Industrial strategy: where UK and US economic plans diverge

Fotolia_96263802_M.jpgTheresa May recently launched the centrepiece of her domestic agenda: the UK’s industrial strategy. After six months of commentary on the parallels between the phenomena that led to the Brexit vote and US election result, it is useful to reflect on the differences that are starting to emerge. A quick read of the green paper appears to show that May is charting a very different course on industrial strategy from the one now being advocated on the other side of the Atlantic. Significant differences are the approach to resource productivity and the attitude to growing low carbon markets.

The UK’s industrial strategy is in strong contrast to the economic nationalism and roll back on climate action that have characterised President Trump’s prescriptions for the US economy so far. Its focus on science, research and innovation, and the encouragement of trade paints a picture of an open, connected UK that sees its international relationships in terms of win-wins, rather than protectionism. And it explicitly commits to affordable energy and clean growth, referencing the government’s “settled policy position” to meet its legally binding targets under the Climate Change Act.

These two decisions are mutually reinforcing; no-one looking around the world can fail to see the direction that global markets are taking. When China launches its carbon scheme this year, over 20 per cent of the world’s greenhouse gas emissions will be subject to some kind of carbon pricing.

Underlying the differences in the US and UK approach is cold economic logic. In the US, where exports of goods and services represent 13 per cent of GDP, it is possible, in the short term at least, to rely on domestic demand. In the UK, where exports of goods and services represent 27 per cent of GDP, we rely on an economy that is connected to the rest of the world.

A better route to competitiveness
As expected, the industrial strategy’s focus is the UK’s stagnant productivity and the persistent differences in the economic performance of regions. The strategy sets out the opportunity to raise levels of energy and resource productivity, as a direct way to add to the business bottom line. Barclays estimates that this could be worth £2.56 billion in profit to UK business over the next decade.

Energy efficiency is also to be included in a review into reducing the cost of decarbonisation in the power and industrial sectors. This could mark a smart change for energy and resource intensive industry. At the moment, the UK compensates energy intensive industry for carbon taxes to avoid domestic policy which leads to offshoring UK emissions.  The review could go further, and find ways to help industries like steel to invest more in the new production methods that would increase their competitiveness and reduce compensation costs overall.

Need to go further
However, focusing on the cost base is just the start.  If we are to have a truly modern industrial strategy we need to address all the ways that climate change and resource constraints will change and reinvent industry in the coming years, informing priorities in innovation, skills, trade and opportunities. To make this happen, there are three things industrial strategy can focus on:

  • Raise the baseline on product and process innovation for energy and resource efficiency, to lower costs and increase competitiveness of manufacturing and energy intensive businesses.
  • Futureproof sector deals to ensure they support high productivity sectors to remain competitive in the context of a low carbon and resource efficient world.
  • Double down on opportunities to grow new high productivity businesses and supply chains in the UK that will help us deliver on both our decarbonisation and productivity goals.

A successful industrial strategy starts with what the UK is good at already, and identifies how we can continue to succeed in the future. The UK is the second biggest service exporter in the world and has a foothold in developing markets which will account for two thirds of the £65 trillion low carbon infrastructure spend predicted by 2030. The UK has world leading science and research expertise, engineering, accountancy and advisory firms, and a financial sector of global significance. This is a strong start.

Real job opportunities for the future
Focusing on these successes doesn’t immediately sound like a strategy for the former industrial heartlands. But that is to ignore the way technology and the rise of the emerging economies has changed manufacturing over the recent decades. Manufacturing that will thrive will draw on the competitive advantages of the UK’s science and design base. We can succeed by making goods with high levels of production efficiency and by focusing on providing the low carbon and resource efficient goods the world needs.

Parts of America may be cheering the return of mining jobs but, unless the US wants to subsidise coal production against cheaper and cleaner renewables forever, this is unlikely to a long term solution. By stimulating new industries that lead the way in energy and resource efficiency, the UK will foster world class businesses that can compete globally and provide good jobs at all levels for decades to come.

The government’s green paper gives us reason to be optimistic that Theresa May is charting a strong direction for the UK economy.  The government’s next challenge will be to ensure the white paper gets us there.  To do this it needs to position low carbon and resource productivity as more than cost reduction strategies; it will need to focus on ensuring the UK builds competitive advantage in high productivity sectors across the whole economy. As the UK embarks on new set of new global relationships, this may just give us the edge over our Atlantic neighbours.

Our new analysis is available to read now, ‘Why a successful industrial strategy will be low carbon and resource efficient‘. See the animated infographic.

One comment

  • What this article is missing is the linked issue of managed decline…. while some sectors grow (eg science, energy efficient construction, electric bikes, urban/eco-agriculture, solar lighting for developing countries), others – such as traditional steel-based building methods, the internal combustion engine, intensive farming, long-distance logistics – will need to decline.
    How to structure this? I call it, D-growth, for differentiated growth – while some forms of employment should expand, others will have to contract as part of reducing our carbon footprint and as part of that our international trade – and to manage this we will need a basic or citizens’ income.
    As far as I can see, there is also very little discussion of how to combine these various elements.

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