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Can Commercial Diplomacy Help the UK out of Recession? | ASHARQ AL-AWSAT English Archive 2005 -2017
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London, Asharq Al-Awsat- This April was not only the wettest for the UK since records began but also saw the country enter a double dip recession as the economy shrunk by 0.2%. The country is two years into a Liberal Democrat-Conservative Coalition Government whose economic plans combine a deficit reducing package of austerity with private sector export-led recovery. However the current recovery is proving to be the slowest in history, slower even than following the 1929 Great Depression. Indeed 2012 saw the UK fall behind Brazil in GDP as it edged closer to falling out of the list of top ten ranking global economies. The rankings are not perfect but what is clear is that the UK economy, like many in Europe, is stagnating if not declining. For Britain’s policy makers in Westminster, the question of how to manage this challenge and reposition the UK economy in an increasingly competitive global economy is an issue of paramount importance in modern politics.

A Commercial Foreign Policy

One of the key strategies the current government has adopted is an aggressive promotion of the UK globally as a vibrant and dynamic market in which to invest and do business. The UK foreign office has made promoting Britain’s prosperity a central part of its wider foreign policy agenda. The government has recently launched the “GREAT” Britain campaign designed to use the platform of the Olympic Games in 2012 to “showcase Britain’s capabilities, to promote and enhance our reputation abroad and to maximise the economic potential of the Games”. It was announced by Prime Minister David Cameron in New York on 21 September 2011, and supports the marketing and public diplomacy efforts of UK Trade & Investment (UKTI), Visit Britain, the British Council, the Foreign Office and other government departments overseas.

The government has also undertaken several high-profile trade missions to emerging economies including China, India, and most recently South East Asia. The 2010 delegation to China was led by Prime Minister Cameron who travelled with the largest ever British trade mission to the country, including four other Cabinet ministers and 43 business delegates, as well as a small education and culture delegation. Following the visit a Parliamentary Select Committee praised the delegation for delivering “a number of tangible business outcomes. Trade deals announced included a $5 billion deal with Airbus and a £750 million deal with Rolls Royce”. The Committee also agreed that the “importance of regular high-level engagement with China should not be under-estimated”, while the Daily Mail reported that Government officials insist that exports to countries where Mr. Cameron takes a trade delegation are boosted by a fifth. Indeed after signing a £700m arms deal in India in 2010 Cameron spoke of how the trip was “evidence of our new, commercial foreign policy in action”.

The commercial foreign policy has manifested itself in a more unique manner in the Middle East and North Africa region. The UK government has increased trade with traditional partners like Israel where bilateral reached £3.75 billion in 2012, up 34 per cent in a year, and Qatar, which including a 2011 deal reached during the Prime Minister’s visit, when British multinational Centrica agreed a £2 billion gas supply deal with Qatar Petroleum (QP). The UK has also placed a new emphasis on engaging with countries that aren’t traditional trade partners such as Algeria and Morocco, where at present UK trade is worth only £200m a year. However an interesting sign of UK’s commitment to the Arab Spring was that British policy towards Libya was directly counter to the UK’s commercial interests, as was the policy of restricting Britain’s export licenses to the region. Many British companies have lost substantial revenues as a result of the Libya intervention and are now in a kind of limbo, hoping to take advantage of post-Gaddafi opportunities to recover lost funds. In both cases money was not factored into the equation despite the emphasis on ideas of ‘commercial diplomacy’ that came into play with the new Coalition government.

Aside from the Arab Spring ‘exception’, the British government has been trumpeting its commercial diplomacy. This February the government marked the end of the first year of their new trade policy by highlighting a number of successes including having supported businesses to secure more than £800million in high value opportunities overseas and helping more than 20,000 small and medium-sized enterprises to export and break into new high growth markets like India, China, Brazil and Turkey. In April Cameron led another delegation on a tour of SE Asia, arriving in Japan on a plane emblazoned with ‘2012 is GREAT Britain’. The plane itself would later be a source of embarrassment when it was revealed it was not a British jet but rather one privately chartered from Angola. More than 35 senior executives joined this trip with particular focus on appealing to Japan’s defence industry (BAE Systems) and energy providers (the Nuclear Industry Association).

On May 8 the Prime Minister and Deputy Prime Minister appeared at a factory to signal their commitment to their export-led growth plan. They reminded the assembled crowd that Britain is still the sixth largest manufacturer in the world and that the Fiat-owned New Holland factory, where they were speaking, assembles 26,000 tractors a year mostly for export.

Hurting but not working?

But does this focus on selling ‘UK Plc’ actually work? Should our economic recovery be relying on offering an ever-growing slice of the UK productive economy to foreign investors? And is it right that at a time of growing global competitiveness the UK seems to be becoming more unilateral in its approach to trade rather than playing a leading role in the recovery of the wider Eurozone?

What is clear is that the UK government alone cannot rely on monetary or fiscal policy to steer the country away from economic danger. Britain, more so than many G20 countries is critically reliant on the global economy. And while the Cameron government talks at length about the importance of bilateral trade with the world’s emerging economic powers, the reality is that it is the health of the Eurozone, which is still by far the most important factor in Britain’s future. The government’s desire to see an export-led recovery will only be met if the Eurozone continues to buy British goods and services.

There is no better example of the stark reality of the UK’s trade balance that Britain still exports more to Ireland or Belgium and Luxemburg combined than it does to China. As David Nash, Research Fellow at the UK’s Institute of Public Policy Research (IPPR) noted when talking to Asharq Al-Awsat “the UK’s trade deficit is not going to be solved by trade trips to China or South East Asia.”

While politically it does not help the Government to talk up the need for a strong Eurozone, it is clear that the government understands the need for it to survive. This is why the Chancellor George Osborne, against the fury of some of his own deeply Eurosceptic party MPs, was willing recently to commit a further £10 billion to the IMF bailout fund aimed at protecting the Euro currency area. IMF Managing Director Christine Lagarde underlined this reality in April saying of the UK “it’s in their interest because if the key partners of a country like the UK are in very bad shape they are bad clients. They can’t pay their bills. They can’t trade properly. And it’s not in the interest of the UK to have a weak euro.”

The UK’s export-led recovery rests on continued economic recovery in the US and the eventual emergence of a stronger Eurozone, something which doesn’t look likely at the moment. However, analysts are beginning to argue that we will see an upturn in the Eurozone by the end of this year – for the UK, which is still heavily reliant on US and Eurozone exports, the hope is that this prediction will come true.

A confident hub of innovation

But away from the UK’s primary export markets of the US and Europe, how much further gain can the UK expect through the government’s aggressive promotion of the UK internationally and its focus on export-led growth? Economists including Will Hutton argue that the UK has to get its own house in order first. The government’s strict focus on deficit reduction has led to an erosion of confidence amongst consumers and the public meaning little money is being invested in the kind of dynamic products and services Britain could then export. In effect the UK economy is no longer a permissive environment for innovation. And while the UK’s debt reduction and fiscal discipline has protected its triple-A rating on the world’s financial markets it has choked off business finance.

For a government desperate to assuage global capital markets, the result is a domestic business sector unwilling to take risks in terms of expansion and innovation and there is little sign this will change in the near future. David Nash of the IPPR says that the only sector in the UK economy sitting on a surplus of cash is business but they are not willing to invest or expand due to a deep lack of confidence in the economy.

This lack of confidence in the domestic economy and of the appetite of UK consumers is one of the prime reasons Prime Minister Cameron and his Chancellor are emphasizing the opportunities open to the UK in emerging markets such as China, Brazil and India. And while some analysts believe the size of the markets and the speed in which trading and investment opportunities will materialise is over-stated, there is definitely space for the UK to drastically increase its exports to emerging economies.

Currently Brazil, the economy that overtook Britain this year, is ranked a staggering 27th in the list of countries the UK exports to with a value of approximately £2.4 billion. For Nash the UK government needs to become more focussed and start to make strategic decisions about industries it can support where the UK has a clear comparative advantage. At the moment, he argues, the government does well in supporting big marquee projects such as Airbus but has not done enough to help the service sector, “the UK’s Export Credit Guarantee System is a good policy but it needs to support businesses which can really add value in places like China. I’m talking about accountancy, law, and management.”

On the positive side, the UK is continuing to position itself as a hub for currency transactions. While the emphasis in the UK is in rebalancing the economy away from financial services, its near term future is still dependent in part on the strength of this sector. The historic announcement in 2011 that the UK and China had agreed to a private sector-led development of the offshore RMB market in London, and that the two countries would launch a cooperation project on the development of RMB-denominated products and services was a massive coupe for the City of London. The agreement means London will become the first financial centre (after Hong Kong) to receive public backing from Beijing to become an offshore RMB centre. As the power of the Chinese currency grows globally, for London to become its European platform ahead of Frankfurt is a huge boon to the UK economy.

The UK’s blue-collar workforce is also seeing an unexpected benefit from the growing strength of the Chinese currency; the heightened cost of Chinese labour and transport. UK businesses are slowly and tentatively starting to repatriate some industrial production to the UK bringing jobs and income back to Britain. This is by no means a macro trend but certain key producers have made news by bringing production home. Trunki, the iconic child’s ride-on suitcase, is one example – last month it announced it was ending its Chinese production and moving back to Bristol. On the demand side rising wealth in China is also providing niche sectors such as the luxury car producers with a huge new market.

The UK economy has a structural problem, which is being witnessed within many countries pushing through austerity plans. It cannot trigger confidence and growth in the domestic economy. In addition, the UK’s reliance on the Eurozone means that its economic future is inextricably linked with that of its European neighbours. The government’s narrative of an export-led economy focusing on the world’s emerging markets will undoubtedly be part realized as there are opportunities to expand what is currently comparatively small exposure to markets such as China and Brazil. But in the near to medium term Britain cannot rely on the Renmimbi or the Real. It is no coincidence that on the May 9 state opening of parliament the Queen said that her government will seek the approval of the agreed financial stability mechanism within the euro area.

Additional Reporting by Sam Hardy, Director of the New Diplomacy Platform