Burnham’s Buy British plan could kill his EU dreams

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It received less media attention than many of his more eye-catching announcements, but yesterday Andy Burnham stated that under his premiership, British firms would be favoured for government contracts. While this is well meaning, outside a narrow set of circumstances such as issues relating to national security, this would be a costly mistake.

First, it would be bad for taxpayers. Government procurement preferences work by narrowing the field of eligible bidders to domestic firms, then letting them compete (or not) for taxpayer-funded contracts. The immediate effect is mechanical: fewer bidders means less competitive pressure on price and quality. A foreign firm that could deliver the same road-paving equipment, software platform or steel beams for 15% less is simply removed from consideration, regardless of how that affects the final bill.

The extra cost of such policies is significant. Studies of ‘Buy American’ type rules in US infrastructure spending have repeatedly found cost premiums in the range of 10-25% on covered goods, depending on the sector and how binding the requirement is. That premium is paid by taxpayers, or it shows up as fewer total miles of road built and fewer hospitals renovated. This is taxpayers’ money we’re talking about, politicians and civil servants have a duty to ensure it’s spent responsibly.

Second, the case for domestic preferences which Burnham seems to be making is that they nurture local industry. If you give domestic firms guaranteed customers, they’ll grow, hire and eventually compete globally. However, protection from competition tends to produce the opposite of competitiveness. Firms that win contracts because foreign rivals were excluded by law, rather than because they offered the best price or product, face less pressure to innovate, cut costs or improve quality. Over time this can calcify into the same dynamic seen in heavily protected industries throughout economic history: comfortable incumbents, slower productivity growth and an industry that never outgrows its dependency on the state’s favouritism.

Moreover, domestic preferences tend to direct capital and talent toward firms that are good at winning government contracts rather than firms that are good at building things efficiently. Lobbying for favourable procurement rules, navigating certification requirements and cultivating relationships with officials becomes a viable business strategy – one that consumes resources without producing anything of value to the public.

Far from helping to boost growth and support ‘left behind’ areas of the country, Burnham’s policy would actually harm them.

Third, it is probably unlawful and will lead to retaliation. Government procurement is a major share of GDP in most economies. As someone who worked on trade negotiations, I can tell you that this is often a sticking point and is seen as a ‘win’ when the other country allows firms in your country to compete on an equal footing with domestic firms. In fact, these provisions were included in Britain’s new and enhanced deals with countries such as Australia, New Zealand, Japan and India. The UK would be in breach of its treaty obligations were it to do this. That would not only mean many of the benefits of the deals would not be realised, but it would make it harder for us to strike new ones.

When one country restricts access to that market for foreign suppliers, other countries tend to respond in kind. Domestic exporters who depend on selling into foreign public-sector markets can find themselves locked out of contracts abroad as retaliation for restrictions at home. The net effect can be a smaller market for everyone’s exporters, not a larger one for domestic suppliers. This is precisely the dynamic that multilateral agreements like the WTO’s Government Procurement Agreement were designed to prevent, because the alternative tends to shrink the overall pie rather than redistribute it favourably.

It would also simply annoy our two most important trading partners, namely the EU and the US. Burnham clearly wants a closer relationship with the EU which he can kiss goodbye to if he does this. As for the US, President Trump already seems suspicious of Burnham and he needs no excuse to punish countries who he perceives to be treating America unfairly. If Burnham does this, then the Office of the United States Trade Representative will spring into action. British firms will suffer, and the special relationship will be in an even worse state.

If Burnham is serious about helping British businesses and reindustrialising, then there are plenty of things he can do. He should start by slashing public spending so that taxes can be cut. He can start cutting red tape which acts as a barrier to growth for many firms. He can scrap the steel tariffs which will raise costs for British industry while doing very little to help the steel industry. He can work with the EU and likeminded nations to challenge unfair trade practices such as ‘dumping’ by China. Most importantly, he can slow down on the push to Net Zero which has seen commercial energy prices in the UK among the highest in the world and rendered many industries unviable.

Some of Burnham’s announcements are harmless gimmicks. A few might even help. Domestic preference is neither – it’s pure protectionism, and someone always ends up paying for it.

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