10 September 2020

Passing up a trade deal over state aid would be a huge strategic mistake

By

Britain is on the verge of punching herself in the face in order to have the freedom to shoot herself in the foot.

According to the Spectator’s James Forsyth, and ITV’s Robert Peston, the Government is willing to sacrifice a trade deal with the European Union over state aid rules. “The sticking point [in EU negotiations] isn’t fish — I’m told that there is a ‘deal to be done’ there — but state aid, the question of how much freedom Britain should have to subsidise companies and industries,” Forsyth writes.

Apparently it’s not just that the Government wants to avoid signing up for Brussels’ specific state aid rules in perpetuity — a reasonable position for a newly sovereign country. Rather, it’s because, as one government source tells Forsyth: “state aid is critical if you are going to try and shape markets in technology”.

Yesterday, the Business Secretary, Alok Sharma, announced the UK would follow WTO subsidy rules from January that broadly forbid internal subsidies which undermine competition (i.e. preventing companies playing off regions for tax breaks). As ever, though, the devil is in the detail.

Sharma committed to avoid 1970s-style “picking winners and bailing out unsustainable companies” while also stating that the UK would maintain flexibility to “intervene to protect jobs and to support new and emerging industries now and into the future”. So no subsidies, unless we decide to do subsidies.

It really does appear the UK could sacrifice a deal with the EU  — which would in the short run seriously disrupt trade in goods and services, undermine security service data sharing, and raise serious legal issues around the Northern Ireland Protocol — for the worst possible reason: an interventionist economic agenda. For a supposedly conservative Government that just vanquished Corbynite socialism, that would be quite something.

More to the point, the British state – which has proven extraordinarily inept in recent months – cannot be trusted to “support new and emerging industries”. Bureaucrats lack the knowledge and skills to pick sound investments, and since they are spending other people’s money, they also lack the incentive to get it right. In practice, subsidies benefit the favoured few while crowding out private investment and keeping alive unproductive businesses and models of operation. The same goes for state research and development spending which, despite the myths around ARPA, does not stimulate innovation.

If a technological venture has potential, private investors will be sure to pile in. If it’s going cap in hand to the Government, it’s almost certainly a sign that it’s already failing. Apple, Google and Facebook do not need state subsidies because they create and sell products that create value for millions of people. The same goes for most British companies. You only go to the state when private markets, which are extremely liquid these days, have turned you down.

Take OneWeb, a bankrupt UK-based satellite company. In July, the Government invested over $500 million to save the firm on the basis that it might one day compete with GPS and Galileo. The problem is that OneWeb uses low earth orbit satellites that are unlikely to ever provide accurate location signals, unlike the other SatNav systems that use medium orbit. Both the UK Space Agency and a top civil servant warned against the purchase, but it went ahead after a round of last minute lobbying to senior ministers.

That came after the botched bailout of FlyBe, which collapsed earlier this year just after receiving special state support, and the first ‘Project Birch’ bailout of a dying, polluting industry, Celsa Steel, in July. Nor are domestic aviation and steel exactly “new and emerging”.

These cases show how taxpayers’ money can too easily by frittered away at a minister’s whim. And the more state intervention in the economy, the more the winners are those with the best paid and best connected lobbyists.

So what is behind this surge of statism?

Forsyth claims the Government is concerned that without subsidies the UK risks becoming “a technological vassal — reliant on either the United States or China, both of whom are unafraid to use the state to shape these markets”.

This is crazy technological isolationism. No single country can or should develop every single technology and keep it for themselves. We are much richer because of technologies developed and produced in other countries. Imagine how awful everything would be if we only used British-made goods no iPhones, no Zoom, no Samsung TVs, no Amazon, no Microsoft Windows. The list is endless. Remember too that the great tech success stories in the US, and even in communist China, are led by the private sector, not the state.

According to Peston, Dominic Cummings believes that the key to British success in the first industrial revolution was being the first mover in many key industries. Again, though this had little to do with state intervention. In fact, quite the opposite.

The reason Britain was successful during the industrial revolution was a combination of freedom to disrupt existing modes of production and a strong emphasis on entrepreneurship, underpinned by property rights. We should take the same approach today by getting rid of cumbersome red tape and taxes that hold businesses back. As the FCA’s regulatory sandbox for Fintech has already shown, if you make Britain a great place to innovate the innovators will come. It doesn’t mean picking specific companies.

Brexiteers may be tempted to take a belligerent ‘No Deal’ path to get out of the European Union, but the real priority is making Brexit a success. That means avoiding an unnecessarily acrimonious, disruptive divorce and shunning domestic policies that will only make Britain poorer.

Rejecting a trade deal over something that isn’t even a good idea — subsidising domestic industry — could prove one of the biggest acts of strategic self-harm in Britain’s history.

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Matthew Lesh is Head of Research at the Adam Smith Institute.

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