HC Deb 19 May 1998 vol 312 cc863-70

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Clelland.]

10.35 pm
Mr. Austin Mitchell (Great Grimsby)

The United Kingdom's balance of payments in manufactured trade has long been a worrying issue. However, I did not quite realise the extent of the problem until I began to assemble material for this debate. We are in the throes of a very rapid deterioration in the balance of our manufactured trade. The deterioration of the situation will be prolonged. Once started, such processes are very difficult and take years to turn round. Moreover, we are at the end of a period in which we have had problems generally with our balance of payments.

The United Kingdom maintained a surplus in manufactured trade from Roman times until the 1980s. In every quarter until 1983, we had a manufactured trade surplus. Subsequently, our manufactured trade balance went into deficit—which hit its lowest point in 1989, and has been maintained in every quarter since. The deficit is now becoming a gaping one.

We have paid for the deficit by our surplus in invisibles, which has been maintained in trade with the world outside of the European Economic Community. Our current account deficit with Europe is £6.8 billion, whereas, last year, our current account surplus with other countries was £10.5 billion. We have an overall surplus of about £4.5 billion. However, that surplus is now slipping. The protection and cover provided by that surplus in invisibles is declining, becoming a deficit.

Our manufactured trade deficit represents a long-term failure, which is clearly due to the destruction of so much of our manufacturing base under the Conservatives. They lost more jobs in manufacturing, did more to shrink our manufacturing base and closed more manufacturing than the Government of any other advanced industrial country. The loss has been a debilitating one, forcing us to face our current difficulties with a manufacturing base that is weaker than it should be.

Our manufacturing base provides the basis of our export effort, and our trade deficit—specifically our manufactured trade deficit—is debilitating our economy. The fact is that 60 per cent. of our exports are manufactured.

Our poor record in exporting manufactures has led to several consequences. The first is that our overall export growth has been depressed because of our poor record in exporting manufactures.

Secondly, our manufactured trade deficit has depressed the rest of our economy. It has effectively created a low economic ceiling, depressing and preventing our domestic economy from expanding as we need it to. We cannot grow, because we cannot pay for growth.

A third consequence of the slow growth in our manufacturing, which has been caused by our manufacturing industry's comparative failure and our trade deficit, is low productivity growth. Productivity growth is achieved more easily in manufacturing than in services. Productivity growth is largely a feature of increased production—if production goes up, productivity goes up. Our production has not been increasing at the same rate as everyone else's, which is one reason why UK productivity is low. The deficit is also the reason why growth has been low. This country's growth record is the worst in the advanced industrial world. We have had cumulative growth of just under 2 per cent. a year, which is half the world average.

Why has there been such a deficit in manufacturing trade? It is not unique British incompetence—although our manufacturing has a smaller scale of production and has invested less than its competitors. The deficit is certainly not due to industrial relations and the so-called power of the trade unions. That power and those industrial relations are, in the main, a result of failure to grow rather than a cause of it, because the fight to share out the cake is greater and more intense if the cake is not expanding.

There are three basic reasons why we have a manufacturing trade deficit. First, historically, our interest rates have been higher than those elsewhere in the world. Those interest rates are accompanied by a capital system that demands a quick and very high rate of return. Secondly, tight monetary policies have kept down demand. The third and most important reason is the high value of the pound. It is as simple as that. There has been prolonged overvaluation of the exchange rate since the late 1970s, through the 1980s and into the 1990s. It was at its highest in the early 1980s and early 1990s.

Overvaluation hits manufacturing particularly hard because manufacturing is in the front line of international trade. It is a hugely competitive area. New competitors are coming along all the time all over the world; competition is intensifying.

Mr. Kelvin Hopkins (Luton, North)

Does my hon. Friend agree that the most successful countries in the post-war era were Germany and Japan, which ensured that their currencies were kept low relative to those of other countries? Their success was based largely, if not primarily, on a low exchange rate.

Mr. Mitchell

I agree with my hon. Friend the Member for Luton, North (Mr. Hopkins). Such countries began with a low exchange rate, which made it possible to invest in manufacturing and made exports profitable. They have maintained such exchange rates, failing to let them rise as much as they needed to when they were in surplus.

The world is becoming more competitive still. There are huge new competitors—specifically China. Prices of plastic goods, toys, basic stationery and all kinds of manufacturing equipment and produce are plummeting as China enters the market. Our industry is being asked to run a competitive race with the new tigers, especially China with its very low costs, with a ball and chain on each leg. The ball on one leg is marked "overvaluation" and the one on the other is marked "high interest rates". Together, they are crippling manufacturing.

The situation that emerged in the 1980s is getting worse. The balance of trade in goods and manufactures is turning sour. In the three months to the end of February 1997, we had a manufacturing trade deficit of £2.7 billion. In the three months to the end of February 1998, the deficit had risen to £4.6 billion, and it has accelerated since.

The Confederation of British Industry quarterly trends survey in April stated that manufacturing optimism about export prospects had seen the largest fall since July 1980; business confidence had seen the sharpest fall since October 1992; export orders had declined at the sharpest rate since January 1989; and firms with fewer than 200 staff that make intermediate goods had been harder hit than other sections. We are seeing a fall in export orders.

The CBI figures are paralleled by other figures from the Engineering Employers Federation, British Steel, Toyota, which is reporting a loss for the first time in three years, chemicals firms in Grimsby and food production firms. They all face international competition and are all shackled by overvaluation. Today's figures in the Marks and Spencer report show that the company is suffering in France owing to the high value of the pound. In a range of company reports, export prospects are dimming, exports are falling, and a wind-down in export sales is being predicted.

That is grim news for jobs in my part of the country and others that depend on manufacturing. It might not be so grim for the financial sector in London, but companies there will also be hit by the problem eventually. It is grim for investment and for growth. Manufacturing accounts for only 20 per cent. of employment, but it employs a lot of services because of the trend to contracting out. It is not accurate to look at the manufacturing figures in isolation.

The pace of those developments is growing because the pound is still grossly overvalued. It is overvalued because our interest rates are too high and speculative flows are coming out of Europe to buy sterling because it is a safe haven that gives a high return. It is overvalued because the deutschmark—some people might find this extraordinary—has been managed down and the French franc has depreciated with it. Sterling is also overvalued because many far eastern countries have undergone substantial devaluations.

The decline in our manufacturing trade and the growth in our deficit will not end until the pound comes down, and it will not end immediately even then. Because of the J-curve effect, the situation will turn round only slowly. It is no use clutching at the slight fall of a few pfennigs since the summit agreeing monetary union as a hope for the future. More rubbish is talked on that subject than on any other. A headline in the Financial Times of 13 May said, "Fall in sterling has yet to lift exports". That is the most incredibly stupid headline. The fall in sterling happened during the six weeks before that headline appeared. Does the Financial Times expect that exports will suddenly turn round because a few pfennigs have come off the value of the pound? Even that fall was only about 20 pfennigs from DM 3.10 to the pound at the end of March. It is incredible that people can clutch at that as a straw of comfort in a disastrous, deteriorating situation.

Mr. Hopkins

rose—

Mr. Mitchell

My hon. Friend wants to become a chorus.

Mr. Hopkins

I am grateful to my hon. Friend for giving way again. He is pointing out that the journalists know nothing about the J-curve and time lags in such matters. Relatively small changes in exchange rates make almost no difference. Would he like to comment on the TUC's suggestion this week that an exchange rate target of DM 2.50 might be reasonable? I think that that is still too high, but at least it is a start.

Mr. Mitchell

The scale of depreciation needs to be more substantial. Once damage has been done, it is difficult to reverse. To aim at a target, we have to be able to manage sterling by controlling interest rates. I do not want to go too far into that matter.

This is a non-partisan issue. It is not career-enhancing for me to be making this speech. I have seen Back Benchers rallying round at Treasury questions and Trade and Industry questions in the past few weeks, asking supportive questions. Members from steel areas have said that even though the pound is a bit overvalued, we are still competitive and we are fighting on. Others have said that the situation reduces the price of raw materials, as though the value added in this country were unimportant. Others clutch at the straw that the pound is falling, or that exports are holding up. That makes no political sense. It is Back Benchers' responsibility to tell Ministers when things are going wrong. Things are going wrong in our areas.

Mr. Michael Jabez Foster (Hastings and Rye)

Does my hon. Friend agree that companies that find niche markets in which they have particular expertise are doing well in the export market? Several companies in my constituency have been bucking the trend. That may not be an overwhelming success, but it is an achievement in the market that he has described.

Mr. Mitchell

There are always exceptions in any situation. We have to consider the overall figures, because they determine the prospects, the level of investment and the number of closures and jobs. A couple of swallows do not make a summer, just as a few pfennigs fall in the value of the pound does not make a devaluation. It is no use concentrating on those; we have to concentrate on the overall picture, and on bringing that home to Ministers so that we can have action. We should not try to coat the picture with honey for party political purposes.

The Conservatives will always say that the pound is in a disastrous situation. They put industry into this mess by the debilitating way in which they treated it for 20 years; no wonder it has been hit. It is hypocritical of them to make the present position a party political issue. None the less, it is the responsibility of those of us who represent manufacturing areas to say what the problem is—and, in my view, to say that there is no way out unless the pound falls.

If the pound does not fall, it simply will not be profitable to produce in this country with such overvaluation. If the overvaluation is sustained, production will go elsewhere. We have already seen the threat from Nissan, and the problems that Vauxhall has had in the constituency of my hon. Friend the Member for Luton, North.

Overvaluation is a threat to inward investment. Why should firms invest in this country if it is not profitable to produce here? There is the right to roam. The new German and Japanese owners of British industry cannot be bought off, fobbed off and conciliated by the prospect of knighthoods or seats on the board of the CBI, as British management was. Those people have a more realistic view of things. They want to produce profitably, and if they cannot, it is "Sayonara—goodbye, that's it." They are warning us, and rightly, too.

Ministers say that industry must be efficient, reform itself and make itself more competitive, but industry cannot become 25 per cent. more efficient or produce a productivity surge of 25 per cent. to cancel out the overvaluation—and if it cannot do that it cannot survive in the increasingly competitive markets that we now face.

British industry is not the most productive or the most competitive, and the additional burden of overvaluation is an impossible hurdle for it to jump. The problems of British industry can be put right only by growth, which means expansion, improvement in productivity and investment. All those come from an exporting prospect, which in turn comes from competitiveness.

Without that prospect, people will not invest—and the situation that we now face is the very reverse of it. A balance of payments deficit that lies basically in manufactured trade is usually an excuse for deflation. We reduce the demand for imports with which we cannot compete, by deflating demand in this country. That is usually an excuse for higher interest rates. Indeed, interest rates have to rise if we are to finance the deficit that we are incurring.

I have seen that happen twice in the 1980s, and I do not want it to happen to my Government, blurring and destroying the bright prospects that we need to fulfil in terms of expanding the economy, generating growth, creating jobs and improving the lot of our people. I do not want us to be deterred from that process, on which we must embark by fighting and reversing the balance of payments deficit. We cannot do that by clutching at straws. We have to act.

I do not suppose that, in his reply, the Minister will suddenly decide to tell me how right I am. Adjournment debates are usually an opportunity for a defensive reply. I suppose that the Department, and the Government as a whole, cannot submit to the arguments of one Back Bencher. However, I hope that, beyond the defensive reply that we shall hear tonight, the Government are seriously considering what can be done.

The present situation cannot be prolonged, because it is ruinous for jobs. Unemployment is beginning to rise—as it will, because manufacturing will shed jobs. Overvaluation is also ruinous for growth and for all the things that Labour wants to achieve—indeed, it will undermine all that we need to achieve. Unless we turn the situation round, we shall fail.

It is no use hoping that economic and monetary union will stabilise Europe and rescue us. There is a nightmare prospect that no one seems to be considering—that the euro will not be the hard currency that everybody expects. All the expectations held out hitherto—such as the idea that the convergence criteria would be fulfilled—have been belied in the event. If expectations are now held out that a hard euro will save us by making its users less competitive in comparison with us, thereby improving our position, they can easily be belied too. There is every prospect that the euro will be soft. The Germans have depreciated the deutschmark, which could be a last fling before the hard and rigorous disciplines of marriage, but it could also be the prelude to further depreciation to create a soft euro, as that would be the best way in which to make the single currency acceptable—it would cause employment to expand, and unemployment is the horrendous problem in Europe at the moment. A soft euro could make things worse for us.

Given that there are lags—export performance picks up only some time, perhaps two years, after a competitive reduction in the exchange rate—we must act now and act quickly to bring down the pound. There are many ways in which that can be done—I shall not go through them tonight—but the balance of payments deficit in manufacturing trade will be put right only if the exchange rate is more competitive. We must now bend our efforts to find how we can secure a more competitive exchange rate—otherwise we shall be stuck in recession and a balance of payments trap.

10.55 pm
The Minister for Competition and Consumer Affairs (Mr. Nigel Griffiths)

I congratulate my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on raising the important matter of manufacturing. We all share the sentiments that he has articulated tonight. I assure him and the House that the Government will give no defensive reply; we intend to take his pertinent points and long-standing criticisms—which extend over at least 18 years—very much to heart and to address them directly.

I welcome my hon. Friend the Member for Luton, North (Mr. Hopkins), who speaks eloquently for his constituents—he made some telling points, to which we have listened. In putting his constituents' case so well, he is proving that Luton, North is being listened to in a way in which it has never been before.

I say the same to my hon. Friend the Member for Hastings and Rye (Mr. Foster)—never has Hastings and Rye been better represented in the House. He speaks for business and manufacturing in his constituency with a concise articulateness that means that Ministers have to listen—as, indeed, we are.

That contrasts with the sorry state of the Conservative party. This is the first Adjournment debate that I have attended in 11 years as a Member of Parliament at which no Conservative Member has been present. Where is the right hon. Member for Wokingham (Mr. Redwood), the shadow Secretary of State for Trade and Industry? Does he really care about manufacturing? Is he listening to the real concerns that are being voiced by employees, families, businesses and manufacturers throughout the country? The answer, sadly, is no. Conservative Members have been absent throughout the debate, as have the nationalists. I welcome as the representative of the Liberal Democrats the hon. Member for Torridge and West Devon (Mr. Burnett), who managed to catch the tail-end of the contribution of my hon. Friend the Member for Great Grimsby—we are pleased that he is listening.

We have heard tonight the real concerns about the deficit in manufacturing trade. I assure the House that the Government recognise the important part that manufacturing industry plays in our economy. It has both a direct and an indirect impact on local jobs and local prosperity. It employs 4 million people directly and its output amounts to a fifth of our gross domestic product.

The manufacturing sector provides a vital contribution to our trade. Manufacturing production is about 10 times as likely to be traded across international boundaries as services are. That means that firms in the manufacturing sector are much more likely to feel the full brunt of international competition. It can, however, serve to strengthen those firms and improve productivity, as I think we would all acknowledge, which is why the Labour Government are doing their best to ensure that manufacturers, as well as non-manufacturers, are given the opportunity to thrive. The latest figures show that, in the three months to February, manufactured exports were 1.5 per cent. higher than in the previous three months, but the legacy of the previous Government remains: the deficit still exists.

The Government inherited an economy with many fundamental weaknesses. Over the past 30 years, manufacturing output and exports grew at a slower rate in the United Kingdom than in any other G7 country. Under the previous Government, instability did incalculable damage to manufacturing. Trade in manufactured exports has been in deficit each year since 1983: the first time in our history that manufacturing has been in deficit in peacetime.

We have created a stable macro-economic framework in which British companies will be able to plan and invest for the future. Industry has long been asking for a stable environment with sustained growth, low inflation and sound public finances. Even my hon. Friend the Member for Great Grimsby will acknowledge that the Government are delivering that.

A stable framework is also the key to achieving a stable and competitive pound over the medium term. Of course, we fully recognise the worries of manufacturers about the current level of the exchange rate—no more so than in Luton, North, Hastings and Rye and Great Grimsby—but we must avoid the short-term view that led to the damaging cycle of boom and bust. There are no quick and simple fixes to the short-term pressures facing manufacturing industry. A more stable exchange rate, which will suit more of our traders, will be achieved only through a stable framework. It is also worth noting that two thirds of sterling's recent appreciation occurred under the previous Government.

As has rightly been pointed out, macro-economic stability is not enough. If we are to reverse the current trade deficit in manufacturing, our firms will need to become more competitive. There is evidence to suggest that the UK became less competitive in the 1980s. The trade deficit in manufacturing grew rapidly from 1983 to 1989, and import penetration in the UK was higher than the Organisation for Economic Co-operation and Development average throughout 1979–96; over that period, UK import penetration followed an upward trend relative to the OECD.

The loss of competitiveness under the previous Government needs to be recovered and further improved on. That is why the Government are working in partnership with business to help British companies to become as competitive as possible, generating the wealth that the nation needs, as well as good jobs and opportunities for all our people.

Many vital areas must be addressed if we are to improve the competitiveness of British firms. The performance of all our firms—not only our weakest performers, and not only manufacturing firms—has to be improved. I fully acknowledge that the manufacturing sector makes an important contribution to UK trade, but we must not ignore the other components of the balance of payments.

UK trade in services has been in surplus every year since 1965—in Harold Wilson's Government—and in the three months to February the surplus was £1.8 billion; but export and trade promotion are as vital now as ever. Today, both the Prime Minister and the President of the Board of Trade are in Geneva celebrating the 50th anniversary of one of the greatest achievements of the post-war era: the creation of the general agreement on tariffs and trade. Our commitment to the multilateral trading system and free trade remains as strong as ever. We recognise the vital role that trade has to play in the creation of jobs, prosperity and growth, and we seek to promote trade wherever we can.

Improving British manufacturing firms' ability to exploit export markets is an important part of increasing our competitiveness. Here, the Government as a whole, and, in particular, the Department of Trade and Industry, have a crucial role to play. The DTI is assisting manufacturing companies in their marketing operations abroad in a number of ways. The export forum set up to review current activity has now issued its report; it makes several recommendations as to how support could be delivered more effectively.

One important recommendation is that we should select a smaller number of markets, based around two categories: those that are accessible, reasonably straightforward to enter and suitable for the new or less experienced exporter; and those that are growing fast.

High and sustainable employment requires a stable economic environment, to which the Government are committed, and not the boom-and-bust instability of the past. The whole House will welcome the fact that the latest figures show a rise in manufacturing employment of 6,000 in February, and of 22,000 on a year earlier.

There is clearly much to be done. I am grateful to all my hon. Friends who have contributed to this important debate, and no more so than to my hon. Friend the Member for Great Grimsby.

The motion having been made after Ten o'clock, and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at five minutes past Eleven o'clock.