Earlier this afternoon my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) concentrated his remarks on the competitiveness of British industry, our productivity, and what might generally be called our problem industries.
The Secretary of State's reply, particularly on steel, was cursory, if not totally obscure. On steel my hon. Friend the Member for Arundel (Mr. Marshall) made an outstanding speech, as I think many hon. Members will agree, and I am sorry that the Secretary of State was not here to hear it.
My hon. Friend was followed later in the debate by the hon. Member for Rotherham (Mr. Crowther), who said that he did not believe that the desperate crisis facing the steel industry, to which my hon. Friend the Member for Mid-Sussex (Mr. Renton) also referred, was fully appreciated by the Government. The hon. Member for Rotherham represents an area which has one of the most profitable divisions in the British Steel Corporation. I believe that the mill there is known as the Thryver bar mill, and is without exception the very best that we have. The hon. Gentleman pleaded that we should devote more money to the record breakers and suggested—I do not know whether this is accurate—that the Corporation is passing some of the less profitable work to the most efficient mills and sending some of the more profitable work to the inefficient mills. We were disappointed that we heard virtually nothing about steel from the Secretary of State.
Since the opportunity of commenting on trade affairs rarely arises in the House, and as the Secretary of State for Trade is to wind up the debate, I wish to make a few comments on the wider issues of the world economy and the prospects for trade, because for all the difficulties that we have in our steel, coal and shipbuilding industries, arid in British Leyland, it is the world economy that is likely to have an equally telling impact on prospects here, not least through the competition that our industries will face at home and overseas.
The industrial strategy about which The Secretary of State waxed so eloquent was mentioned only once in the whole debate, and that was by the hon. Member for Hammersmith (Mr. Tomney). I do not think that any hon. Member knows what the industrial strategy is. May we one day have a debate? Clearly nobody on the Conservative Benches knows what the industrial strategy is all about. At one stage I was under the impression that it had something to do with backing success, but, as understand it,£500 million has either been committed to British Leyland or is promised to Chrysler. Neither of those firms, whatever might be said about their future, can he described as successful industries at present.
On the trade issue, since the Downing Street Summit and its relatively optimistic tone I do not think that anything has arisen to give us any comfort. Inflation in the OECD countries has shown very little general improvement over 1976. Resistance to wage restraint is gaining force, not just in Britain, but in many other Western countries.
Growth is likely to be in the 2 per cent. to 4 per cent. range, and that is well below the rate of 5 per cent. expansion which OECD itself considers to be necessary to reduce unemployment. Only the other day, the London Business School pointed out that industrial production in the OECD countries was running at 9 per cent. in 1976 and 4·8 per cent. in 1977, and it estimated that it would be 2·6 per cent. in 1978. Industrial production seems to be going down towards near-stagnation in the OECD. Investment, even where demand arises, does not seem to be responding to higher demand.
The cause for that malaise almost certainly lies in the very large fall in the rate of return on capital when measured after tax and when adjusted for inflation. It is happening not just in this country but in all OECD countries. This is compounded by the dramatic change in relative prices caused by the oil crisis.
The conclusion has to be that, even if the Chancellor of the Exchequer pursues optimum policies—and we know the likelihood of that—the outlook for inflation, growth and investment is poor in the OECD countries generally and certainly not as good as is sometimes indicated by Government spokesmen.
What is worse, the prospects for growing world protectionism are substantial. There is no doubt that tariffs and non-tariff barriers appear to be going up rapidly against our exports all over the world.
Given the likely gain to our overseas payments position from North Sea oil—to which my hon. Friend the Member for Worthing (Mr. Higgins) referred—which amounts to between £4 billion and £6 billion on our current balance, it is probable that the exchange rate will be acting to reduce further still the profitability of British industry both from increased competition in the domestic market from imports and also more competitive prices and protectionism overseas.
This gives ground for no small cause for concern, given the figures which my right hon. Friend the Member for Leeds, North-East mentioned that we have now a rate of return in British industry, when adjusted for inflation and depreciation at replacement cost, of about 2·5 per cent. In many industries the rate of return, adjusted for inflation, is nil.
My hon. Friend the Member for Worthing talked about exchange rate policy. There is a range of options open to the Government, but virtually the only one which is not open to them is the one that they took. There is no way in which the parity of sterling can be held at a level that denies the existence of North Sea oil, simply because the capital inflows would wreak havoc with the money supply and domestic inflation. Anyhow, our allies would not allow us to build up massive reserves of the kind for which the Secretary of State for Trade is constantly criticising the Japanese.
Should sterling be held at a level which enables our payments to balance by the repatriation of foreign funds and the reduced competitiveness of our industry, or should we allow sterling to float cleanly with our payments balancing mainly by the investment overseas of our own domestic funds? That was the point made by my hon. Friend the Member for Worthing. This would tend to reduce the parity to a lower level than it would otherwise be and would ensure that our manufacturing industries were kept more competitive.
I ask the proponents of exchange controls and greater public investment in our industry—a policy promoted by many in the Labour Party—to think through the proposition. First, the Exchequer proceeds of North Sea oil will not be very large. They will be between £2 billion and £3 billion only. Even if the Whitehall bureaucracy were able to pick winners—we have seen its attempts at that one has only to look at the oil platform saga, which was a perfect example of Whitehall picking winners—it is not the winners who will have any problem in finding capital in the market, as the Wilson Committee will surely say; it is the losers.
If confidence is to return—as I believe it will in due course, when the Labour Government have departed the scene—there will be very real problems when bank advances start to move forward again, because private industry—and the Government want private industry to invest—will be squeezed out if we have a borrowing requirement of £8 billion.
The Exchequer proceeds of North Sea oil should be deployed in reducing the borrowing requirement so that interest rates for the private sector generally would be lower than they would otherwise be. That was, I think, much of the burden of what my hon. Friend the Member for Worthing was saying.
I do not believe that capital outflows would be very great if we reduced exchange controls. Many major firms are already investing overseas, but smaller companies would be encouraged to develop overseas markets. Those in the trade union movement who are concerned about the loss of jobs in the United Kingdom were we to lower exchange controls—and I can understand how they arrive at that view—should look at the example of American industry, which has benefited dramatically from overseas investments. British subsidiaries operating overseas in faster growing markets than the United Kingdom tend to be captive customers for British exports, and all the lessons of American investment overseas show that investment overseas and exports go hand in hand. I also believe in the abandonment of exchange controls on portfolio investment, but that is a wider issue, and I leave it there.
I do not think that the Government have any option about the floating of sterling. My own belief—I hope I am wrong—is that we are moving into another period of monetary instability in the world, caused by the American demand for oil and to some extent by the increasing difficulty of the less-developed countries in meeting their debt obligations. The former is the major influence, but the combination of the two is likely to lead to the sort of instability which occurred in 1972 and led up to the Smithsonian settlement.
There are now$350 billion held overseas, according to the Bank of International Settlements. This is three times the amount of overseas dollars that were swanning around in the world in 1972, and there are a further$100 billion held in American Treasury bills. I believe that there is every possibility of a resurrection of monetary instability, and then the Government will have no option. The exchange rate will have to float freely, since it will be the only way of accommodating capital movements. Stability for British exporters and British industry will be best maintained by a cleanly floating rate rather than one manipulated by the Bank of England.
The Secretary of State might well agree with the point that I wish to make about protectionism. It is that tariffs and quotas are not the cause of protectionism but a symptom of it, in spite of all the invective about the evils of tariff protection and the desirability of consumer choice within domestic markets, and the need to provide the stimulus of competition. Some of us are even told by our wives that they want to buy cheap Eastern skirts that fall to pieces in three weeks, rather than good British textiles. We hear all these arguments against tariffs and quotas, but none of them actually goes to the root of the problem.
Those who constructed the post-war world order at Bretton Woods always realised that international monetary affairs, international investment and trade were all one, and could not be separated. If one leg is knocked out of this three-legged stood, as has happened in the international monetary field, in the end the whole structure will collapse and crumble.
The crucial issue that faces the world today is to recognise that it is not bilateral trade agreements—of which the Multi-Fibre Arrangement is a very good example— that are leading to protectionism in the world. What we have to look at is the massive surpluses on the part of the surplus countries, and the instability in our international monetary system.
In my view the principle causes of protectionism are, first, an inability to create a new, sensible international monetary order—following its collapse in 1972 —and, second, the whole proliferation of State subsidies, political pricing, discriminatory taxation and the regulation of internal markets which is practised in every country but, in particular, by COMECON.
I believe that we should have taken a much more vigorous line on the Tokyo round. The Americans should have taken a more vigorous line on the Tokyo round. The Tokyo round however would only be of transitory significance if the most powerful economic nations persistently refuse, or are unable, to impose upon themselves a sounder and more disciplined international monetary order. That means either cleanly floating or fixed parities with agreement before they are changed.
I leave that aside. No doubt the House will be glad to hear that, but we seldom have the opportunity of debating these matters in the House.
I now come on more closely to what has arisen in the debate, which has been a bit of a knockabout, but not too much so. It is understandable that Parliament should always be concentrating on our problem industries and that we should always be looking inward on our own domestic problems. We have had such a debate on steel today, but the fact is that we also have many industries, partly but not wholly in the commercial sector, which are equipped to benefit from a regime of real freedom and greater convertability on the exchange rate of the kind which my hon. Friends are recommending.
In the manufacturing sector, food manufacturers and the chemical, soap and detergents, electrical, mechanical engineering and aerospace industries have all increased their exports as a proportion of total production. Most of them have pushed down import penetration levels, although our average share of world markets for manufactured goods has diminished and import penetration has increased.
Of course, there are many of our manufacturing industries that have made substantial progress and that would benefit from a greater regime of freedom with regard to the exchange rate and less bureaucracy in the manner in which they operate overseas.