5 September 2023

How can the UK respond to the global tilt towards protectionism?

By Hubert Kucharski

The clearest argument against the UK going tit-for-tat with America’s green subsidies is simple maths. The size, power, and growth of our economy are dwarfed by our friends across the pond. We need to embrace a more flexible approach if we are to reap the benefits of the green transition. 

The UK government’s Advanced Manufacturing Plan, aimed at promoting investment and growth in green energy, is a positive signal of intent towards harnessing industrial policy. What is more attractive to investors than generous tax cuts, subsidies, and other support measures?

However, we trail behind European competitors like Germany, a nation lauded for its efficient industrial policy. Meanwhile, across the Atlantic, the Biden Administration’s unveiling of the Inflation Reduction Act speaks volumes about America’s commitment to strategic industry and innovation. Any parallels drawn between our economy and theirs would clearly be misguided.

Let’s consider scale and structural differences. The US, with its vast resources and wealth, has the economic prowess to pour substantial funds into such policies. Germany, with its coordinated market economy, is poised perfectly to absorb the benefits of government interventions. In contrast, the UK, a liberal market economy and considerably smaller than the US, must tread carefully. Dedicating a significant chunk of our resources to aggressive industrial policies like tax cuts and subsidies might be a strategic misstep, given our constraints.

With international trade also leaning towards protectionism, there is no guarantee that our allies – or competitors for that matter – will play nice. Economies like the US have tried to pull up the ladder up against Europe in the past and may do so again. If we try to compete with greater spending, they will just up the ante with more subsidies, with the final outcome being the end of free trade. 

The central flaw in the current discourse is the assumption that industrial policy’s success lies in its ability to pour resources into specific sectors. Industrial policy can become ‘sticky’. Locking too many resources into one sector can result in massive waste should that sector not flourish as anticipated. A great example of this is Humber Estuary’s British steel, which foundered in the wake of cheap Chinese steel imports. However, instead of fading into obscurity, the Humber region has now transformed into a thriving hub of green technology. The secret? Reallocating labour from declining industries to burgeoning ones.

The resilience of an economy, especially one faced with the relentless uncertainties of global trade, lies not in the immovable structures of industries but in the adaptability of its workforce. In the high-stakes race of global competition, our best bet isn’t in anti-competitive and rigid industrial strategies. Instead, our trump card lies in cultivating a labour force that is both highly skilled and flexible.

Embracing this outlook clarifies the direction our advanced manufacturing plan should take. It’s not enough to merely support the industries of today; we must invest in preparing our workforce for the industries of tomorrow. The key is not to fight the inherent uncertainties associated with changing trade patterns but to build a system that thrives and adapts within them.

Thus, the most balanced, and arguably most effective, intervention would be one where the government doesn’t dictate how labour is deployed but offers tools for education and retraining. Workers, then, become the ultimate decision-makers, choosing where and how they wish to retrain. This amalgamation of intervention to boost labour supply with a free-market economy ensures that the state’s role is constructive, but not overpowering.

The UK’s advanced manufacturing plan, while well-intentioned, needs a paradigm shift. Rather than leaning heavily on inflexible and anti-competitive industrial policies, it’s time we pivot to prioritising labour market adaptability. By investing more in retraining programmes, we can foster an economy that’s not only competitive but also resilient to the unpredictable ebb and flow of international trade.

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Hubert Kucharski is the Head of Research at Leeds Think Tank

Columns are the author's own opinion and do not necessarily reflect the views of CapX.