Pearls and Irritations

One of the consequences of the UK Brexit vote and the election of Donald Trump as the next US President is the association with the re-emergence of industrial policy in both countries which are important for the development of policy thinking in Australia. This comes at a time when Australia is dealing with the economic transition associated with the end of the mining boom.

In both the Brexit vote and Donald Trump’s electoral college majority the rejection of the status quo by the older industrial areas of the UK and the US was an important driver of the end result.

Both regions had suffered massive jobs losses as the manufacturing base had contracted, while at the same time jobs in the financial and online economy centres located elsewhere had expanded. The electors felt that the elites in the capital cities didn’t understand the situation they faced and had no real answers other than more of the same. Feeling they had nothing to lose, they voted for change.

In principle, the gainers from globalization and the trade liberalization that made it possible should have been able to compensate the losers and still be ahead. But in practice no such compensation took place. The result was a rather significant skew in regional income distribution.

In response, Mrs May’s UK Government has moved quickly to articulate what it calls a “modern” industrial policy which is aimed at bringing about better balanced growth and a more even spread of the benefits of growth.

A core aspect of Donald Trump’s “Making America Great Again” campaign slogan is to re-invent and bring about a new dynamic in terms of manufacturing industry. Australian-American citizen Andrew Liveris has been named as the chair of the American Manufacturing Council.

Brexit and the Post Brexit Response

The Brexit vote threw the cat among the pigeons in a number of unexpected ways and is having consequences that were not foreseen prior to the referendum.

London and Scotland voted against Brexit, perhaps for different reasons, but the rest of country and especially the older industrial regions voted overwhelmingly for Brexit. The divide between South-East England and the rest of England was on display for all to see.

Mrs May as the new Conservative Party leader seems to have realized that the vote was as much against the status quo as it was against the EU. She quickly identified the inequality that had emerged and the apparent lack of opportunity outside the favoured South-East England needed to be addressed. In response, one of the notable things she did was to pick up the proposal of the Confederation of British Industry for the development of a modern industrial strategy.

In a major speech on 21 November Mrs May outlined the philosophy of the so-called modern industrial strategy and a number of concrete measures. These included:

Pounds 2 billion for government investment in R&D by 2020-21;

Establishment of an Industrial Strategy Challenge Fund based on the US Defence Advanced Research Projects Agency;

Improvements to the business R&D credit scheme;

A review of the availability of patient capital; and

Improvements to government procurement from small business.

Mrs May also promised to make the UK’s corporation tax the lowest in the G20 countries.

Because of the uncertainty created by Brexit the Japanese automotive companies who have major production facilities in the UK mainly to address markets in the EU, were looking for reassurance. A priority for the UK government has been to do whatever is needed in this direction. The deal with Nissan to produce models at its Sunderland plant is a clear example.

For the most part the measures announced are forward looking, but the automotive industry situation suggests that holding onto major industrial capability will also play an important role. This requires engagement with the relevant global automotive companies.

By and large, the reaction to the modern industrial strategy has been positive although not without concerns being expressed by the usual suspects who have always seen industrial strategy as a left wing plot doomed to failure except in some countries of Asia where successful export led growth strategies have been pursued with vigour over long periods .

The US Presidential Election

Michigan, Ohio and Pennsylvania were meant to be Democratic Party strongholds. But the US Presidential election showed they were unhappy with business as usual and wanted change. Donald Trump offered them that.

The Trump pitch was to pillory trade agreements, to point to major infrastructure spending, to reduce regulation, to cut taxes (company tax to 15%) and to promise to reinvent and rebuild manufacturing industry.

During the campaign Trump went out of his way to bring public pressure to bear upon US companies not to proceed with shifting further production facilities offshore and in fact to reshore facilities where possible. A lot of play was made after the election by a visit to the Carrier Plant in Indiana which under pressure decided to keep 800 jobs bound for Mexico in the US. Ford also became a focus during the campaign and the company has made clear it intends to move a small car to Mexico but will be expanding other US based operations.

This kind of thing could normally be expected to get the Republican commentariat excited as an interference in the rights of business but criticism has been muted. The Economist (10-16 December) has been more forthright asking that Trump lay off protectionism and bullying companies. The financial limits to bribing companies to remain in the US place clear limits on how much of this sort of thing can be done even when the considerable capacity of the individual States is taken into account. But the use of the Presidential bully pulpit might not be so tightly constrained.

The other step Trump has taken is to appoint Andrew Liveris as the Chair of the Amaerican Manufacturing Council. Liveris who heads Dow Chemicals wrote a best selling book in 2011 entitled “Make it in America: The Case for Re-inventing the Economy”. He was also a co-chair of the previous Advanced Manufacturing America 2.0 Council. Liveris, amongst other things, has honorary doctorates from the University of Michigan where Dow Chemicals is located and the University of Queensland where he got his engineering degree. He is also on the Board of the Australian Industry Growth Centres one of which is for advanced manufacturing,

Liveris in his book took as his starting point that manufacturing and its associated supply chains remained vital in the US to providing good quality jobs, spreading the benefits of growth and exploiting the great opportunities that would be associated with the new technologies that were likely to revolutionise manufacturing in coming years – robotics, machine intelligence, 3D printing, the internet of things to name a few.

He made the point that other big nations like Germany, reflected in its Industry 4.0 strategy, had recognized this and were investing appropriately in R&D and skills formation.

What are the prospects for success?

Government through its unequaled capacity for agenda setting, infrastructure investment, support for skills formation and R&D, lightening the regulatory burden and reducing company tax is well placed to deliver on its promise of a modern industrial strategy a la Mrs May and Donald Trump.

Whether they will succeed in practice is rather more difficult to say. For example, movements in exchange rates could either assist (UK) or hinder (US) progress. But the point is that the democratic process expressed very clearly in the UK and the US means that these nations Governments will now seek to make good on their promises.

In both countries there seems to be strong support in the leading national business organisations for an effective industrial strategy. Developing an effective and durable government-business partnership for economic growth is essential for success.

Building close collaboration between the universities and research institutions and business on the other is an essential precondition for success. This is recognized in both the UK and the US.

Industrial strategy also needs to concern itself not just with what exists but also what might exist in the future. Supporting new business development is a key part of industrial strategy.

Judging from what has been said in both the UK and the US a modern industrial strategy will be essentially forward looking rather than seeking to defend the industries of the past. It is in this respect that expectations will need to be managed carefully. There are limits to what industrial strategy can or should achieve in the national interest.

If the US is to pursue the Liveris/Trump vision of making American manufacturing great again it is to be expected that this will have implications for other great manufacturing nations including China. The latter is already investing hugely in education and R&D to underpin its competitiveness in the industries of the future and not just the relatively labour-intensive industries it has built itself on to become a manufacturing powerhouse.

Where does leave Australia?

The last occasion when a UK Prime Minister and a US President seemed to be in sync with each other on economic policy was during the time of Margaret Thatcher and Ronald Reagan. Both played major roles in releasing market forces and throwing highly regulated industries open to competition. Their efforts had a global effect including on Australia. The Hawke-Keating reforms took place in this period.

There is a reasonably high degree of alignment between the approach and policy measures announced by Mrs May in her November speech on a modern industrial strategy and the approach being followed in Australia. The Commonwealth Government has raised innovation and science to a key part of its jobs and economic growth strategy. Support for venture capital and start ups has been increased considerably and more is in the wings. Bringing about closer collaboration between the universities, research entities and business is a priority. Some State Government’s have significant innovation plans in place.

Unlike the May/Trump axis which is committed to reducing company tax to 15%, at this stage Australia is stuck with the much higher company tax rate of 30% with a small discount for small businesses. At some point this gap will have to narrow.

It is notable that the UK and the US have both taken robust action to retain and build their automotive industry, whereas the Commonwealth Government through the actions of then Treasurer Joe Hockey pretty much gave General Motors and Toyota their marching orders. The consequences of this decision for the thousands of people employed by the industry in Victoria and South Australia seems to have been discounted in favour of the benefits to be captured by automotive buyers. Some State adjustment programs were hurriedly assembled, but they did little to address the political costs.

We had our own Brexit light moment leading up the last Federal election when the Coalition’s prospects of holding seats in South Australia following the automotive closure decision led them to commit to the Submarine project with the French bid and large parts of the project to take place at the ASC in Adelaide. In retrospect it might have been better for the national interest if the Coalition had negotiated a modern industrial strategy deal with General Motors and Toyota for them to continue operating in Australia and given themselves rather more time to consider the Submarine decision.

A further direct consequence of the decision to close the automotive industry is the emergence of Nick Xenophon as Australia’s de facto Minister for Manufacturing. He had some success in trading his votes for the ABCC legislation for a much enhanced statement on the use of government purchasing to support Australian industry. He is likely to use his leverage in the future to obtain further benefits for manufacturing, including keeping close tabs on achieving the projected benefits of the Submarine project for South Australia and advanced manufacturing.

There will be those that will regret manufacturing coming back into the policy agenda. It was meant to fade away quietly. But in Australia, the UK and the US which are in important respects economies in transition – Australia rebalancing after the minerals boom, the UK facing a post EU world and the US needing to revitalize is North-Eastern States – industrial policy is seen as part of the solution. Add in the transition to a low carbon world and dealing with new technologies which hold both opportunities and challenges, the likelihood is that we will see a lot more priority given to this area of policy. Surprises should be expected.

David Charles is a Director of Insight Economics. He was formerly Secretary of the Commonwealth Department of Industry and Commerce from 1985 to 1990.  He co-founded the Allen Consulting Group in Melbourne.

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