In the 2015 Conservative Party general election manifesto, the party made vague references to increasing British exports. To quote from the manifesto directly: “we will do more, using the new embassies and diplomatic posts we have opened to connect Britain to the fastest growing economies in the world…as a part of our drive to attract more investment into the UK and increase British exports”. Obviously this is not an especially controversial statement as all political parties seeking power want to increase British exports as this would create jobs domestically. However, a key way to see if the Tories are meeting this target is if they are in the process of reducing the British trade deficit, and it is clear that they are failing to do so.
The Office for National Statistics (ONS) have released a report explaining the current UK trade deficit and the news isn’t good for the Chancellor. The difference between imports and exports for the first three months of 2016 is £13.6 billion. To put that in context the figure of the previous quarter was £12.2 billion. Financial analysts have stated that the increased disparity is actively suppressing financial growth, which is important to point out as first quarter GDP growth dropped to 0.4%. It therefore logically follows that if the financial analysts are correct, the continuation of the widening of the trade deficit will slow growth even further.
On the specifics of the report, the ONS identified that imports had risen by around £1.9 billion, particularly in relation to jewellery, footwear, clothing, cars, and mechanical machinery. By contrast exports only rose by £500 million and the highest proportion of this came from an increase in exports of chemical products. There are reasons for this, namely the strength of Sterling, particularly in competition with the Euro, and moderate demand from Britain’s key trading partners.
Having drawn out some of the specifics of the report, it is also key to look at how to solve the problem. The traditional way to increase exports has been to devalue the national currency which will make British goods more competitive, and it appears the the pound may lose some value in the coming weeks due to uncertainty over the EU referendum result. The other thing that has historically been done was to introduce tariffs on foreign goods in order to encourage people to buy domestic goods, however the neoliberal consensus of international institutions like the IMF and WTO make such a measure impossible.
The way in which Britain can reduce its trade deficit is buy diversifying its economy and investing accordingly. The ONS report identified that mechanical machinery was one of the areas that is increasing the trade deficit. In order to reduce this, therefore, the government needs to target investment into manufacturing such machinery as well as providing grants to universities to pioneer research in this field. Further, the government should look to fundamentally restructuring the British economy away from a reliance on service industries and raw material extraction. By injecting huge sums of capital investment into the economy people are put back to work, the manufacturing base grows, and the trade deficit will narrow.
The solution to this problem is multi-faceted but with interests rate at one of the lowest levels in recent history, now is the time for the government to borrow money and invest in the economy. With more people put back to work, economic activity increases, and foreign businesses look to Britain’s increased output as emblematic of future growth.
This argument is not a left-wing one, it is a Keynesian capitalist one. By stimulating demand through capital investment projects in transport infrastructure and education, manufacturing is boosted, more people are put to work, and growth picks up. The Marshall Plan proved that huge investment can transform a country’s economic position, and it is time that this approach was implemented in Britain today.