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Lee Hopley on navigating the choppy waters of modern global trade

The EEF's chief economist says UK manufacturing can compete on the global stage, but Westminster must be realistic, and prepared. 

By Augusta Riddy

On Tuesday 24th July, Jeremy Corbyn gave a speech to the EEF manufacturers’ organisation. He told the audience that a Labour government would “stand up for the real economy” and would “take decisive action to make finance the servant of industry not the masters of all”. By the “real economy”, Corbyn meant industry, and he promised to use new freedoms post-Brexit to “allow government to intervene to protect our industrial base” and start “reprogramming the economy”. 

Lee Hopley, chief economist at the EEF, responded to the speech in her blog. “Manufacturers might challenge the idea of an industry in demise,” she wrote. “A smaller share of the economy in output terms – yes. But one that has been growing.” Anyway, she observes over coffee at the EEF offices in Westminster, no other sector is judged on its output. “It seems to be a particular obsession we have with manufacturing.”

So, how would Hopley describe it? “It’s an industry which is resilient and adaptable. It has shifted with globalisation and technological advances, in spite or because of government policy.” This, she says, is how the 2.8m people that work in UK manufacturing would prefer the sector to be thought of. 

Corbyn is not the first politician to appeal to a sentiment that idolises Britain’s “lost” industrial past. Why don’t we make things anymore? Why are we importing goods that Britain invented? Former chancellor George Osborne’s 2015 “March of the makers” speech played on the same emotion, when he too promised to re-balance the economy away from finance and increase manufacturing output. Is this vision possible? “What is their vision?” Hopley asks bluntly. “Because their vision of re-industrialisation is not tangible. How do you measure it? How do we know we’ve delivered that?” Instead of getting all misty-eyed, she argues, politicians should be focused on driving improvements that will ready the industry that contributes ten per cent of UK gross value added (GVA) for the hurdles ahead. “We’re the 9th biggest manufacturing economy in the world, which I think is alright … There’s no point having a big conceptual idea of a future that doesn’t stack up with where business is going.” 

What Hopley is appealing for is a strong, lasting industrial strategy. “An industrial strategy doesn’t lead to a brave new world of re-industrialisation but it can deliver industries that are capable of meeting society’s future challenges.” Four governments have now had a “crack” at an industrial strategy, she points out, and although “elements of them all are still hanging around”, none has stood the test of time. The fact that an industrial strategy is accepted as necessary across the political spectrum is progress, she says, and there is broad consensus around the “high-level” goals: “productivity, good jobs, improving living standards. There’s some common ground there.” Hopley is keen to see the promised (but delayed) Industrial Strategy Council installed “to make a judgement on whether progress is being made … [and to] start giving indications of where progress is lacking.”

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The “challenges” that UK manufacturing needs support to face are significant and wide-ranging, but the most obvious is Brexit. A drop in the value of sterling – its performance between April and June 2018 was its worse quarter since the referendum and its second-worse quarter since the 2008 crash – led to optimistic speculation that UK manufacturing exports would rise as they became cheaper. Not so fast, says Hopley. “The [idea] that sterling depreciation was going to suddenly lead to a boom in export demand sheds light on the lack of understanding we have of modern manufacturing in the UK.” When demand goes up, gaps in the supply chain have to be filled by “sucking in more imports,” she explains, and the “sharp movement in sterling does immediately impact on the cost of those imports.” Overall a drop in value is a good thing for manufacturing, she accepts, but the real enemy is volatility. “Volatility is a nightmare. I think a lot of our members would accept a higher rate of sterling for more stability.”

Hopley will not be drawn into a discussion on the impact of a “no-deal” Brexit on manufacturing: “I don’t think we’re close to that being the scenario … I’m not sure as an economist I fully appreciate the practical ramifications.” However, there are plenty of things that need to be addressed “whether or not we’re leaving the European Union”. 

Greater even than Brexit is a fundamental shift that will rock global production and trade to its core, which is the fourth industrial revolution, or 4IR. The EEF defines 4IR in a fact sheet as “the coming together of cyber networks with physical networks, to create new autonomous systems”. The UK needs to be ready, warns Hopley. “It’s something that lots of other governments around the world have plans for. You don’t choose to opt in or out of technological change. It’s happening.” 

As intelligent machines continue to automate roles there are expected to be widespread job losses. When envisioning the workforce in 2025, “the vast majority of those people are in the workforce today,” points out Hopley. Therefore it’s not just a question of getting education right, “it’s also about the stock of human capital that we’ve got at the moment and the adaptability of that.” New technologies, however, – “if adopted and deployed in the right way” – could improve UK productivity, she argues, which has been stagnant since the financial crisis. “In broad terms, productivity has been flatlining.”

Hopley now has her sights on the Autumn Budget, and she hopes investment will be a key focus. “I think we need to look seriously at the gap between what we could have won, and where we need to be to make sure we aren’t losing pace with competitors.” Following the 2011 Eurozone crisis and a fall in commodity prices in 2014, European markets made a recovery that was “hugely important” for manufacturing in 2016/17. However, in the UK this “has not been accompanied by a corresponding improvement in investment”. That is important, she says, as investment “tells us about confidence; how do [investors] feel about the UK, the demand outlook, and the competitiveness of the business environment.”

But with goods being produced in low-cost markets such as China and India, can the UK really expect to compete in the future? “It’s not all about cost, it’s about value, and we definitely can [compete] in the UK.” When it comes to domestic procurement, which politicians like Corbyn are arguing for more of, there needs to be more communication between government and industry, and plenty of forward planning, Hopley says. “It is about having that relationship on the procurement side which gives some kind of forward visibility about the pipeline and allows innovative solutions.” It’s no good, she argues, issuing one-off government contracts to UK suppliers without a more sustainable pipeline of orders. “You can’t have famine and feast. You can’t say we want 15 power stations and then we don’t want any for another ten years.” 

The world is changing, Hopley acknowledges, and global trade structures that were taken for granted can no longer be relied on. Trump’s recent steel tariffs are a stark example of this new order. “We had the decade where it was all about multilateral agreements, opening up, freeing trading goods. The assumption was this is the new norm.” Now, she says, the UK government needs to think seriously about how the country can influence this “important global agenda”, especially as trade will have to shift its focus away from the EU when Britain exits. “Trade liberalisation is a game we want to play, but other countries aren’t in the mood. [As we] progress through the Brexit negotiations that is something we will need UK politicians to have an answer for.”

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