There was only a smattering of applause when Theresa May left the stage at the World Economic Forum in Davos last week. The prime minister’s bold thesis, that Britain would enjoy a bright future by throwing off the shackles of European integration and embracing free trade, was met mostly with disdain.
Few among the global elite policymakers who show up each year at the Swiss ski resort believe that trade deals, at least ones that favour both sides, can be achieved by minnows in a sea of sharks. However, their reaction was in sharp contrast to the rollicking cheers May’s speech received from Britain’s mainstream press, most of which congratulated her for coming clean and admitting that if the UK is to take control of its borders, it will have to wave goodbye to the European Union’s single market, and probably the customs union.
As the Observer reports today, a group of Labour MPs has written to May, describing her approach as one of “self-harm” (see opposite). But the louder voices on these shores were notably bullish. Several painted a picture of Britain as a rejuvenated mercantile nation, summoning images from the other Elizabethan age. Fraser Nelson, in the Daily Telegraph, was typical: it was “one of the best speeches given by a prime minister in recent years”, and he approved her citing philosopher Edmund Burke’s assertion that if a state cannot change, it cannot survive.
But just as in Davos, the missing element was any supportive commentary from the business community to buttress the thundering editorials. Instead, banks operating in the UK lined up to warn that without a more coherent plan for their industry they would start to move staff to the continent. HSBC threatened to send 20% of its investment bankers to Paris, while Swiss bank UBS predicted that a similar proportion of its staff could be heading for Frankfurt.
Goldman Sachs boss Lloyd Blankfein reckoned New York would be the big winner if London cut the cord with the EU. He had been shifting staff to London before last year’s Brexit vote, as much to escape the tough and complex Dodd-Frank banking regulations in the US as to enjoy the diversity of London’s financial centre. Not any more.
Toyota told the Financial Times it was examining how it could increase its competitiveness to weather the effects of Brexit. Chairman Takeshi Uchiyamada declined to elaborate on this in Davos, but it was immediately interpreted as a trigger for cost cutting and a re-evaluation of investment decisions at its plant near Derby – which manufacturers the Auris and Auris Hybrid – and at its engine factory on Deeside.
Nissan announced last October that it would turn its Sunderland factory into a “super-plant”, having received assurances from the government regarding post-Brexit trade arrangements. But the company’s boss, Carlos Ghosn, sounded considerably less gung-ho on Friday, as he indicated that Sunderland’s competitiveness would be reviewed once Britain’s relationship with the EU was finalised.
Likewise, Britain’s aerospace industry is nervous about the direction of travel. Before the Brexit vote, BAE Systems chairman Sir Roger Carr said several contracts, including a £1.6bn Anglo-French programme to develop a combat drone and a Kuwaiti order for 28 Eurofighter Typhoons – made in co-operation with Airbus and Italy’s Finmeccanica – might be at risk if Britain left the single market.
Since the vote, Carr has publicly played down the impact of Brexit, but privately many in the industry repeat his fear that British companies will be edged out of cooperative agreements and sidelined in bids for big contracts.
How much these statements are simply corporate manoeuvring and how much they translate into production and investment cuts remains to be seen. But hard-headed business people chuckle when told that export contracts are won in open competition by companies squaring up against each other in a transparent bidding process. If the email inviting you to bid is the first you hear of a contract offer, you have probably already lost, they say.
In Whitehall, they worry that the car, aerospace and banking sectors are key to maintaining the UK’s skilled workforce and the government’s tax base.
A recovery in manufacturing since the 2008 financial crash has largely centred on the success of Toyota, Honda, Nissan and a rejuvenated Jaguar Land Rover. The deep and complex network of companies that cluster around the car industry have provided a strong boost in jobs and trade. The same can be said of BAE Systems and the rest of the aerospace industry.
Yet, even before uncertainty became the most overused word in the business lexicon, Britain’s manufacturing sector was ailing. An academic study last year found that since 2011, far from being the source of new jobs in research and development, factory output has suffered a “fresh era of decline”.
This report, and others like it, showed most academic economists continue to be sceptical about the strength of UK manufacturing and its ability to overcome higher barriers for exports destined for the EU, as well as to strike fresh deals further afield.
In answer to this downbeat view of the economy, international trade secretary Liam Fox has sent his team to 55 countries and is “actively making representations to overseas buyers and governments, organising key meetings and missions, showcasing UK products to overseas buyers and providing direct financial support”.
A spokeswoman said: “We are pulling out all the stops to promote the United Kingdom as a place to do business and trade with. Leaving the EU offers us an opportunity to forge a new role for ourselves in the world – a positive and powerful force for free trade.”
Fox says he can build on the “strong economic ties with both established and emerging trading partners”, which is why foreign secretary Boris Johnson was in India last week and why May will be an early visitor to Washington. Fox says Britain is conducting “trade audits” to prepare the ground for deals that can be announced as soon as the UK leaves the EU in 2019.
Talks are understood to be under way with countries including China, Australia and South Korea as well as India, Saudi Arabia and Oman.
The US is another destination often cited by Fox as ripe for trade expansion. The rising value of the dollar and the symmetrical fall of the pound has made British goods cheaper and thus more attractive to US businesses and consumers. But the list of deals published by the trade department that Fox says can pave the way for a surge in exports remains vague and unlikely to convince many who worry about the UK’s dealmaking prowess.
Top of the list is the export of air traffic control software to Latin America, with the princely price tag of £500,000. A £5m deal “to export a television programme to the US” and a “£100m deal to export solar-farm technology to Africa” are also included in the top six outlined a fortnight ago.
There is also concern that growing levels of corruption abroad will make it difficult for companies to operate, especially in the Middle and Far East, where legal disputes end up in decades-long wrangles.
British companies are far from the only ones to have been caught bribing their way into the affections of potential clients. Rolls-Royce may be grabbing the attention at the moment after a joint Guardian and BBC Panorama investigation identified 12 countries in which Rolls-Royce had hired “commercial agents” or advisers to help it secure high-value contracts.
Go back a few years and Siemens was caught doing much the same, and Italy’s oil companies are almost constantly under investigation by local prosecutors for using bribes to win contracts, most recently in Algeria.
As this country ventures beyond its traditional comfort zones of the EU and the US – which together account for more than 60% of trade – corruption will become an acute concern, one among many in the brave new world of Global Britain.
THE SECTORS
FINANCIAL SERVICES
Nervous about leaving single market
The most recent figures, for 2015, show a trade surplus in services of £88.7bn, of which £40bn was in financial services where, for a decade, the UK has led the world’s exporters, beating New York, Tokyo and Frankfurt. While there was still a chance of staying in the single market, bankers were most concerned about “passporting” rights, which allow transactions across EU borders to progress unhindered. Now some in the City fear that, outside the EU, unless regulators water down tax and money laundering rules, London’s international banks will shift staff to Paris and the Far East. Mark Boleat, of the City of London Corporation, takes reassurance from the prime minister’s assertion that transition deals will be needed. Boleat says other EU members are starting to acknowledge this too. But Switzerland, which recently voted to accept free movement so it can keep its EU free trade deals, has struggled to stem a flow of money and jobs to Singapore.
MANUFACTURING
A sector afflicted by stagnant output
This sector accounts for almost 10% of GDP, and almost 20% if the services connected to it are included. Britain remains one of the world’s biggest exporters of manufactured goods after China, the US, Japan, Germany and Italy. But investment and productivity have failed to pick up since the 2008 crash as employers rely on cheap labour to expand.
The Sheffield Political Economy Research Institute highlighted the uphill task of recalibrating the economy back towards manufacturing. It found output had “barely risen” in the past five years despite 5% more jobs. The booming ready-meal sector underpins buoyant food production, but pharmaceuticals, for example, are still way below their pre-crisis peak. The prospect is that, outside the EU, Britain will join Turkey as a low-cost producer, undercutting continental goods through low corporate tax and wage cuts. Turkey avoids tariffs as a member of the EU’s customs union.
TECHNOLOGY
Internet giants ready to back Britain
Snap Inc, formerly Snapchat, has backed Britain, as have Google and Facebook. All three are expanding their London HQs despite the likely loss of unfettered EU access. Some analysts see the EU’s crackdown on tax avoidance by US tech firms as making London more attractive than low-tax Dublin. Others cite the UK’s world-class higher education system, which they expect to survive Brexit, that swings the vote away from the Irish capital. The latter is a more likely reason. Like the financial sector, the tech industry is reluctant to turn its back on London’s vast pool of English-speaking, skilled workers.
Snap says it chose Britain because of the nation’s “strong creative industries”. But Amazon remains in Luxembourg and Dublin is still home to Facebook and Apple. Smaller tech firms have privately expressed concerns that talent could bypass London after Brexit. They are also concerned about university research programmes and the EU’s Erasmus programme for education and training.
