top of the value chain, so we need to come back down it.

How to do that? How to pay for it?

Firstly one would need to create some demand. The much trumpeted and long overdue rearmament might achieve that. For example, the Royal Navy needs more frigates and to replace the ones it has as well. That means the UK needs an increased shipbuilding capacity. While opening a shipyard from scratch is no easy task (Neville Shute fans know this from his brilliant novel, Ruined City) it’s not impossible. Start today. Ships need steel. Steel needs coke, which needs coal. Ditch net zero and get digging. The ships need weaponry, much of which we do make. Increase production and open more factories if necessary. Stipulate that henceforth for reasons of national security the defence supply chain must be under UK control, with a few items from trusted allies. All of a sudden there’s an entire supply chain, largely funded from existing planned defence spending – which is the part answer to how to fund it.

Building six warships a year would require some 50,000 tons of steel for the MOD. That’s not much, even if you add in a few thousand more tons for tanks and armoured vehicles. Port Talbot used to supply about 3.5 million tons per year and UK steel demand is about 7 million tons per year, of which 60% is imported from places with lower electricity costs (pretty much everywhere).

Ditching net zero would help drive the electricity cost down. In the interim the Prime Minster could simply decide that UK steel production is a core part of national security, rebuilding it will take time and during that period imports will pay a tariff. (That tariff of course, boosts government coffers to cover part of the steel costs of the enlarged fleet). The UK is a net importer, so tariffs would work for us.

Don’t Fear The Commentariat

Establishment economists would, of course, freak out. In 1981 364 eminent economists wrote to the Times stating categorically that Mrs Thatcher’s polices were wrong. She ignored them and the 1980s boom ensued. More important is how the bond markets would react. It’s not inconceivable that they might appreciate a policy designed to generate growth in the UK without increasing government borrowing. If there’s money to be made then private sector investors will step forward. Again, the government could reasonably argue that steel is a strategic UK industry. Investors domiciled in friendly countries very welcome, those in competitors and tax havens not so welcome.

Some (or more) economists and politicians will shriek that the risk of a government taking greater control of its national infrastructure (which it holds on behalf of its people) could expand into economic insularity, protectionism and autarky. These in turn lead inexorably to decline, poverty and war, or perhaps all three, not necessarily in that order.

I’m not persuaded. The EU is a protectionist block as much as it is an internal market. As yet it is not at war with anyone. So is the United States and NAFTA. In the theoretical world of Davos man, one in which the World Trade Organisation has actually delivered global free trade and wise governments have ensured transparency on pricing and production methods, the concerns may be true. In the real one outside of their models their concerns are less compelling. The World Economic Forum was established in 1971, the heyday of centralised government. Its message hasn’t changed much over the past five decades, despite the huge changes outlined above. That it holds so much sway is more a testament to embedded groupthink than enduring wisdom. Globalism has not worked for most of the population of the west. It might have once, but it doesn’t now. As John Maynard Keynes said “When the facts change, I change my mind.”

Reform UK should be developing an economic policy that tackles the abject failure of Davos, rather than bickering in public. If they, the representatives of the economically and culturally abandoned, don’t do this, who will?

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