My Lords, by all means leave the Chamber if you are on the way out, but may I ask those exiting to do so quietly? My noble friend is trying to introduce this debate, but if anyone wants to leave now and go that way—do they want to go now?—they can do so while I am talking. I encourage my noble friend to start again.
My Lords, during the past few weeks, our focus has been on the EU referendum of
What we must not allow is a state of paralysis as we try to extricate ourselves from the EU and its institutions, and we must not ignore the absolutely crucial need to develop business opportunities with the rest of the world. If we accept that the degree of access to the single market may affect the types of agreements that can be negotiated elsewhere, the task has to start now—and simultaneously with the Brexit negotiations. While many of us may have serious misgivings and concerns about the impact of the referendum result, there is a general consensus that going it alone has one obvious plus: it allows us to be nimble and flexible. After all, it is one of the reasons that so many voted for an exit from the European Union. We now need proactive engagement with the rest of the world. It will by no means be from a standing start but we have to work to make it greater.
It may be useful to remember that the highly developed markets of the US and the EU have relatively slower growth than the emerging markets. We have of course been aware for some time that the world’s centre of gravity has been shifting eastwards and that building trade links with emerging markets is essential. In recent years, we have witnessed closer economic ties between Britain and China; the Chancellor’s support for the Asian Infrastructure Investment Bank illustrates this well. China has a maturing economy that is ripe for the services and luxury goods that are Britain’s strengths, but certain markets have been ignored to a large extent in the past. We must now take the opportunities wherever they are to enhance our relationships, and in particular to re-engage with the Commonwealth, where we already have such strong historical ties and a special relationship, which we have not taken advantage of fully.
The Commonwealth accounts for around 10% of UK trade; that has remained stable over the last decade. Among the Commonwealth countries, Australia, India, Canada, Singapore and South Africa are the largest of the trading partners. However, with the Commonwealth we are provided with a spectrum of economies at various stages of growth, from the developed and advanced economies of Australia and Canada all the way to some of the fledgling economies in Africa that really need support. In between, there is the exciting frontier of fast-emerging and fast-growing economies, such as those of India, Pakistan and Bangladesh.
IMF reports show that the developing and emerging economies’ share of global GDP has increased to 55.1%. I suggest that we require much more additional resource to establish proactive and dedicated campaign teams for particular regions—essentially, a task force working with existing departments and institutions to strengthen our commercial trade and business links with countries outside the EU. These campaign teams should be results-driven and run like a business. Unusual times and circumstances mean that we have to think out of the box—so we should have fewer reports and more action.
This is not to say that business organisations have not already been working hard in seeking global markets, but, by being liberated from the constraints that the EU inevitably presents as it seeks to balance the needs of its many members, the UK should be able to be more targeted in developing these commercial relationships through a highly tailored approach by country, region and sector.
I must acknowledge the work of the Foreign and Commonwealth Office through its embassies, high commissions and consulates that do such a fine job in building trade relations—but they have to be strengthened, as does UKTI. For example, one Commonwealth country in which I have an interest, as the Prime Minister’s trade champion in Pakistan, has huge potential yet there is not even one person at UKTI dedicated to developing business with it. I had the honour of representing the UK Government in Karachi last October when, for the first time, it held one of the Great British Festival events that promotes the Great Britain brand. The very small and dedicated team at the consulate had done a great job but we need to do so much more for a market which has been given emerging status and has a population of 200 million people, the vast majority under the age of 30. Although I am keenly aware that issues such as security have been an impediment to this potential trade, the arguments for engaging with this market are now too many to ignore. Apart from its significant population, its vast natural resources and a growing middle class with purchasing power are key attributes.
I hope that noble Lords will bear with me if they have heard this before, as I have previously highlighted these points and opportunities in another debate, but it is important to remind noble Lords that the Chinese investment of $42 billion in an economic corridor—a network or roads, railways and pipelines to transport oil and gas—enables China to develop a cheaper and shorter route to trade and investment with the Middle East, Africa and Europe. It links China, all the way through Pakistan, to the port of Gwadar on the Arabian Sea. According to analysts, it will place Pakistan at the heart of four out of the five fastest trade flows in the world. The UK has the potential to engage there in a number of areas: in energy, infrastructure, agriculture, dairy and of course education, which is key to building a skilled workforce for this emerging economy.
Pakistan is a good example of somewhere with which we already have some business links but where there is lots of room for growth. Preconceptions about security, corruption and the difficulty of doing business —in Pakistan in particular but non-western countries in general—need to be challenged, with a more realistic appraisal provided by trade organisations and the FCO. One thing that can help, and where we are well placed to deliver effectively, is our capacity-building skills and consultancy generally. These emerging economies are crying out for this. Education, which I have mentioned, is another area of expertise where we could be doing so much more across the emerging economies of the Commonwealth. High-value engineering, fashion retail—where we are possible world leaders—and of course financial services, which probably deserves a whole debate in itself, are all areas within our capacity.
But while we scope out our strategy for the future and where we want to be 10 years hence, we must also ensure that our teams pursue policies that will provide a future for those left behind in society, in particular by developing our manufacturing base. It is about being outward-looking, and engaging globally—but that means looking to home, and building and supporting businesses here. The last two days of debate on the outcome of the EU referendum have highlighted the concerns of many noble Lords that we have real issues of inequality and disparity in our society. So this must be a time for collective thinking—for creative thinking.
It is the small and new businesses which continue to revolutionise the economy of this country. The talents of people from all regions of the United Kingdom—from the north of Scotland all the way to the most southern regions of England and Wales and Northern Ireland—will take us forward. If we want to export, we have to make things. We must increase and expand our manufacturing base and output. The very substantial regional and generational inequalities have to be tackled, and having a goal to promote Britain abroad is a great way to take everyone forward together. It is time to invest in entrepreneurship and to teach and provide the young with certain skills. This is already being done in many schools but needs ever-greater attention. It is crucial that we persuade potential investors that the UK’s infrastructure and policies are among the most attractive in the world for manufacturing. I will make one important point here today: the UK has underinvested in infrastructure and we are hesitating once again in our commitment to airport expansion. This cannot be right at such a crucial time for our country and our economy.
As a student of history, I spent many hours trawling through the dusty archives of the Mitchell Library in Glasgow when I was carrying out some postgraduate research—which, I hasten to add, never saw completion. I recall the sense of awe when uncovering old company documents and reading of the great trading nation that Britain was. As a small island with a small population, Britain was the most advanced economy of the 19th century. Of course, the circumstances were quite different—we had the advantage of leading the industrial revolution—but there was something else there: determination and a strong work ethic. The degree of entrepreneurship and the fearlessness in exploring new geographies around the world was really quite remarkable.
With globalisation, we are so much more inter- connected, and in some ways that should make it easier. But we require leadership and the right conditions for business to flourish—venture capital investment and finance for small and medium-sized enterprises, and proper connectivity. There is one great plus that I can see from leaving the EU; with any luck, there will be a reduction in red tape and bureaucracy, which has for so long stifled SMEs. Perhaps now we can develop conditions whereby public procurement can benefit small companies.
I can say from my own experience of business just how dismal a scenario it has been. OJEC has required the kind of resource that small businesses just do not have. OJEC, or the Official Journal of the European Community—or now OJEU, the Official Journal of the European Union—is the publication in which all tenders from the public sector which are valued above a certain financial threshold according to EU legislation must be published. It is one rule that it will be a relief for companies such as mine to flush away—and let us refrain from putting other red tape in its place. We now need more doing and less paper-pushing.
Finally, we ought to develop a “Built in Britain” brand: something that stands for quality and longevity. It requires collective thinking from industry and government and requires an aggressive mix of bureaucrats and business people to make it happen. We need a Built in Britain brand which carries everyone with it and is part of the nation building that is so badly required—a banner under which we can export to the rest of the world.
My Lords, I am grateful to the noble Baroness, Lady Mobarik, for the opportunity to focus on the future of British business. Trade is the lifeblood of the British economy, but the significance of trades goes far beyond the boardroom or the factory floor. As they choose their next leader, noble Lords opposite might remember that from the corn laws to imperial preference and the EU, trade policy has put them on these Benches much more effectively than my own party.
Why is trade so central to our national psyche? Britain has always been a trading nation, from the plantations of the West Indies to the tea clippers of the east. For many of us, trade is the fountainhead of our Britishness. I came to the UK as a graduate apprentice because of Britain’s manufacturing base. When I came to Birmingham, British products represented one-sixth of the world’s manufacturing exports. Manufacturing represented one-third of our economy and one-third of all jobs. With the rest of world expanding their capabilities and technical skills, it was obvious that manufacturing exports would play a smaller role in the UK economy. Yet the contrasting performance of Germany and the UK during the financial crisis shows that it is essential to have a strong, stable, manufacturing base.
Clearly, leaving Europe will cause major issues for manufacturers. Losing our voice on regulation, increased barriers, limits on recruitment and sheer uncertainty will have a depressing effect. These may be dealt with in the Article 50 negotiations. I hope that they are, although I fear they will not be. But I do not wish to focus on potential negatives today. The choice is made. To be positive, we can still increase trade while outside the EU, but it will require us to reform not merely Brussels, but ourselves. In many ways, that is a far harder challenge. It demands that we not only stay competitive in Europe, despite being on the outside, but become competitive far beyond the EU. The challenge is to improve what we offer the world’s consumer. That requires investment in innovation. We do not do nearly enough. R&D spending in Germany is 2.9% of GDP. Across the whole of Europe, R&D spending is more than 2% of GDP, but in the UK it is stuck at 1.7%. Outside Europe, the comparison is even less flattering. Compared to America, we spend a third less on innovation as a share of GDP, only half of what the Japanese spend and just a third of what the South Koreans spend. We need to match their innovation if we want to sell to the rest of the world. To achieve this, the CBI says we need to spend 3% of GDP on R&D. I believe it is the right target, but it is not enough.
That innovation also has to be outward looking and collaborative. We cannot research new technologies in a little bubble and expect to impress the world. For example, at the start of the millennium, most experts thought that our automotive manufacturing capability would more or less vanish, and we gave up. They thought that all that would survive was the assembly of foreign-designed vehicles as a stepping stone to Europe. That itself is now in trouble. The huge talent, skills and flexibility of British designers and engineers were ignored. We have outstanding technical innovation, product designers, digital technology and a science base that is the envy of researchers around the world, but decades of poor management had created a short-term mindset while failure to invest in innovation and R&D meant that that talent was wasted. Saving the neglected capability of the British car industry was the reason I asked my friend Ratan Tata to consider buying Jaguar Land Rover. We did that on a Sunday morning from my breakfast table because I knew the talent was there and we could make it a success. I had seen weak leadership and short-termism almost destroy the sector, but I believed that strong, stable leadership and a long-term approach could restore it. Even I was nervous at the beginning, but 10 years later we have one of the most profitable manufacturing industries in the country, exporting 80% of production.
We can make it in this country. How has this been achieved? It has been achieved by adopting the sort of long-term, innovation-led, collaborative industrial strategy we have lacked for more than 30 years. I stress “collaborative” because we must work with the rest of the world as equals. The arrogant language of “moving up the value chain of digital technologies” undervalues the advances made by others, fails to appreciate their consumers’ needs and underestimates what their innovations offer us. Instead, we must build partnerships with firms and universities around the world. We must invest in understanding the Indian, Chinese and Indonesian consumer, as well as our own, because we know what happens if we do not. British Steel faced the fall in global steel prices carrying a legacy of underinvestment and low innovation. I know this because it is another company I made my friend buy. I am hopeful that we can still find a solution that will secure the future of the steel industry. It was all because of underinvestment and poor management. Yet the truth is that the root causes of the steel crisis should have been dealt with well before the glut. We need a level playing field for domestic steelmakers against overseas competition, including competitive energy, labour and tax policies—mainly infrastructure. However, to grow trade we cannot merely subtract cost; we must add value. A strong trade policy, especially in manufacturing, will require an effective industrial strategy. That means not picking winners but ensuring that where an industry or technology has the potential for growth, we maximise the chances to succeed.
A strategy on its own is not enough. Attention to detail and sustained commitment are the keys to success. We must continue to push business and academia to look outward. We have to reach out to create new global partners and stand beside them in the tough times as well as the good. This matters because trade is not simply the purchase of goods but the building of relationships. So all industrial policies need to be built on a dialogue between British industry and the world. Most of all, we need to develop a mindset of competitiveness, to which the Government should always respond.
That is especially true of immigration policy. An outward-looking industrial strategy is essential for improving British trade and should be at the centre of our post-EU trade strategy. Investment from firms such as JLR and the UK motorsport industry has massively grown exports. Considering the key people who work in those companies, I would suggest that a lot of them are top-quality immigrants. The results are clear: record levels of production and thousands of new jobs.
So why is that the exception, not the rule? Because the US, Korea and Japan invest two to three times more than the UK on public sector applied science. As a result they have a private sector that invests in commercial research, whether in nanomaterials or in microprocessors. This is the engine of innovation that pushes forward their trade. By backing bodies such as Innovate UK and listening to groups such as the CBI and the Automotive Council, the Government can use our strength in science to get the private sector to invest in innovation, and that will drive trade. That is how we drove trade in the past.
So I ask the Minister to assure the House that innovation will be a key priority in our planning for a post-EU Britain. To succeed, we have to be competitive, we need the mindset to collaborate with the best, we need the resources to innovate with the smartest and we need the partners to invest for the long term. Investing here will increase our national wealth, spread prosperity more widely and build a broad-based, growing economy, instead of what happens now. If anyone goes to the Government for anything they are told, “It’s against EU rules” or, “It’s against state aid”. They will use every excuse under the sun, and then no one will be welcome in this country because of all these problems.
The secret to a strong trade policy is simple. Ultimately, it is simply making products that people in the rest of the world do not have and find that they want. That is how Britain led the first Industrial Revolution, even outside Europe, and it is still the key to success today.
My Lords, in times of economic change and challenge there are always new opportunities for business. That is why my noble friend’s debate is so timely, and I listened with great care to what she had to say.
Change is all around us but we must not be seen as mere supplicants at the gates of the stronger in the economic world. For sure the pound is down, but then the stock market at FTSE level is higher than before
Equally, on trade itself, President Obama said that in his view Britain would be at the back of the trade treaty queue. We will see about that. Australia, India, Mexico, South Korea, New Zealand and others have all expressed interest in new deals. I hope the United Kingdom will pursue those with vigour while at the same time we continue to trade with Europe, a much-valued customer for what we do but also a major market in both directions, because it wishes to sell to us. Therefore we must respect our close neighbours, allies and friends. However, in the coming months both sides will, post that decision-night shock, realise that getting bogged down into difficult discussions of a never-ending sort about access to the single market for goods will turn out to be a bad for world trade and European trade. This process cannot drag on forever, so we should simply apply World Trade Organization rules after, say, a 24-month period after the exercise of EU Article 50 unless we agree otherwise in specific areas, if agreement does not happen during that period.
The proposal for applying World Trade Organization rules would do a number of good things for the UK, its economy, and for exporters. First, it would provide business with new certainties, which it wants—understandably, businesses like certainties—to parallel other measures such as that corporation tax reduction proposal, which would create a most attractive location for inward investment into offshore Europe. Secondly, it would encourage UK business to raise sector-specific concerns early with the Government. Thirdly, faced with World Trade Organization tariffs, other countries would be encouraged to negotiate, which would allow the United Kingdom to seek freer access to the EU for some of our priority industries. Lastly, and most importantly, with our new albeit surprising freedoms to do this kind of stuff we can unilaterally decide to do all this in short order after 24 months or whatever period, and it can be delivered without trade wars.
I will exemplify how this works or might work with a worked example; I do so with some temerity, seeing down the Bench from me my noble friend Lord Green of Hurstpierpoint, that strikingly successful former Trade Minister who knows what he is talking about. None the less, I will risk it, and will take our trading goods with Europe—trading goods alone—as an example of how this might work.
The context of all this is that the European Union in the last full year, 2015, exported £219.8 billion of goods to the UK. On the other hand, the UK exported £134 billion of goods to the EU in return. Therefore the average tariff on imports into the UK would be 4.1%, by my calculation, raising about £8.9 billion per annum under World Trade Organization rules. The average tariff rate in the other direction, on exports from the UK, would be 3.5%, costing about £4.6 billion per annum.
However, all this detail—and let no one accuse me of not getting into the detail this afternoon—should be set against the context that the UK is the EU’s single largest export market: some 17% of all EU exports come to the UK. That is bigger than the amount that goes to the US, which is 16%, or, for example, to China, which my noble friend mentioned in her introductory speech, which is a mere 8%. Therefore we all have to recognise on both sides that the EU needs the UK market very badly indeed in any future trade negotiations.
UK exporters have benefited from the reduction in the value of sterling and are therefore now very competitive, even with tariffs. The only significant sectors where we are a net exporter to the European Union are fish, mineral fuels and bitumens, and aircraft spacecraft and parts thereof. These sectors would need to be helped in various ways and would doubtless be the focus of government incentives to relieve any pain of tariffs, even beyond the currency tail-winds, to be realistic—I recognise that.
At the same time, some UK importers would suffer substantial additional costs, and these are focused on a few industries: my little list is vehicles, electrical machinery, plastics, nuclear reactors, boilers and so on, and meat and fish preparations. There are also a few relatively small sectors where the UK relies heavily on EU imports that would attract high tariffs. These are flowers, vegetables, citrus fruit and nuts, preparations of meat and fish, preparations of vegetables and fruit, and fertilisers. There will also be—I have taken expert advice on this—some even smaller sub-sectors that will be affected. One, I am told, is pastry cooks’ products. Let no one suggest that I do not get into the detail of these future trade negotiations.
In those areas, the UK could do one of two very important things: first, unilaterally reduce tariffs on imports for smaller sectors where leverage over any one member state is low; and, secondly and absolutely vitally in these negotiations with Europe, use the tariff imbalance to negotiate other access rights—for example, trade tariff-free access for cars coming from Europe into the United Kingdom in exchange for the continuation of passporting for financial services. To take one country as an example, the Netherlands relies very heavily on the UK for its cut flower industry. It would doubtless apply pressure on other EU countries to act in a realistic way and in the spirit of give and take that all global trade agreements demand in return for tariff-free access for its own goods and markets here. Without a doubt that is what the Dutch would do. That is enough detail. That approach with our European friends would underpin the broad strategic approach to other worldwide business opportunities which my noble friend so rightly wishes to see and which she eloquently set out in her introductory speech.
I should like to ask just one question of the Minister, and I apologise for not having given her advance written notice of it. Working, as I do, outside the House for my living, some of these niceties escape me. I apologise and would be very happy to have a written answer placed in the Library of the House in due course if she cannot give it now. What is our vision for utilising more systematically our trading links with the 53 member countries of the Commonwealth, which should be our natural trading friends and allies? After all, the Commonwealth Secretariat says:
“Through our expertise and assistance … countries secure better trade deals”.
We are indeed one of the countries seeking those better trade deals and we should trade vigorously with our Commonwealth neighbours.
My Lords, I congratulate the noble Baroness, Lady Mobarik, on initiating this debate, but I suspect that it was planned in an environment very different from the one in which we have found ourselves since
With the growing deficit in our current balance of payments, we should concentrate on an offensive strategy to open up new markets and initiate import substitution, but I am afraid that, with the reality of Brexit, we are in a defensive strategy to protect what we have—that must be our first priority—and to negotiate completely new trade agreements. I remind the House that 44% of our exports go to the EU. If you count all the preferential trade agreements that we have, 57% of our exports are covered by the EU as well, and if we include the agreement that we hope to see with America and Europe by the time we reach exit from the EU, something like 73% of our exports will be covered by agreements and arrangements with the EU.
There are three principal problems with this. Of course, business will adapt to the problems we have created as a country by voting for Brexit. Change and crises galvanise change in business. In companies that I have run, I have always quite liked crisis because it enables you to achieve change more quickly, but I remind the House that many fewer companies than was the case 40 years ago are controlled and owned in the UK. Multinational companies will follow not the national interest of the UK but their own interest. All our motor industry jobs will depend on such companies and the decisions they make. One of the saddest things about the referendum result was the vote in Sunderland, where Nissan is based—a company which is owned not just by the Japanese; a 44% shareholding is owned by Renault. What will happen the next time a new line or new investment is planned for that plant and where will it go?
We need as a country to bring in new skills, because we do not have the skills to negotiate trade deals in great numbers. I am told that we have 40 experienced trade negotiators, most of them already working in the EU. The public comment is that some 500 are now needed. The EU will have a great competitive advantage in these negotiations, because it has the knowledge, the skill and the expertise.
The Government will try to reassure us. They have already said, “Oh, look, the economy now is fundamentally strong enough to deal with this crisis”, but the country is facing a vulnerable situation. We have made some progress on the deficit, but we will now be blown off course by lower growth and greater uncertainty. We are an economy still recovering from its heart attack in 2007-08 and dependent on the life support of artificially cheap money. We are still very unbalanced as an economy. We may now have the competitive advantage of a lower pound, but household debt is still too high and we have not created the export growth that we wanted even with quite a competitive pound during the past four or five years. Business investment is very disappointing. We are bailed out only by flows on the capital account to keep us in a liquid situation on our foreign accounts. Uncertainty will kill business confidence and investment.
As a country that is so dependent on trade, we are woefully unprepared for the decision that Brexit has given us, and I have to question the sheer incompetence of a Government leading us into a referendum to solve their own problem and emerging from it completely unprepared for what we now have to face. If Chilcot thinks that we were unprepared going into Iraq, I hate to think what future historians will say about where the Government now find themselves in dealing with these problems.
There are two issues that we should address in this debate. First, whether we should remain in the single market is completely unresolved. We have had the noble Lords, Lord Lawson and Lord Patten, telling us effectively that we should ignore the single market and just get on with our own arrangements, because they say that the single market would be unachievable without free movement of labour. But it is much more complex than we realise. We have had 40 years of free trade and integrated our supply chains as a consequence. The reason for our not seeing improvements in our balance of trade when the pound goes down is that it simply increases the level of imports of vital parts for our manufacturing and other services, which we then have to sell as exports, so it does not necessarily help our competitive position. I know that they will say, as the noble Lord, Lord Patten, said, that we will simply go to the World Trade Organization and negotiate away the 10% tariff on cars. I fancy the negotiations on agriculture because we now have significant exports of agricultural goods and I imagine that we will have such a strong position against the French and German farmers, negotiating away the 20% or 30% tariffs that those exporters will now face. There will be a complete disruption of supply chains.
The other aspect is all the preferential deals that the EU has negotiated with other countries. What will our position be in those? Do we retain our rights or will we have to renegotiate them? I challenge the Government: what is your preparation and what are your contingency plans on these matters? Most experts think that it will take five to 10 years to extricate ourselves from these sorts of arrangements. Then of course we are saying that we want to do new deals with the USA, China, Brazil and India using the flexibility that we now have to negotiate. But how will we possibly have the time, expertise and experience to do that?
I have a couple of other points. Our competitive advantage as a country depends on a number of factors. I have mentioned supply chains. Last year, I went to Airbus to see how it assembles aeroplanes. We will now have all the complications as parts of the aerospace industry have to go in and out of the single market and out of this economy. We will need to negotiate very carefully in these areas to protect our aerospace industry and our car manufacturing.
Our universities should be the source of all our future hope and prosperity in terms of research and development. It is a big competitive advantage. All that will be completely disrupted by the change in funding. Finally, there are services. Manufacturing is important—my goodness me, it is important to our economy—but services are our future. If we look at the way that people voted in the referendum, those areas of the country that had a big commitment to the service industries—whether London or the motorway links going down to Hampshire and Sussex and up to Cambridge, across to Bristol, Oxford, Manchester and our university bases—were where people saw the threat of coming out of the EU. Services are all-important so, looking forward, are the Government launching an immediate consultation on the single market and the detailed impact, industry sector by sector, service by sector, on the consequences of withdrawal? It is a question of talking not just to other countries, but to sectors and industries in this country. What are our priorities for renegotiating all the other trade deals that the EU has? Are we gearing up not only the diplomatic service but all our trade organisations to deal with this huge task?
I leave noble Lords with one final thought. There is already talk of us becoming the Singapore of Europe. We have already had these initiatives of lower taxes for business. Lower taxes do not actually help investment. They create cash but it does not mean necessarily that that cash is invested back into the UK. It may just simply stay idle if there are no investment opportunities. But believe me, if we are relieving taxes on business, we are putting higher burdens on everybody else. We should be very cautious of anything going forward that undermines our competitiveness. The living wage, training levies and pension contributions are all coming along the pipeline. Going alone is a very dangerous place. We were told that we would be more flexible and more responsive, but I recall the words about going abroad: “Speak softly, and carry a big stick”. Without the single market, our leverage in negotiations will be much reduced and this is a very dangerous, uncertain step into the unknown.
My Lords, I congratulate my noble friend Lady Mobarik on introducing a debate on a matter that is topical, critical and urgent. In fact, well before the referendum decision this was an urgent and chronic topic for us. It is the clear Achilles heel of the British economy and has been for several decades. Last year the external position of the country deteriorated to the point where the current account deficit was just shy of £100 billion and something above 5% of GNP. That is the largest since the war. The trade deficit is over 2%, which is not a record but nonetheless serious and chronic. It is worth reminding ourselves that no other developed country is in this position. The Australians have a significant deficit, but it is about 3%. The US and Canada both have deficits, but they are less than half of ours in proportion to GDP. No other major EU state faces the same challenge. Finland, Poland and France all have trade and current account deficits, but they are less than a quarter of ours as a percentage of GDP.
The trade deficit has been there almost all the time since the 1960s. Hitherto we have had no trouble financing it, but it would be folly to assume that the markets are always going to be that kind to us. As the noble Lord, Lord Stoneham, indicated in his remarks just now, the deficit is becoming more deeply rooted. Traditionally, sterling devaluation every now and then helped us out of the crisis of the time, but each sterling devaluation has had less effect than the last one. Why is that? It is partly because of short-term responses. There seems to be a tendency for export prices to be held up in the foreign currency rather than to cut them on the back of a devaluation in order to gain share. On the import side, it seems to have resulted in a short-term depression of import demand rather than real domestic import substitution. In any event, over time the growth of supply chains has reduced the impact of a sterling devaluation because our major engineering names—household brands for all of us—which export world-class products from this country find that the import component has gone up over the past 20 to 30 years from around 30% to about 70% of their output.
The point is that this is a serious challenge and has been so for a long time, and there is good reason to believe that part of our challenge is to get more British firms involved in the export markets. Compared with some of our obvious competitors across the Channel, we have a smaller proportion of businesses engaged in the export trade.
Of course, we have recently increased dramatically the scale, complexity and risk of the challenge. We have put into question our ready access to the market that takes more than 40% of our exports. As my noble friend Lord Patten said, the EU does indeed have every rational interest in a reasonable deal with the UK going forward, but it will be complex to negotiate it. We have told ourselves that other markets will be ready and eager to negotiate trade agreements with us to replace the existing 50 or so EU agreements around the world under which we currently trade. We have told ourselves, too, that in the case of the big ones currently under negotiation—the United States, Japan and India—the counterparty is not only ready and eager, but will find it easier to negotiate with us because we do not have to balance the demands of 27 other member states against our priorities.
“O brave new world
That has such people in’t”,
I am tempted to observe, because now we are on our own. We have taken the challenge, we have made the decision, and now we need to deliver on the promises.
We have given ourselves some extra degrees of freedom—that is clear—but we have undertaken grave risks. We have seen sterling fall. As of yesterday it was at its lowest level against the dollar since 1985 and against the euro since 2013. On the face of it that is good news for British exports, but on the other side we have started to see anecdotal evidence of an investment slowdown, various announcements of decisions, particularly strategic decisions, being put on hold, IPOs being pulled, and evidence that we are moving into a period of uncertainty that will affect investment. We need to keep that period of uncertainty as short as possible.
It is too early to tell, as Zhou Enlai famously said about the French Revolution, how this will all play out—but it is not too early to reflect on the policy challenges and the trade promotion imperative that we now face. I will talk briefly about three things. The first is the policy challenge vis-à-vis the EU. Participation in the single market now becomes a trade policy and negotiation question. Essentially there is a spectrum of possibilities that will have to be looked at in the coming couple of years or so. At one end we have an arrangement that looks like the EEA—essentially for access to the single market but taking the four freedoms as well and the costs of contributions to the Brussels budget. It is worth noting under that heading that being a member of the EEA does not get you inside the common external tariff of the EU and that we will face, even under that regime, new customs procedures, proof of origin rules, and so forth.
At the other end of the scale we have the WTO rules which, however, cover only goods. If we set our tariffs with the EU at zero we have to generalise those around all the other markets—and that removes bargaining chips as we go into negotiation with them. I make these points simply to indicate that life will not be easy or straightforward in these negotiations.
We can look at in-between arrangements. Switzerland has attracted a certain amount of attention in recent days. That country has dozens of agreements with the EU. Its relationship is fractious and changing. It is worth noting that it does not yet have passporting arrangements for Swiss banks in the EU, and that the Swiss have put all of that in balance by their referendum in 2014 which voted to restrict migration from the EU. The standstill arrangement on that runs out next February, so we will see how the Swiss get on.
There are other models. People talk about the Canadian arrangement: the Comprehensive Economic and Trade Agreement. That covers goods and agriculture and deals with tariffs, quotas and subsidies but does not cover services which are, as a number of speakers have already pointed out, important to us. It is also outside the customs union and would have the same effect, therefore, as being in the EEA.
Not talked about enough is the Turkish option. It is inside the customs union and can still negotiate independently with third parties. The arrangements cover only part of its economy—notably its manufacturing and processing industries—and Turkey notoriously does not have free movement of people. That is a disadvantage in their minds which, I suspect, would not be a disadvantage in the mind of the British Government. I do not know what the way forward is; I merely stress the importance of sorting out this problem as soon as we reasonably can.
As for the rest of the world, we have to negotiate with those countries that are currently covered by the EU agreement. It is probably too easy to assume that they will be happy to sign the same thing with us independently. In the case of the Canadians, for example, that was a painfully negotiated deal, involving the provinces as well as the federal Government of Canada, which makes it complex on their side as well as on ours. We will see as we get into it how well we get on with these various renegotiations.
What about those countries where no agreement exists yet—notoriously, the United States, Japan, and China, the first, second and third largest economies in the world, by the way? Negotiating TTIP at the moment feels to all concerned rather like walking through treacle and we do not know how and when we will get out the other side. We have told ourselves that they will find it much easier to negotiate with us because they do not have to deal with the requirements of 28 member states—only with us. That is true, but we need to stare one uncomfortable fact in the face: that negotiation is all about services and regulatory convergence or harmonisation. Tariffs on goods are 3% both ways, and for the most part are relatively trivial. The services that we care about, in particular in pharmaceuticals and financial services, are ones where it is a particularly difficult negotiation on their side. We would be unwise to assume that the Americans will find an agreement with the UK easy to negotiate.
We are where we are, and the question, to quote one famous Russian politician, is: what is to be done? The most obvious point is that we need a huge increase in official resources devoted to this challenge. We should see this as almost putting the country on a war footing. I am told that there are about 20 people in the trade policy division in the Department for Business, which roughly coheres with my memory of it from a couple of years back. My suggestion is that we probably need to grow that at least fivefold or maybe tenfold as quickly as possible with people who are able, and who, as rapidly as possible, will be trained in the minutiae of trade negotiations.
On the trade promotion front, we should re-look at the question of the UKTI budget. It was slightly reduced in the spending round. It would seem rational to ask ourselves whether we should not reinstate an investment in UKTI and encourage an expansion of the partnership that has been developed between UKTI and business groups around the world—in some cases it is chambers and in others British business groups in what I think is now 37 countries. I suggest that we need to enhance those, be prepared to invest in them as strategic partnerships and not see them just as contractual arrangements. In short—I am conscious that I overrunning my time—there is a lot to be done. I look forward to hearing any comments from my noble friend the Minister on the way that we will resource this.
My Lords, I remember well sitting in the peripheries of a highly successful trade mission to Kazakhstan led by the noble Lord, Lord Green, and it is a pleasure to follow him today. The noble Baroness, Lady Mobarik, should be thanked for moving your Lordships’ House on to arguably the single most important subject beyond that of the referendum.
Much was made during the referendum debate of what would, and needs to, accrue from exporting globally. On the United Kingdom’s standing in the world, the Prime Minster informed us that we are the fifth-largest economy—although, expressed in dollar terms, we have already, I believe, slipped to sixth or seventh. We are members of the Commonwealth, but even many of our friends there have entered into their own regional arrangements. These were all cited as illustrations as to why we need not be concerned for the future. Comments ranged from those of some, who took the view that we do not need to be a member of the single market, to those of others advocating that the European Union needs our market as much as we need it, which then comes back to that all-important question of access—or not—to the single market and on what terms.
While I have listened with great care to all the positive messages today, I believe that we are afforded a few moments for a reality check, all put forward in the spirit of helpfulness. On
Global opportunities and the environment in which UK commercial interests can thrive become imperative. In years gone by, it was often said that the world is our oyster. Certainly, the UK has many comparative advantages, but that environment is fast-changing. Increased competition comes from countries such as India, China and South Korea, with France wishing to protect its interests in the francophone area, and the multivector policies adopted by many countries, particularly those that are strategically placed. However, what gives me equal cause for concern is that the new world countries, where many of the opportunities previously existed for the United Kingdom, are starting to play the game by their own rules.
As an example, some time back I was requested by the national oil and gas state entity in Kazakhstan, KazMunaiGas, to negotiate with the three largest foreign oil and gas operators to recognise that procurement policy was not expected to pay scant regard to national goods, works and services capabilities. From these aspirations, I was able to create a memorandum that is known as the Aktau Declaration on Joint Actions, which was signed up to by all the operators concerned. This was in line with the desire to ensure,
“opportunities for the companies and citizens of Kazakhstan to benefit directly from oil and gas projects as part of a strategy to develop an indigenous capability in the sector … creating an appropriate environment and attracting joint ventures with technology transfer by companies in the global oil and gas supply”— in other words, a stringent local-content programme. These activities become more dire with the low oil price and the little-known consequences of a low oil price that is holding back investment in capital projects.
The point of all this is that the rules of the game have changed and are changing. Partnerships and joint ventures with local employment will become increasingly more mandatory. I cannot underline enough that what these countries expect is genuine partnership. The illustration I am offering noble Lords is being increasingly adopted by many around the world. I think particularly of Tanzania, where the president, or his Government, has signed up with the appropriate foreign entities.
Yesterday afternoon, I sent an email to 50 or so chambers of commerce around the UK and a trade mission organiser to inform them of today’s debate, requesting that if they had any points of specific concern that required being flagged to kindly let me know. I am most grateful to the large number who responded by return. A range of important issues emerged. The difficulty I now find myself in, with regret, is that those issues were far-ranging and far too numerous to do them justice—even a snapshot, with calls to action—and to be able to place on record today all the many concerns and challenges expressed. To be exact, I received 15 pages of condensed type of useful suggestions. There is no possibility of my doing justice to all that I have received.
However, the examples include the need to accommodate business visas with easier-to-obtain visas. For example, Dubai is now taking over as the meeting place of choice for not only nearby states but also west Africa. Our friends in west Africa prefer to go to Dubai instead of coming to London Heathrow or Gatwick, as they have done historically. The fast-track trade agreement with India was noted by a number of people, and clarity on a timetable for exit from the EU is considered essential. Lastly, to pick up one of many of the points made, stability should be sought from the Government similar to that being expressed in a clear and resolute fashion by the Bank of England. Would the Minister kindly allow me to package these up and send them over to her for her officials to review? By the way, it is a pleasure to see the noble Baroness at the Dispatch Box. The noble Lord, Lord Price, is, I understand, in the marketplace today, where the UK needs him to be—in China.
Nevertheless, over the years I have felt that there is not sufficient partnership between the public and the private sectors in the UK. That gap needs to be plugged. After all, while often too much can be expected from government, the support of—and, in many circumstances, assistance by—government is paramount. Conversely, the private sector is at the sharp end and its views need to be taken on board as an equal partner.
With regret, I now conclude my remarks with an unpalatable tale but one that illustrates the importance of the work that needs to be urgently carried out by the Minister’s department. At this point, conforming with protocol, it is appropriate that I declare that I am the founder and chairman of SupplyFinder.com, a free-to-use global business portal created to stimulate global trade and investment, presenting national and international opportunities covering 195 countries and 25 sectors in eight languages—a large undertaking. I have been keeping the Minister’s department, including the head of digital, informed of progress and will of course continue to do so to the extent that they are minded. To go back to the tale, some short months ago I had occasion to speak with our consul-general in Casablanca, who informed me that the OBN—the Overseas Business Network—in Morocco, which is UKTI’s partner on the ground, was frantically arranging itself in Meknes for what was apparently the largest agricultural conference and exhibition in Africa. Making an immediate decision, I jumped into my car, albeit in Faro, and drove to Meknes, arriving in time for the last day—all well and good. I went immediately to the overseas pavilion, calling at the European Union stand, followed by those of Spain, France and others, including various African representatives. But then—guess what?—the UK stand had packed up shop the day before and left. There was no note, no catalogue, no point of contact—nothing.
We can only scratch the surface of what needs to be debated in this opportunity today, but there is so much more that could and needs to be added if the UK is going to excel in this highly competitive global market. I end with just one thought for the Government, which I believe has been expressed elsewhere. While there is an undeniable need for UKTI to settle down and become supercharged—a new word I learned yesterday, by the way—and properly resourced, there is an urgent need for a review in parallel that addresses this self-created, changed world that had its big bang on
My Lords, it is with a certain nervousness that I stand here before your Lordships, recognising that I have been in this House for 52 years, but I stand with pride knowing that my noble friend Lord Lyell has been here a year longer. During this time, I have been drip-fed by numerous political parties and others and, often out of my depth, talking and failing to understand how you spell things, but liking the object of trade.
I came here only after my father suddenly died accidentally and, before I knew it, I was told that I should go to see Lord Jellicoe, for whom I had a lot of time. He asked if I could give up part of my job to come to the House of Lords. I said that I would ask my boss, who immediately said no, but that he could put me on part-time work as a consultant. Then I was introduced to Lord Shackleton, and it was these two Lords who gave me my interest in trade. Before, a lot of the work that I did was trade research, but these two wonderful men, who were themselves great friends—and competitors—opened up the world for me.
I was told to do some research and to decide what I thought I could do in the House of Lords, so I went off and researched the history of trade. I read most of the volumes—with the help of the Library—of the original council of trade of Queen Elizabeth I. I suggest that your Lordships read the rules and regulations there, because I think that they are slightly better than those that we are trying to introduce today. They were very patriotic indeed, because they were looking at inward investment as well.
In that period of time with my two noble friends, I wondered what I could do. They said, “Why don’t you get involved in trade, as you are doing trade research?”. Lord Shackleton said, “You’d better come to Moscow with me. You’ll find that it is going to have a different future—there are going to be all sorts of changes with the Russians”. We went to the embassy in Moscow and had to go down into the basement. We then found that some strange mouse, or some strange human, had put a microphone into the wall in order to learn what I might be prepared to say. I thought it very complimentary.
It was suggested that I should look at the socialist world because it would change and we, the British, could probably be their best friends and help to put them in order. It was also suggested that I should get involved in trade, not just the Board of Trade; I found myself on the East European Trade Council, under Lord Shackleton, and was quite a lot younger than the others. With Lord Jellicoe, I suddenly found myself almost on the Board of Trade. I went off to Cuba; I was told to deal with the more difficult countries because, when things changed, I would probably the only one alive who had had certain experience.
With Lord Walston, I went to Havana. When we got there on a British plane, we wondered how we could get to where we needed to go. In fact, we had gone to Miami, but I thought we had arrived in Havana. When we did arrive at that end, we were greeted by Raúl Castro, Castro’s brother, and shown around, but Lord Walston seemed to know everybody. A party was given at the embassy, which was quite nice. A rather strange incident had taken place the week before, when the wife of the Foreign Minister, dressed up to the nines, had walked in—head held high with pride—and, not noticing the swimming pool, which looked like the marble surrounding it, walked straight into it. I gather that her husband asked whether anyone had a walking stick or a golf club because her extra hairpiece had come off and had to be picked out.
We were shown all around Havana. I said, “I hope to be alive when relations get better. Is there anything you could sell us?” Someone said, “Well, we’ve got pretty good fruit, particularly pink grapefruit”. I have to say that I did not know what a pink grapefruit was. He asked, “Have you got anyone who could buy them?” I asked whether they had a telephone, and they said yes. I asked whether it worked internationally. They said, “Oh, of course. Our telephones can get anywhere in the world”. I rang Marks & Spencer, which said down the telephone, “Tell him to fill up his biggest ship and we’ll take the lot”. That was my first trade deal with Havana. I have learned that some of our old relationships with other nations are quite important.
Having been involved in such things, I rapidly found myself president of the British Exporters Association and dealing with all sorts of activities. My real wish, however, was to see whether we could get foreign investment into the United Kingdom, because our manufacturing industry had been declining for quite a long period. I then went out as a banker to ask people to come in. One of the first was the Italian white goods group called Merloni Ariston; “ariston” is the Greek for best. It was a family business that used to make weighing machines. Before we knew it—we had been sitting down with Arnold Weinstock—everyone in England wanted to get out of white goods. I said to Merloni, “If they want to get out and you’re so good, why don’t we buy them out?” They said, “We don’t have that sort of money.” Before I knew it, however, they had managed to buy a large section of the white goods industry. The Italians were playing everything off the front foot.
In fact, that led to my being asked to go on the British Overseas Trade Board—I was already on the East European Trade Council—and I was then made chairman of the Committee for Middle East Trade, dealing with the Arab world and others. They wanted someone who would be alive when important things happened. From my own background, I knew that in the Middle East and the Arab world, the guest is always the most important person and is always protected, so I had no fear.
I went to Jordan first, and then moved to Iraq for the first time on my own. I waited for someone to arrive, and when people asked what I wanted, I said, “I want to reopen trade relationships. Have you got any oil you could sell?” Before I knew it, I was seeing the Oil Minister. He was sitting in his office, with a mirror showing a whole lot of people negotiating transactions. This all led to my believing that it would be a good idea to have a close relationship with Iraq. I was chairman of the Committee for Middle East Trade, so it seemed to come under me, and I asked the Foreign Office and the Department of Trade and Industry so that I did not put my foot in it.
Having looked at the history of our trade relationships with Iraq, I got to know Tariq Aziz who was a very nice man indeed. I had been a wicket-keeper, which is why I had to have new knees to walk, and found that Tariq Aziz had also been a wicket-keeper in Wales, so we had a quite intriguing relationship. After my Iraq trips, which were many, I went to see the key man who was doing the evaluation and it was deemed that what I knew was irrelevant at that time.
If we look at the world, in a way the British are best at dealing with the more difficult countries, where the competition is least. We know too, if we look at inward investment, that a lot of British businesses which would like more business may be in a position to be acquired by foreign or international interests. Our own balance of payments is not particularly strong but the quality of the people we have here and the desire for others to come into the United Kingdom makes it very interesting. Instead of trading, maybe we should look at which companies and institutions within the EU we might join in partnership investments, as we look at different parts of the world.
Into all this work that I got involved in would come the nice, exciting bits which you could not understand. I was asked to deal with exclusion zones. I then raised in your Lordships’ House the issue that British influence includes the 200-mile limit, which gives us an economic exclusion zone that makes up 20% of the world. If that is put together with the French zone, it comes to nearly 30%. Into the blue, when I asked about this it was brought to my attention that the largest ever sea chase after a fishery, for the Patagonian toothfish, took place in the South Atlantic. The Patagonian toothfish’s importance is that it was apparently much loved for eating among the American mafia. Out of that came a new world of calamari—the squid. I was given some aerial photographs to show the importance of squid fishing. It was done by North Korean fishing boats, effectively using sticks to catch the calamari or squid that now adorn the tables of much of England.
It is nice to know about the EU—in the bank, they made me an EU adviser for a time, when my job was not to get anything done but to go and get the money back. I have a great hope that we have to be global and I regard the EU as just a small part of the global initiative.
My Lords, I am grateful to your Lordships for permitting me to speak in the gap and I thank my noble friend Lady Mobarik for securing this debate.
I returned two days ago from the meeting of the British-Irish Parliamentary Assembly in Malahide, near Dublin. As your Lordships will know, the assembly was created in the bad days of the 1990s to enable Back-Benchers from both sides to talk to each other. On the British side, it owed much in its early days to the imagination and vision of the then Peter Temple-Morris MP, before he entered this House. I am very happy to see the noble Lord, Lord Temple-Morris, in his place.
It will come as no surprise to your Lordships that there is considerable anxiety in the whole of the island of Ireland at the outcome of the referendum but particularly in the Republic, which, among the 27 members of the EU involved, probably has the most to lose from Brexit. In the context of this debate, Great Britain is Ireland’s largest trading partner. The Irish are especially worried about the effect of the weakness of the pound against the euro on their tourism, which depends on visitors from the United Kingdom. The retail trade in the south could be affected by the stream of shoppers from the Republic who will once again take the high road to Belfast and make shopping expeditions to take advantage of the weakness of the pound there.
I cannot say too strongly that a reversion to a closed border, which would become an EU border when Brexit takes place, would have a disastrous psychological impact, particularly on north-south relations within Ireland but also on wider British-Irish relations. It could have the effect of putting back Anglo-Irish relations 30 years or more, a theme that ran through the whole of the BIPA meeting from speakers from both sides. I am happy to say that at our meeting we had an assurance from the Minister for the Diaspora and Overseas Development Aid that it was the policy of the Irish Government to maintain the open border. I understand that following the referendum result, my right honourable friend the Prime Minister had an early conversation with the Taoiseach on this sensitive matter. I hope that as part of the Brexit settlement, the Irish border will be maintained in something like its current open state, whether by derogation or other means.
I finish by saying that the Anglo-Irish relationship is unique within the European Union as it is now constituted, and I urge Her Majesty’s Government, through the Minister, to do all in their power to ensure that in the coming Brexit negotiations this very special, close and mutually beneficial relationship will suffer the minimum disruption.
My Lords, I congratulate the noble Baroness, Lady Mobarik, on securing this debate today and all noble Lords, who have made very thoughtful and perceptive contributions, including the noble Lord, Lord Selsdon, who I will henceforth think of as our man in Havana on account of his exploits in our now mostly gone world of international trade. I now know more than I ever wanted about the Patagonian toothfish. We have heard a lot about the difficulties of renegotiation and about the gloom and doom, including how the pound is down to a 31-year low from the noble Lord, Lord Green, in his excellent and thoughtful contribution.
This is very unhelpful when our balance of payments deficit is so large that we are spending more to buy imports than we are reaping in improved attractiveness of our exported goods. We have moved from being the fifth to the sixth-largest economy in the world— displaced by the French, which is galling in more ways than one.
We have to look at our place in the world from a new perspective, as many contributors to the debate have done this morning. We no longer have the might of the largest market in the world on our side when it comes to negotiating power, as my noble friend Lord Stoneham mentioned. Like it or not, we have to strike out at new or at least underdeveloped markets and, to get those markets to take us seriously, we have to have a plan. Indeed, it would have given more comfort to Britain’s industry if we had had an industrial strategy in the first place, but Mr Javid, the Business Secretary, apparently does not like the words “industrial” and “strategy” in the same sentence. The noble Lord, Lord Bhattacharyya, echoed this in his excellent contribution and talked about the importance of manufacturing and innovation, both of which are very endangered amid the possible outcomes ahead.
It is time to stop reacting and to start planning to help industry to cope with the changed economic landscape that it finds itself in. The option suggested by the noble Lord, Lord Patten, of going straight to the World Trade Organization in two years if we have not got a deal, would be disastrous for British manufacturing. A 10% tariff on cars and 12% tariff on clothing and food do not bear thinking about.
I am sure I was not the only Member of your Lordships’ House to experience dismay to discover that, as far as trade was concerned, there was no post-Brexit plan in place from the Brexiteers. Bold statements like, “We’ll soon have our own, better deals with the rest of the world” were not, it seems, backed up by anything other than rhetoric. The world we face, and the opportunities that exist within it, may not be quite as enticing as they might have appeared from the other side of the pre-Brexit fence.
Our Chancellor has laid great store by doing trade with China. Trade with China is rapidly expanding, but still constitutes only 3.7% of our exports, and growth in China is slowing, as we know. India, another great focus of government optimism, constitutes only 1.7% of our exports. Several Members mentioned trade with Commonwealth countries and the importance of reinforcing the links that we have with our friends in the Commonwealth. To look on the positive side, at least there is lots of room for improvement.
Let us look at countries where our balance of trade is positive: Australia, South Korea, Singapore, Japan, Switzerland—in EFTA—and of course our good old pals, the US of A, our largest single trading partner. I for one would be very willing to put my best suit on and go to any country to proudly sell the British brand. In the coalition, we boasted that no Minister was allowed out of this country without a business brief in their little red box. We need the same get-go focus today, right now more than ever. The noble Lord, Lord Stoneham, in his excellent contribution, said he likes a crisis and that it galvanises business to make changes. I hope it galvanises the Government as well, because otherwise we could be in a great deal of difficulty.
We must have a plan, but the plan needs to take account of what kind of deal we will be doing with our erstwhile European partners. Some of the other trading models which give a degree of access to the single market impose restrictions on trade deals with other non-EU countries. The noble Lord, Lord Green, gave an excellent explanation of the models and analysis of the situation, and I conclude from his comments that none of them is as good as what we have at the moment. The noble Viscount, Lord Waverley, included in his contribution the lost opportunities in public procurement, alongside a number of other very thoughtful and perceptive comments.
As we will become the EU’s largest trading partner—a bigger trader even than America—I am sure we will have a lot of negotiating power. The deal that we will be able to obtain should be unique, not least because we buy more from the rest of Europe than we sell to it. Several noble Lords have made the point that it is very much in its interests to trade with us too. In my view, and in the view of my party, access to the single market is the most important thing we should be striving for. But here is the quandary: we need a plan—fast—to restore confidence and our attractiveness in the eyes of investors, but equally we need access to the single market, otherwise our attractiveness to non-EU countries aiming to invest here, at least in part to gain access to the single market, is lost. It is the old chicken-and-egg question.
Business thrives on certainty, and right now that is in very short supply. The two major political parties are so busy tearing themselves apart that their focus on the needs of their country has been lost. Who would have imagined, six months ago, two months ago or even two weeks ago, that things would have ever come to such a state? However, there is one political party whose focus has not been lost; one party that is undivided in our appreciation of the need of our country for stability and certainty. We know what we stand for: a Britain strong in Europe and strong in the world. We say that our priority must be to remain within the single market, so companies can have confidence to stay here, invest here and trade from here. We say to the Government: do not pour what money we have into tax breaks for the rich by reducing corporation tax, when it could be put to better use supporting British business by bolstering the British Business Bank and supporting innovation, business growth, and those businesses that may not any longer attract funding from even more risk-averse banks. As long as we retain access to the single market, Britain is the best place in the world to trade with and from. We have the flexible, skilled workforce, we have a “can do” attitude towards supporting business and we are still the best place in the world to do business.
My Lords, I draw attention to my entry in the register of interests, which currently holds a balance of winners and losers from the post-Brexit crunch. I congratulate the noble Baroness, Lady Mobarik, for her accomplished and comprehensive speech, in which there was much to agree with. It was very valuable to have the debate introduced and such an effective case made. I shall try to be helpful. I am hoping, in this moment when we have suspended animation, to try to make a case—and to convince the Government that it is necessary—for being bold and expansive. We are in a very different place, but we are where we are, and we have to think about our challenges and the right prescriptions. In that regard, I thought the speeches of the noble Lords, Lord Stoneham and Lord Green of Hurstpierpoint, were outstanding. Both identified that we need to be bold and that our plans need to be based on a correct estimate of our challenges. It has been clear for a long time that our trade has underperformed. One simple measure is how Germany’s trade with countries such as China has rapidly grown, way outside our own capability. Those sorts of things are great illustrations of some of the challenges that we face.
I shall touch briefly on three areas. First, there is the Government’s performance on promoting exports. Secondly, there are some of the challenges for exports, which we must address, as a consequence of the decision to leave the EU. Then I shall make some final observations on the risks ahead for our country.
We on this side of the Chamber had high hopes that, when the noble Lord, Lord Maude of Horsham, became Trade Minister, we might at last see some serious progress in addressing clear structural weaknesses in government that were holding back our capacity to perform effectively compared to our peers. I am not suggesting that it made us believe that we would hit £1 trillion, with a doubling of trade, but it certainly gave us some expectation that the whole of government could be galvanised. Traditionally, we have expected UKTI and UK Export Finance, admirable though those organisations are, to carry the sole burden of supporting exports. A consensus had formed that the whole of whole of government needed to be mobilised, and the increasing engagement of the Foreign Office illustrated only how our performance lagged and how much more we could do. We can do better and we need all our overseas posts to show the laser-like pursuit of Britain’s commercial and economic interests—and, across government, all the departments that deal or engage with business sectors can encourage, support and help businesses to explore overseas opportunities. We were pleased that someone who had the ability to galvanise Whitehall was chosen to make this happen, and we are disappointed that there seems to be a gap. This is not to criticise the current Trade Minister, who, as I read in my Bloomberg stream, is doing a very fine job of flying the flag in his role. But we need an expanded group of Ministers to take on all these challenges. The noble Lord, Lord Green of Hurstpierpoint, made the right point about how we have to expand, and on the level of expansion that is required. We need to make the most of all those willing to fly the flag for British business abroad, and I thank all those Members of both Houses who act as unpaid trade envoys. Our business ambassadors also play an important role. But the case is clear that we have to scale up, and scale up massively.
We must look at what is on the agenda. It is not just a small amount of trade promotion; in the round, we have to look at how we will approach the WTO framework and the multilateral negotiations, the 100 or so renegotiations of trade agreements, as well as how long they take and how they are covered. The EU is in the midst of arrangements, for both implementing and discussion, with Canada, Singapore, the United States, Japan and Vietnam, India, Mercosur, Australia and New Zealand, Mexico and Chile. That is as far as I could work it out—I suspect that it is a whole lot more. So what are we going to do bilaterally? That is a huge challenge, and we will have to make sure that we are prepared to address it with the right resource.
On the second series of issues, we are concerned about the size of challenges ahead in dealing with the consequences of Brexit. There are myths about our current circumstances. First, on the argument that a decline in the pound’s value could stimulate exports, off-setting any downsides from leaving the EU free trade area, the evidence suggests that, at best, the answer is “not enough”, and by some distance. The stimulating effects of currency depreciation have been gravely overstated. A fall in sterling merely compounds the problem. It is no solution. We are import-dependent for food, drink raw materials, semi manufactures and finished consumer goods. Imports are relatively inelastic with respect to price. A depreciation merely generates domestic inflation or damages margins in manufacturing, wholesale and retail. Although weak currencies typically present an opportunity for increased output, this luxury is not available to the UK. Our exports concentrate on highly sophisticated services and goods, such as financial, legal and IT services, as well as pharmaceuticals. The economy’s core exports naturally suffer from low price elasticity. In volume terms, therefore, a 1% depreciation of the pound increases the UK’s exports by a mere 0.12 %. Meanwhile, a widening trade deficit, caused by a falling pound pushing up import prices, casts uncertainty on the UK’s capacity to substitute its large import values with domestic production. The result is rising consumer prices with little or no improvement in exports in return.
What is more, as the UK manufacturing sector continues to decline—we had an outstanding speech from my noble friend Lord Bhattacharyya on manufacturing issues—any further depreciation of the pound will lead to price increases. Currently, the UK’s trade deficit is experiencing its highest levels in eight years. With a lightweight manufacturing sector, the UK is unable to plug the widening trade gap domestically, causing price elasticity of supply to remain at zero. We have been far too relaxed over the decline in manufacturing and we are suffering the consequences.
There is also a fallacy that there will be some deregulatory boost from all this. I shall not go into that in too much detail, but those things are specious and we have to understand that we need some regulatory push to ensure that we have effective markets. I look forward to later in the year when the Minister introduces the better markets Bill. I think we may be able to accomplish some things there.
We also need to address the fact that, as a result of the shocks and challenges in our position, we need to institute some form of industrial policy, using our advantages to support industries while we have a competitive advantage, with a strategy to ensure that nothing makes it less attractive for large multinational companies to favour the UK over other countries, support for domestic clusters of industries, and connected ecosystems to drive innovation. Where we have capabilities in industry and science and technology, we need a larger global presence, and we must focus policy—on skills, infrastructure and other areas of capital and financial support, to make sure they can prosper. These things are essential.
We have two critical sectors on which we must keep a close eye. Before the referendum, the motor industry was the UK’s second largest export industry, worth £3.2 billion, an increase on 2015. Our automotive industry produces an average of 1.6 million cars each year, of which 77% are exported abroad, of which 58% are sent to EU countries. That is absolutely critical. In addition, the pharmaceutical industry is of major concern. I hope the Minister can give assurances that the EU regulatory approval system that aids the faster dissemination of drugs between the EU and UK will be a priority discussion in future negotiations. I would be grateful if the Minister could also address the question of the EU Medicines Agency, and our role in and view of it, and whether it is likely, given that it is based in London, that it will have to relocate in the circumstances of our exit.
There are some major issues that confront us. The noble Lord, Lord Green of Hurstpierpoint, made the speech that I wish I could make, but he set the context for the issues around the current trade deficit. Can we pay our way? Can we make enough from exporting to pay for our imports? Can our invisible exports, whether they are services, tourism, or things such as insurance—or even income generated from our overseas investment—help us to deal with this? We are now in the worst position in our history. Never has the Government’s inability to meet their objective and balance trade been starker. There are two serious crises. Our weak export performance, no matter what we have done, no matter what gloss we put on it, does not address where we need to be. Foreign direct investment is hugely underperforming.
There is one matter to which we must turn our attention. The money that we earn from British-owned overseas businesses minus the outflows to overseas owners of foreign-owned businesses located here is now negative. There is now a £250 billion deficit in the value of UK assets owned by foreign companies compared to foreign ownership. This number is only going up. FDI is now likely to sharpen the current account deficit. When I read the Government’s April press release headed:
“UKTI reveals record number of UK businesses looking to export”,
I raised a glass. Notwithstanding my scepticism when I read such things about when the records began, what they are and the nature of the data that were collected, I raised a glass, but it is nowhere near enough. Even before the decision to Brexit, trade, our current account deficit and FDI meant we were facing huge underperformance and there were conditions for major problems to our GDP, so we need the Government to rise to this new level of threat as well as to the opportunities. I appreciate that the Minister cannot provide the answers required in our current political circumstances but, most importantly, are she and the Government prepared to accept the level of the crisis we face? At a time when we can do something about it, I hope she is.
My Lords, I am very grateful to my noble friend Lady Mobarik for calling this debate and for her wide-ranging, interesting and perceptive speech. I associate myself with the words of the noble Lord, Lord Mendelsohn, in relation to all that has been said about other speakers.
Our economic position in the world is at a point of inflection. As we turn to the future, the overwhelming need is to rise to the occasion, seize the initiative and make the most of the new opportunities. In my noble friend’s words, we must not allow a state of paralysis. We must engage with the rest of the world, building on existing relationships and, I would say, creating new ones.
While I wanted the UK to remain a member of the EU, the British people have spoken, and it is the Government’s job to implement their decision. In contrast to some noble Lords who have spoken, my vision for the future is positive, because there are opportunities as well as threats in Brexit. We must capitalise on new export opportunities, attract inward investment and build UK dynamism by making the UK the best place in the world to do business. As the noble Lord, Lord Mendelsohn, said, we will no doubt be returning to that later in the year.
I sense that those who have spoken in today’s debate are already looking forward and thinking about how to turn opportunities into action. As my noble friend Lord Patten said, the Chancellor has announced that he is looking into cutting corporation tax to encourage investors. I was very interested by my noble friend’s analysis, which underlined the strength of mutual trade between the UK and the EU and the tariff opportunities if we go that way. We also need to factor in the depreciation of sterling as a positive, which we have seen reflected in the relative share prices of, for example, Rolls-Royce and GSK and some of the best British companies. However, I take the point made by my noble friend Lord Green that, because of changes in supply chains, this is slightly less significant in its impact than what we saw, for example, after Black Wednesday.
As someone who has worked in business, I have some sympathy with my noble friend Lady Mobarik’s point about the need for a robust, results-focused plan on international trade, and I agree with my noble friend Lord Green that this needs to be properly resourced. The noble Lord, Lord Mendelsohn, said that we need to scale up, and I can see the case for that. As a start, the Government have established a new EU unit in Whitehall, drawing in the best and brightest from inside the Civil Service. To respond to the noble Lord, Lord Stoneham, we are also looking outside the Civil Service for talent—as we did in the Second World War. I remember my mother, who worked at the Board of Trade as part of the war effort, talking about the brilliance of the academics who came in and what a difference they made. I have already had approaches from colleagues I knew doing deals around the world, in Asia and elsewhere, asking whether there is an opportunity for their talent to be offered to government. We need to look at all these kinds of angles in the stepping up of resourcing.
There will be no immediate changes to our relationship with the EU. While the UK is still a member, all rights and obligations will apply. We continue to support the EU’s trade agenda, and the UK will participate constructively in EU decision-making on trade issues. Indeed, I am off to the Council, in Slovakia, next week. As the current Single Market Minister, I know how hard we need to work on the issues involved. I assure the noble Baroness, Lady Burt of Solihull, that we are doing just that. We are engaging in a series of sector roundtables to make sure that we are identifying the challenges as well as the opportunities. My door is always open, as she knows.
One of the most important tasks for the Government going forward is forging deeper trade relationships with the US, China and Japan, for example, and rekindling long-standing ones, such as those with Australia, New Zealand and Canada. To respond to my noble friends Lady Mobarik and Lord Patten, I agree that a strong Commonwealth, with enhanced economic prospects for all members, is good for UK business. The United Kingdom Government are represented across the Commonwealth, and UKTI has offices in around half of the Commonwealth countries, including in Pakistan, where there is the fast-growing market which my noble friend Lady Mobarik talked about—I know well the opportunities there and, indeed, Pakistan is an important source of textiles in this country. There are shared systems in the Commonwealth and a shared language, which means that the cost of trade between Commonwealth countries is some 19% lower than with non-Commonwealth countries. We are committed to helping the Commonwealth unlock its vast potential in the area of trade. I am very glad to say that Commonwealth Trade Ministers will meet in London in March 2017. That has now become a much more important meeting.
Getting these trade relationships right is at the heart of the Government’s vision for the UK after we leave the EU, but it will be equally important to maintain existing trade relationships, for instance with Korea, to provide stability for UK businesses. We are not starting from scratch. We already have strong international relationships, which are underpinned by our network of more than 270 posts in 160 countries around the world. As has been said, many countries have already been in touch to express their desire to maintain and build on existing trading relationships with the United Kingdom. We have laid good foundations with China and India, exemplified by the visits of President Xi Jinping and Prime Minister Modi last year. As has been said, my noble friend Lord Price is not in his place today because he is in China. I will be visiting China next month and will be focusing on resolving intellectual property matters, which are a key issue for UK investors.
Of course, we can build on the relationship we already have with one of our most important trading partners, the United States, where I was in January—I followed that up recently when I was at the OECD in Cancun last month. The US is the largest export market for British goods and services outside the EU, including in key sectors such as machinery and transport equipment, especially aero-engines, chemicals, food, live animals and, of course, financial services.
I agree with my noble friend Lady Mobarik that infrastructure investment is very important to a successful economy. As the Transport Secretary has said recently, it is right that the vital matter of airport expansion is resolved in a decision to be made by our incoming Prime Minister.
Britain’s economy is fundamentally strong, and we are a great trading nation. The UK is the seventh-largest trader in goods and fourth-largest trader in services globally. We have strong sectors to drive our trade forward. In 2015, Britain exported £4.56 billion in medical technology, £25 billion in pharmaceuticals and £19 billion in food and drink. As an aside, pharmaceuticals, which was raised by the noble Lord, Lord Mendelsohn, is always a priority area for the UK, and he is right that we need to respond to that. The European Medicines Agency is an issue, although not an immediate issue for the reasons that I have said.
I agree with the noble Lord, Lord Bhattacharyya, that manufacturing is vital to our country. It has been a great strength and must continue to be one. We also have established strengths in aerospace and vehicles, and in 2014 exports of finished manufacturing goods rose to a record level of £148 billion. I commend the noble Lord’s work in bringing Tata to the UK and in helping Jaguar Land Rover, which has helped to revitalise our car industry in this country.
The noble Lord is also right that innovation is key to growth. We are a nation of great inventors, we have great universities and a world-respected IP regime and we will be setting forward our ideas in an innovation plan in the coming months.
The UK is the world’s largest exporter of financial services, exporting more than the US, Switzerland and Luxembourg. In 2014, our total financial services, pensions and insurance exports were worth £69 billion. They have grown 7.9% compound over the past decade. We will need to ensure that all those industries are capable of thriving and prospering on the world stage.
Trade of course goes two ways, and the UK has many strengths which make us an attractive place in which to invest and do business. As Minister at the Department for Culture, Media and Sport, I am particularly proud of the global reach of our tourism sector, our creative industries, which are growing at 9%, and the strength and innovation of our digital economy.
My noble friend Lord Selsdon talked about the importance of foreign investment and some past successes. He will be glad to know that investment continues. Even after the referendum result, Singapore’s Centurion this week committed £20 million to fund new student accommodation in Newcastle, Manchester and Bristol, citing the UK’s education sector as strong and resilient.
I remind noble Lords of the benefits of free trade—I speak as an economist. The WTO remains the bedrock of international trading, and I must mention that recent successes have included the Bali ministerial conference in 2013, where the trade facilitation agreement was reached, which will be implemented next year. I record my thanks to my noble friend Lord Green, whose expertise, diplomacy and brilliance was at the heart of that success when he was Trade Minister. The 10th WTO ministerial conference in Nairobi in December last year agreed a good outcome on agriculture—a very difficult area—with WTO members agreeing to remove trade-distorting forms of agriculture export subsidy. Successful free-trade agreements are concluded outside the EU. The Canada-Korea FTA came into effect in January 2015. This will eventually make virtually all their bilateral trade duty-free.
As was said, our new whole-of-government approach to boosting exports was announced by my noble friend Lord Maude of Horsham in January. UKTI is at the heart of this new approach, bringing together all government players and overseeing export performance on behalf of the cross-government exports implementation taskforce, which is led by Sajid Javid, the Business Secretary. This will be doubly important in the circumstances in which we find ourselves, looking strategically but also at the nitty-gritty—sector by sector—both in trade and in discussion with the EU, because both will be so important in where we get to.
UKTI has recently completed a business forecasting exercise to determine priorities for the next five years, pulling together data from teams across different sectors and markets around the world. That identified 191 new export campaigns which we believe can increase exports by up to £70 billion by 2020. UKTI is also working with partners in the UK, such as the chambers of commerce, which my noble friend Lord Green mentioned, and overseas. We are also bringing in business—a point made by the noble Viscount, Lord Waverley—so we have new partnerships. We are working with Barclays and Lloyds banks, for example, who have pledged to help 40,000 businesses to export by 2020, which will help us to reach our target of 100,000 exporting businesses, which now becomes even more important. We are working closely with businesses of all sizes and other stakeholders to ensure that the UK’s trade strategy works for them and that we continue to be a leader in free trade around the world. We recently announced that John Alty, CEO of the IPO, has been appointed to lead a team for stakeholders to liaise with to discuss their immediate priorities.
To conclude, these are challenging times but also rich in opportunity. Our priorities in the months ahead will be to limit uncertainty during the transition, ensure that our new relationship with the EU works for business and keep Britain open to international trade and to the world. International trade and investment have been integral to the history of this country and will be central to our future. Britain is open for business. Our ambition remains to be the best and easiest place to do business and to be an excellent global trading partner.
My Lords, I thank my noble friend for her comprehensive reply. I also thank all noble Lords who took part in the debate.
I know that there is no time to say much more than that, but I will address one point to the noble Lord, Lord Stoneham. I assure him that this debate was not scheduled in different political times; it was most definitely scheduled after the result of the EU referendum. After the initial shock and dismay at that result, in the words of my noble friend Lord Green we are where we are and we have to move forward. I always like to see the glass as half-full, so this debate was about how we energise ourselves to move forward and take urgent action to scale up our efforts. I thank the House again for allowing this debate.