The Customs Union and the World Trade Organisation

Those who continue to argue that we need to be in the Customs Union of the EU, or need to copy it from outside the Union as we leave, need to answer two very simple questions.

Why do we have a large and persistent trade deficit with the Customs Union, and a trade surplus with the rest of the world trading with them under WTO rules?

Why has our trade been growing faster in recent years with the rest of the world than with the EU Customs Union?

The figures are quite stark. Our trade in goods  deficit with the EU widened to £96bn, and our travel deficit to £15bn. Our sales of services were quite unable to offset these large deficits in the way they do for our trade with the rest of the world.  Between 2014 and 2016 our exports to  the rest of the world  grew by 6.7%, whilst our exports to the EU grew by a little over 3%.

The good news is with or without a deal with the EU we will be trading with them under WTO rules, as both the EU and the UK are members of the WTO and accept its rules and its arbitration system for any disputes. The recently enforced Trade Facilitation Agreement that came into effect last spring from the WTO binds us and them to keeping border arrangements friendly to business with smooth procedures for the passage of legal goods.

Germany in 2016 exported £66bn worth of goods to the UK and imported just £33bn back from us. The Netherlands exported £36bn to us, and took just £18.6bn in imports. I will be looking in future postings at what we buy from these large exporters, and what opportunities there are to buy from elsewhere should the EU wish to impose new barriers on their trade with us.

If they want us to go to WTO terms we will be able to find cheaper imports from non EU sources and produce more at home.

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Old, new and Conservatism

One critic remarked that he could not support the Conservatives because they had never held up change or progress for a single day. He revealed a misunderstanding of Conservatism. Conservatives accept the past, and are happy to adapt and conserve all that is best from it. That does not mean we  wish to go back in time, freeze the status quo or resist positive improvements to people’s lives. We like the new as well.

Radical parties of the left favour more revolutionary action, Conservatives favour more evolutionary action. Both often seek the same high level aims. The main parties in the UK if challenged would say they wish to promote greater prosperity and freedom for everyone in our society. The disagreements come over how you do that, and over how far you should go in sweeping aside or remodelling the past. There are also some issues of definition over freedom, with Conservatives thinking more of freeing people to do things for themselves, and socialists thinking of ways the state can enable some people to do things within government control. This distinction is a matter of emphasis or degree, not an absolute.

Curiously today the parties of the left are more conservative than the Conservatives when it comes to the big issue of constitutional reform and our withdrawal from the EU. They are more radical when it comes to wanting a much bigger role for the state in our lives, in the hope that will create greater equality of outcomes. They fight every inch of the way to try to avoid decisions passing from the EU to the UK people and Parliament. They seek new ways to mimic the controls, spending, taxes and requirements that come from the EU. At the same time they recommend spending far more on state service provision, without discussing whether they could do this within the tight guidelines of the Maastricht budget criteria that the EU requires of its members.

Conservatives and socialists both want good quality public services, with healthcare and education delivered free at the point of use. Both want to spend more on developing those services, with disagreements about how much of this extra spending can and should come from the proceeds of economic growth and how much if any should come from tax rises.

Meanwhile the mood of the country is for the EU to get on with Brexit and tell us what if any barriers they wish to impose on their trade with us. The government should seek to up the tempo and remind them nothing is agreed until all is agreed, and no deal is better than a bad deal.

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The plight of the coal industry

The third of the commanding heights of the 1940s economy to  be nationalised alongside steel and rail was the coal industry. It employed 700,000 employees in the later 1940s, producing around 200 million tonnes of coal a year. The number of employees slumped to just 235,000 by 1979. Many of the employees lost their jobs under Labour governments, who accepted a large number of pit closures as the industry  struggled with costs and falling demand. More job losses followed in the 1980s and 1990s, along with a bitter strike about whether individual pits could be economic or were exhausted.

Today there is no deep mined coal produced in the UK, and a very small opencast coal industry. We now import most of the reduced amount of coal we do need. An industry employing well over 700,000 at peak has all but disappeared. It was nationalised for most of the post war period, but this did nothing to arrest the long term decline. Indeed, there were occasions when the nationalised management took too pessimistic a view of the economic prospects for individual pits. I remember helping the miners at Tower Colliery take over their mine from the NCB when the NCB said it had to shut for economic reasons, and go on to make a success of mining more coal from it for many years.

The nationalised concern did have substantial investment programmes from time to time, developing a range of new super pits with better machinery and operating at larger scale. None of this arrested the long term decline in coal use and coal output. More recently governments have turned anti coal on environmental grounds.

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Housebuilding in UK advances

Yesterday the construction figures came out . They showed total output up 1.6% over the last year (3 months on 3 months average) . Within that total private sector housebuilding was well ahead. Private commercial work was down. Overall construction output was 27.6% higher than in January 2013, the five year low point.  Those who point out the three month on previous three month figure was down are giving a misleading impression, as there is always a seasonal impact during the winter.

Persimmon, a leading housebuilder,  on Tuesday  announced it had increased its forward sales of homes by 10% in December, rounding off a year of growth. Other UK housebuilders too have reported increased build rates and sales. Persimmon’s completions for the year were up 6% at 16043 new homes.  The long recovery from the pre banking crash levels is now well advanced.

At the same time as the building industry steps up its output there needs to be increased capacity for building materials. The UK is importing too much, when these products have high transport costs and can be well made nearer the point of use. Persimmon has just put in a new brick plant at Harworth to produce 80 m bricks a year. Ibstock, one of the UK’s leading brick makers, has also built a new factory to make 100m bricks a year and is expanding the output at its Lodge Lane facility in Cannock as well. These investments will expand UK brick output by around 10%.

There are import substitution and growing market opportunities in concrete blocks, cement, prefabricated timber sections and roof tiles, as well as in the interior fitting out with kitchen and bathroom units, plumbing and electrical systems. The strength of the underlying market to buy a new home can underpin a wider recovery in the building industry.

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Are reshuffles a good idea?

Good management in companies works hard on succession planning, mentoring, supporting people  in jobs, offering training, and talking to employees about their career development. There are regular appraisals which provide a chance for senior managers to explain again what they are looking for and for employees to comment on the workplace, support and direction. If an employee does need removing from post it should not come as a surprise, as it will follow a process of warnings, reviews and attempts to sort out the issues that worry the management.

Governments of all persuasions have handled Ministerial jobs rather differently.  Ministers may not have not been told whether they are doing well or badly. They have often not been offered support, training, guidance or  mentoring on how to carry out difficult and complex roles. When it comes to reshuffle time quite a lot of Ministers stay near a  phone with no idea of whether they are likely to be left where they are, promoted, moved sideways or fired.

There is plenty of talent in the Commons, and plenty of get up and go by individual MPs who want to make a contribution or take a special interest in a cause, department or area of work. Somehow governments need to find a better system of mapping the talent, understanding the knowledge and enthusiasms of those who are elected, and deploying it in the right places within government and the wider public space. Of course the high degree of accountability and public engagement required of a Minister makes it a bit different from senior  management positions in many businesses, but there are still things to learn from the higher professional standards now being expected of those in the better companies. Meanwhile the private sector can learn from the public sector more about the need to listen carefully and respond well to the public who are the ultimate paymasters and judges of both sectors.

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What happened to the railway industry when fully nationalised?

The railways were nationalised shortly after the war and stayed in public ownership until the 1990s under John Major. The track, stations and signals, the bulk of the assets, were renationalised by Labour early this century.

In 1950 BR employed 606,000 employees. They looked after a route network of 19,471 miles of track  with 8487 stations. By 1967 owing to the sharp decline in rail travel and changing patterns of housing and population growth the network was down to 13 172 track miles with 3498 stations. The number of employees nearly halved over the 17 year period, to 318,000. Train travel which was more than fifth of land travel after the war slumped to 9.5% of the total by 1967.

Post 1968 the decline continued  in staff  numbers and in travel. The long fall in train travel as a proportion of total travel only altered following privatisation in the 1990s. Today there are 10,261 route miles and 190,000 employees, with 2500 stations.

There was  no shortage of investment for much of the period. The railways were encouraged to shift from coal and steam power to diesel and electric. There was plenty of subsidy. Despite this,  season ticket prices rose every year in real terms, as the railway struggled to get enough revenue to keep up with its fast growing costs. The railway dumped lots of cheap seats on the market for off peak and unpopular routes, whilst charging very high prices for peak offerings on well travelled routes.

The railway failed to keep many of its former passengers, and did not make a compelling case to potential new customers. The nationalised railway failed , for example, to put in a short rail link from Heathrow, one of the world’s busiest airports, to the mainline into London that passed nearby. It watched as London Transport put in a tube line extension instead, leaving passengers to use a route with many stops into the centre and with inadequate space for cases. The freight railway stopped competing for single wagon business, and failed to put in branch lines to the many new industrial estates which came to be located close to the motorway network instead.

There were many rounds of redundancies and job losses, many fare rises, and a permanent failure to reverse the decline of rail use for both passengers and freight. The advent of a more positive industry under the early years of privatisation reversed the downwards trend in travel and market share.

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What happened to the nationalised steel industry?

Labour nationalised steel after the war, only for the Conservatives to denationalise it when they came to office in 1951. Labour renationalised it in 1967 and  ran a grand investment strategy through to the end of the 1970s when it had to be abandoned  because it created massive overcapacity. The Conservatives bought into the Labour investment led approach for their period in office of 1970-74.

In 1950 the nationalised industry produced 16 million tonnes of steel. By 1965 the competitive private sector industry restored by the Conservatives had got output up to 27 million tonnes. The Labour government on nationalising it decided to build an industry capable of 35 million tonnes of output. They signed off on a bold plan to put in five major integrated works  at Redcar, Scunthorpe, Ravenscraig, Llanwern and Port Talbot. and to develop in Sheffield.

By 1978-9 the industry was only selling 17.3m tonnes, 10m less than the privatised industry had managed on a much smaller capital base a decade earlier. It had however received a whopping £2674 million in interest free  capital from the taxpayer and £350 m of write offs, to allow it build five large integrated works despite their inability to sell the steel they could make.

This ushered in a long period of agonising decisions to close each of the works or parts of each of the works in turn as they struggled to get costs and output down to match the poor levels of demand . Large numbers of redundancies followed and the complete withdrawal of the industry from places like Corby and Ravenscraig.

The tragic story of nationalised steel leads a commentator to ask how could state planning get their forecasts for demand so wrong? Why did the costs of putting in the extra capacity escalate so  badly, making the steel even more uncompetitive? Why did Labour end up closing so much down and making so many redundant? The strategy was bold, well financed and well intentioned. The result was an industry unable to compete with German steel, and later with Asian product, that spent years agonising over cuts and closures. The taxpayer lost large sums.

 

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Why do some people think nationalisation a good idea?

All previous Labour governments have nationalised some state assets. The 1945-51 government did so on a large scale out of ideological conviction.  The Wilson government of 1964-70 and the Wilson-Callaghan  administration of 1974-9 did so alleging it would enable them to pursue an industrial and economic strategy that would lift the growth rate, with a continuous row over how far they should go as the left pushed for a more active strategy. The Blair-Brown governments came to office in 1997 accepting privatisation and saying they would not reverse the large changes from the Conservative privatisation programmes. Later in office they renationalised the bulk of the railway and went on to buy two of the largest commercial banking groups following the failure of their regulatory approach to banking.

The left who argued strongly for more nationalisations argued their case based on three main erroneous propositions. The first was that it would be better for employment and the employees if their jobs came from Ministers and a political process, rather than from competing private sector employers. Instead, as we shall see, the main nationalised industries ended up sacking large numbers of people.

The second was that it would cut out the so called “inefficiencies of competition” – the extra head offices and advertising programmes to sell different brands and services – making the nationalised industries more efficient and better for customers. Instead, monopoly pricing power wherever they had it was used to push up prices to pay for inefficiencies which the monopoly could not or did not wish to remove.

The third was that it would allow rational planning and longer timescale for investment. This they wrongly thought would lead to stronger and better based industries. Instead, the planners usually got it wrong, made large and wasteful investments and ended up having to close their own pet projects or sack their staff.

It would be interesting to hear from those of you who favour complete nationalisation of current railways why the nationalised Network Rail is not delivering a railway you are happy with.

As I will show from  tomorrow from past experience, nationalised industries in the UK developed a bad record as employers, making hundreds of thousands redundant, pushed up prices a lot, and bungled large scale investment programmes badly.

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Productivity

The government was able to report a reasonable increase in productivity in the third quarter of 2017 with a 0.9% gain in the three months, with similar advances in both services and industry. The Treasury is keen to advance productivity as a means of promoting higher real incomes and improving UK competitiveness in world markets.

One of the areas  of the economy that has struggled to make productivity improvements is the public sector. Whilst there is a good reason to want good staffing ratios for front line services like healthcare and teaching, there are many back office functions and other services where the government can improve quality and lower cost by adopting more productive ways of working. Offering more computing power to perform clerical functions, speeding and cheapening communication with users by going digital, adopting the internet for a wide variety of productivity enhancing improvements are the way forward.

Some of it requires policy change. The introduction of Universal Credit is partially designed to reduce the number of benefits that require separate application and calculation, whilst ensuring decent support for those who need it. The Treasury could reduce the costs of tax collection by streamlining and simplifying taxes.

Some of it requires  careful negotiation with staff. The aim should be to help people work smarter and to be better paid as a result. Given the need for more staff in many areas of the public sector, productivity raising improvements do not require reducing the number of jobs overall, but ensuring the jobs are better and achieving more. Some technology will not be popular with workforces, as we have seen with more automation on trains.

Today I am inviting you to write in with your suggestions for ways public service could be improved through the adoption of new technology. Well done it can  raise service  standards for users, reduce costs for taxpayers, and provide better paid and more worthwhile jobs for those in the public sector adopting the new ways of delivering.

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The fall in the pound mainly occurred before the Brexit decision

Today we will doubtless hear plenty of ill informed discussion about car sales and the fall in the pound. So let me remind people of what has happened to the pound in recent years.

It reached a peak of $1.71 on 6 July 2014.  It fell to a low of $1.38 on 28 February 2016, well before the referendum vote when the establishment and City were still all convinced we would vote to stay in.

It was only at $1.41 on 14 June before the vote, and fell to $1.29 on 7 July  after the vote. It is currently at $1.35. As you can see from these figures the pound has moved in big swings in recent years, largely unconnected with the referendum.  I doubt those who think the referendum is the main driver argue that the pound has rose 7% against the dollar last year because of Brexit.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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