The last year for which we had a full trade surplus (goods and services) was 1997. Not that long ago.

“You also hear the claim that this is nothing new, that Britain relies more on trade in services and that our goods balance has always been negative.

Actually, that isn’t correct; if you look at goods imports as a proportion of goods exports, you can see that thirty years ago the balance was reversed:”

This is what is known as “lying with statistics”.

http://www.statistics.gov.uk/statbase/tsdataset.asp?vlnk=224&More=Y

We’ve had a number of years where we had a trade surplus in goods.

1956, 58, 71, 80,81,82.

And that’s it since 1945. Don’t know enough about the 50s but the others were when we were in the depths of recessions. And that’s very naughty indeed, anchoring your time series at a point where you know damn well that something exceptional was happening.

Seriously, you’re trying to claim that things were better at the depths of the Thatcher recession?

If this gov is serious about using exports to boost the economy & jobs, then FFS invest in manufacturing.

Offer tax breaks or whatever us needed to bring jobs back to the UK.

“invest in manufacturing.

Offer tax breaks or whatever us needed to bring jobs back to the UK.”

Why would you want manufacturing jobs in the UK? They’re horribly low paid these days, what with having to compete with the peeps in China and all that.

Napoleon once said of the English “They’re a nation of shopkeepers.” And today we seem to have become noting more than a nation of Del Boy Trotters. Whether it is bankers who fund 50% of the tory party or glorified shopkeepers like Next, or Curry’s or Tesco’s or Carpet right, (with their tory connections) we are just a bunch of jumped up market traders.

They don’t make anything. They just shuffle money around. And in the case of the bankers gamble it away like an addict, and then demand the tax payer give them more money to carry on gambling. Exporting is not high on their list of priorities.

Tim,

What sector of the economy is likely to not end up competiting with low paid labour in Asia over the next few decades?

“What sector of the economy is likely to not end up competiting with low paid labour in Asia over the next few decades?”

Services: less tradeable than manufactures.

Plus, of course, we should be doing what we have a comparative advantage in. One of which seems to be finance…..

Plus, of course, we should be doing what we have a comparative advantage in. One of which seems to be finance….

First, they don’t employ many people, and secondly, its likely to remain a relatively small-scale sector.

And lastly, Germany seems to do quite well in manufacturing despite relatively higher wages. There’s no need to be disingenuous as usual Tim W.

Oh to add, I’m not sure if I understand your above comment correctly. You say:
We’ve had a number of years where we had a trade surplus in goods.

1956, 58, 71, 80,81,82.

And the OP points out that the last time we had a trade surplus was 30 yrs ago – which is what you said. No?

And lastly, Germany seems to do quite well in manufacturing despite relatively higher wages. There’s no need to be disingenuous as usual Tim W.

Watch this space. Germany was pushed out of low-end manufacturing years ago, precisely because it couldn’t compete on price. It now focuses, successfully, on high-end manufacturing, which is precisely the area that China is targeting for growth. Look at what’s already happened to the solar panel market. China has come from nowhere to account for more than half of global output.

Germany is, in relation to China, where Britain was in relation to Germany in the late 19th century.

“And the OP points out that the last time we had a trade surplus was 30 yrs ago – which is what you said. No?”

Indeed, but the OpEd certainly implies that 30 years ago a positive balance of trade was nrmal: which it wasn’t it’s very much the post war exception. Plus, of course, it’s a little odd someone around hrre pointing to the nadir of the Thatcher recession as a good time….

“and secondly, its likely to remain a relatively small-scale sector.”

Really? The UK’s largest net export sector?

“And lastly, Germany seems to do quite well in manufacturing despite relatively higher wages”

There have been two bursts of globalisation: 1880 ish to 1914 and the last 30 years. Globalisation is the international division of labour, each country/company exploiting its comparative advantage. Both times the UK has done finance, Germany the heavy industry. Might even be that those are the relevant comparative advantages really…..

“One of which seems to be finance…..”

Do you think though that at some stage there will be a sufficient number of maths and economics graduates in India, that major sections of finance will move there attracted by cheaper wages. Is there something uniquely difficult about managing a hedge fund for example that prevents it being managed from an office in Bangalore?

11 – time zones, language, and the proximity of associated professions (law and accountancy for example) are the usual reasons (along with history) given for London’s position as a financial centre. The first is surprisingly important.

Plus, there’s more to it than maths and economics graduates – compare and contrast London and Frankfurt, and consider that German education has a far better record.

“Is there something uniquely difficult about managing a hedge fund for example that prevents it being managed from an office in Bangalore?”

Finance, like many other industries (potteries in Stoke, spectacle frames in a town in Italy, chlorine chemistry in Hartlepool, etc) depends to a large extent on clustering. Having more people doing that trade in a particular place brings in yet more people to that trade there.

Your certainly can run a hedge fund from anywhere (I know one in Sydney for example), but running actual markets (Baltic for shipping, LME for metals etc etc) tends to depend upon clustering.

And of course this has it’s good side for the UK: the City ain’t all that mobile precisely because of such clustering. So it can take higher taxation than some might think precisely because of the value of such concentration.

But that doesn’t mean it’s entirely immobile. There is a tipping point and once that’s past it will move.

As an example, the Eurobond market: it’s in London purely as a historical happenstance. The US put a with holding tax on interest on US dollar bonds. So people started lending dollars out outside the US….

So, is it possible that in 30/50 years that hedge funds will be run from Bangalore? Sure, not doubt there’s someone doing it already. But will the big major markets be there?

Dunno, we’ll have to wait and find out. But do note that Vedanta, an Indian minerals company, is listed in London, precisely becuase it’s the world’s major international capital market. Just as it was a century ago, just as it was 130 years ago.

*Could* the City go? Sure: will it? Depends on how hard people try to make it do so really…..

8 – Really its quite simple, as long as you don’t rely on misleading stats such as those in the OP.

First, total trade was in surplus as recently as 1997. That is total trade (goods and services) which is the relevant bit for the national accounts. Second, finance and other services are a huge source of net FX earnings (we have large surpluses in these). Third, goods trade deficits are the norm for this country going back almost as far as comparable ONS data allows. Only the recent size of the deficit is unusual, but this shouldn’t be a surprise when the 2000s were marked by massive debt-financed consumption.

If you really, honestly, wanted a better picture for your readers, you should ask the OP to present Chart 2 in the form of Chart 3.

Ok thanks Tim.

Basically the clustering point is understandable, but brings with it another problem – namely that the UK economy has become hugely distored and reliant upon the south east (also a result of political centralisation..). We know there are also areas like Teeside, South Walers Valleys etc where the only industries that are clustered there are unemployment related things (training people to get jobs in the ‘training people to get jobs’ industry). If you were in charge of regional economic policy, what industry would you try and get clustered in these areas?

Look at what’s already happened to the solar panel market. China has come from nowhere to account for more than half of global output.

True, but this isn’t just because they’re focusing on high end manufacturing, but because they’re investing massively in renewable and alternative energy – something Tories here and Republicans in the US are oddly unwilling to do.

Indeed, but the OpEd certainly implies that 30 years ago a positive balance of trade was nrmal: which it wasn’t it’s very much the post war exception.

Oh right, so it ‘implies’ that (don’t think it does) but it doesn’t state it.

And yet you accuse it of “lying”. Where’s the lie exactly? If you can’t spot it, withdraw that idiotic comment please.

Really? The UK’s largest net export sector?

I meant in terms of employment… though I doubt that it will expand to its former glory in that regard either.

“If you were in charge of regional economic policy, what industry would you try and get clustered in these areas?”

Hmm….well, if I were to open a pottery it would definitely be in Stoke. In fact someone’s just done this, she had skilled workers queuing round the block to apply. Similalrly, I’ve discussed doing some chlorine chemistry and Hartlepool would be the place we did that (probably won’t ver happen though, but that’s just the way of business plans). There’s a company recently set up to do some good stuff with a new way to manufacture weird metals (titanium for example): they set up between Sheffield and Rotheram because that’s where all the industry suppluiers are, skilled workers etc.

So I can definitely see companies going to where there is an industry cluster.

However, about creating them, that’s a very different matter. I’m deeply unconvinced that anyone can create such. Deliberately that is. You might be able to do some interesting stuff which makes the growing up of “a cluster” more likely, but I do doubt that you can deliberately set out to create a “steel cluster” or “car cluster” and certainly not to more fine grained industrial sectors (drugs for alzhemier’s cluster, educational software cluster as inventions and examples).

I tend much more to the view that they’re organic creations, things that grow up from happenstance, coincidence even, more than anything else.

For example, I think The City, it it’s origins, had more to do with the flexibility of English contract and commercial law than anything else. Silicon Valley more about the fact that a few successful tech companies started in that nice part of the world, it keeps going simply because of the concentration of support services (venture capital for example).

And I certainly wouldn’t want government in charge of trying to decide what industry a particular area should try and specialise in. Seriously, would you want either Ed Balls or Georgie Boy trying to decide whether Bristol should try and be the world capital of fake tit manufacture or of fake tit installation?

As to what I would do it would be, as of course you knew I was going to say, supply side reforms. I’d abolish the national minimum wage and public sector national wage negotiations. Low wages, lower wages, is exactly what we should have in areas of high unemployment.

Abolish all regional subsidies and convert them instead into low tax regimes for business. Business rates are nationally collected and disbursed for example, so if you really wanted to regenerate an area abolish those in that area.

And so on: get the basics of the incentives correct and then see what clusters grew up rather than trying to decide which cluster to encourage where.

For example, which bureaucrat 20 years ago could possibly have thought that Edinburgh would become a world centre of the video games industry? So how can you plan for such?

For example, I think The City, it it’s origins, had more to do with the flexibility of English contract and commercial law than anything else

Shipping, I reckon. Most of insurance, a good deal of law and a lot of finance has its origins in the maritime sector.

“You also hear the claim that this is nothing new, that Britain relies more on trade in services and that our goods balance has always been negative.

Actually, that isn’t correct; if you look at goods imports as a proportion of goods exports, you can see that thirty years ago the balance was reversed:”

That’s absolutely an attempt to mislead with said statistics. As I said originally, anchoring your time series at a point where you know something unusual was happening is very naughty indeed.

“True, but this isn’t just because they’re focusing on high end manufacturing, but because they’re investing massively in renewable and alternative energy”

Snigger: what do you think making solar cells is if it isn’t high end manufacturing?

Just to enlighten you: there’s two major technologies used now. CdTe (dominated by a US company with a plant in Germany called First Solar) and Si. The Si market is being colonised by the Chinese firms. The method they’re using to do so? Excellent research and investment into high end manufacturing. The most notable of which is being able to slice the silicon ingots ever thinner, thus using less of the very expensive high purity silicon in each cell. The amount of Si needde to produce a cell has halved in the last 5 years: which is why the Si cell makers are catching up with the CdTe ones.

“I meant in terms of employment… though I doubt that it will expand to its former glory in that regard either.”

You should check today’s export and import numbers. The City (which is a heck of a lot more than just the banks) never stopped being our largest net export sector.

The thing is Tim, we’ve tried most of that in the Valleys – leaving them alone and seeing what happens, followed by a half arsed attempt at regeneration*- and the net result is still high unemployment. Ok so there are still things like a stupid and absurd benefits system, national wage negotiations and NMW – but these are set centrally (beginning to understand why your own party’s opposition to devolution is so bad yet?).

Also, even if we obtained these powers and started setting pay rates locally etc (perhaps we should also have a seperate currency) where is the evidence that all of a sudden an area will become entreprenurial (and get the start-up finance from where exactly?) and a cluster will develop?

* The joke locally is that regeneration schemes are basically escape plans. They involve improving transport to and from the area, and lots of adult education and training courses. What happens is people go on the courses, get qualifications, get jobs in cardiff, commute to jobs using the new train service or roads, before getting pissed off at the commute and just moving to cardiff. To be replaced by a new set of unemployed people getting re-housed in the area and keeping the stats high so the TPA can claim the regen scheme has been a waste of money.

“Ok so there are still things like a stupid and absurd benefits system, national wage negotiations and NMW”

Which is why I suggest changes to them…..

“where is the evidence that all of a sudden an area will become entreprenurial (and get the start-up finance from where exactly?) and a cluster will develop?”

None, except for two ppoints.

1) Every other idea seems worse.

2) Every cluster did in fact start this way.

“None, except for two ppoints.

1) Every other idea seems worse.”

Well, the leave it alone and see what happens strategy hasn’t worked, and we don’t have the power to do much on the supply side of things. So, apart from obtaining the powers necessary (which puts you in the plaid cymru camp), you aren’t really offering any advice other than hope for a sudden wave of entreprenuership.

What I’m trying to get at here is what small scale stuff can local areas do realistically (given the centralised nature of the UK) to promote entreprenuership?

Local stuff?

That’s a heck of a lot easier to propose things for.

1) Space. Business incubators. Tart up a redundant factory, install offices, desks, rent out for a cut of the business. Add in all the usual services as well: no need for 20 start ups to each buy their own photocopier, blah, balh, balh.

2) Business services. Cut all the crap for them about registering for VAT, understanding an accounting system etc. Hire some decent book keeper to work full time for the centre, doing all that shite for them.

3) Mentor the heck out of them.

What central govt can do is extremely limited. What the local community can do to aid new and small businesses is quite a lot.

What central govt can do is extremely limited.

Special Enterprise Zones?

Thanks Tim, that’s the kind of thing I was after.

Tim W: As I said originally, anchoring your time series at a point where you know something unusual was happening is very naughty indeed.

Naughty maybe, but not lying is it?

Snigger: what do you think making solar cells is if it isn’t high end manufacturing?

I know – and I said China is investing massively into this for strategic reasons. And we’re not, for reasons that are constantly pushed by climate change denying Tories. The point is – you either say we’re competing in this, or you just give up and focus on re-inflating the financial sector as before.

The only reason that the trade figures matter to the government is because imports are a drag on growth. Exports are rising but so are imports and the export numbers may have been distorted in December. Hmm, imports rising does not exactly accord with the narrative of a skint beat down UK consumer. A lot of people including me think in a fiat interconnected world the trade figures are spectacularly irrelevant. The trade in goods reflect only the desire to save in that nation. A trade surplus does not make you better off, it just means workers in that country are saving more of their income.

It is distorting to use as a stating point the last time Britain had a trade surplus in goods in your third graph. We have had precisely five years when we had a goods surplus since 1900. Yes, five years since Victoria was on the throne. One should not need to point out why they are irrelevant.

The thing is the rise in VAT, tax rises, rising unemployment and fall in real wages will all improve the current account.Should that be something we cheer?

“I know – and I said China is investing massively into this for strategic reasons. And we’re not, for reasons that are constantly pushed by climate change denying Tories. The point is – you either say we’re competing in this,”

Sunny, this is the whole point of trade. We don’t compete head to head. We cooperate. They, Johnny Foreigner, do something: grow maize, make wine, build solar cell systems, we do something else. Then, because we’ve divided up all of this work, had the international division of labour and specialisation, there’s more of everything that we can swap with each other.

It would be insane for everyone to do a little of everything: entirely against the very basic idea of what we’re trying to do. Each person, company, country, should deploy their comparative advantage and then trade for the things in which it doesn’t have such.

Precisely and exactly *because* China is specialising in solar cells the manufacturing of solar cells isn’t something we want to do.

@20:
“The joke locally is that regeneration schemes are basically escape plans. They involve improving transport to and from the area, and lots of adult education and training courses. What happens is people go on the courses, get qualifications, get jobs in cardiff, commute to jobs using the new train service or roads, before getting pissed off at the commute and just moving to cardiff. .”

That is spot on. I observed a similar process in the north of England in the 80s. Those with skills and any get-up-and-go got up and went. And those who stay are the old, the sick and the dim. People who have talents and need to stay in the area gravitate towards the public sector, because there a few companies to work for, and, even if they want to start a business, the area they are living in has low levels of disposable income compared to the big city down the motorway and they rightly see that the business might fail as a result. So the public sector absorbs the remaining pool of skilled and talented people, gradually in effect squeezing out the private sector and making the problem worse. Regeneration initiatives improve the transport infrastructure, but because the skills’ base has declined the only jobs that arrive in any numbers are in warehousing, distribution, shelf-stacking, etc, etc. It’s a spiral of decline, and there are no easy answers.

So the public sector absorbs the remaining pool of skilled and talented people, gradually in effect squeezing out the private sector and making the problem worse.

Choosing a secure relatively well-paid public sector job instead of an insecure probably-poorly-paid private sector job is a rational decision for any skilled worker that remains. So what is the solution to this? The Tories seem to think that it’s a good idea to get rid of a huge proportion of public sector jobs. How is that going to help? Whipping people into the private sector while reducing the total income of the local economy does not sound like the path to success. Surely a better solution is to support local businesses to try to make them better paid and more secure – building the local economy.

if we are interested in employment, the net exports aren’t necessarily what we need for employment growth.

If the price of imports is rising, we might see an increase in imports in the data, which uses price x quantity. Quantities might then adjust:

http://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition

anyway, if we start having to pay more to import stuff, we might start employing more people at home, who knows. But this stuff is hard to interpret – when we export, we import lots of the materials we need to build what we build, so what happens to net exports is anybody’s guess.

I don’t know if rising imports implies UK workers losing their jobs to imports.

The total goods and services deficit have been worsening since 1997 (figures from Pink Book 2009) and that at a time of an unprecedented boom in financial services. The deficit has been about £40 billion since 2005.

Goods may have been in deficit since Queen Vic’s times but the decline over the past 13-14 years has been at a rate to cancel out any surplus on services – that is a worry. Quantity becomes quality at some point.

Also most economists don’t share Friedman’s sanguine view of deficits (or Bastiat’s and Smith’s), the general consensus is that deficits are unsustainable over a period because they have to paid for. They also lead to conflicts why are the US and China in conflict over deficits/surpluses?

As for comparative advantage, the main one that matters is increasing productivity through technology (there are plenty of examples of low waged industries being vanquished by high waged industries). There is nothing peculiarly Chinese about making solar cells or choosing manufacturing, rather it is question of political choices.

Firstly Tim, you didn’t address my point where you accused Richard of “lying”. He wasn’t, was he? Care to withdraw that?

Secondly, you say: Sunny, this is the whole point of trade. We don’t compete head to head. We cooperate. They, Johnny Foreigner, do something: grow maize, make wine, build solar cell systems, we do something else.

But that isn’t and shouldn’t be our only concern. Firstly, we should have a fair degree of energy independence, incase foreign countries decide they want to restrict our energy supplies for whatever reason.

Secondly, the technology could also have lots of spin-off effects, and there’s no reason (other than cheap Labour) that suggests the Chinese have an automatic advantage in this area. The price of Labour isn’t the only factor in trade.

The idea that we should abandon an important area of technological development just because the Chinese may or may not have a comparative advantage on price is just ludicrous.

@ 32. littlekeithy

A household savings ratio of 10.3% in 1995 to 2.0% in 2008 rather explains the decline.

http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=221&More=N&All=Y

We do pay for our goods and services deficits. Foreigners send us lots of goods and we balance the current account by sending them promises on bits of paper. Seems quite a good deal to me. So what if foreigners have lots of sterling claims paid predominately in sterling. Good luck to them trying to spend sterling anywhere else other than on sterling goods, services and assets. No matter how many imports our consumers buy the money always ends up back in its country of origin.

The US have always had a mercantilist protectionist streak stretching from the left to the right.

“Firstly Tim, you didn’t address my point where you accused Richard of “lying”. He wasn’t, was he? Care to withdraw that?”

I said “lying with statistics”.

Which this is.

“Secondly, the technology could also have lots of spin-off effects, and there’s no reason (other than cheap Labour) that suggests the Chinese have an automatic advantage in this area. The price of Labour isn’t the only factor in trade.”

Sure, lots of spin off effects. As making solar cells itself is a spin off of having other technologies to hand.

There are two main technologies at present: Si and Cd Te. The Cd Te technology is essentially the private patent of a US company, First Solar. So there’s not musch we can do about that.

Si technology: in order to do this you’ve got to be already good at making high purity Si ingot, and the UK has no capacity or experience at doing this (we just don’t make it, full stop). You also need to be good at making chips, just the same as computer chips etc. The UK doesn’t do this either. Not a bean.

So, we don’t actually have the basic skills in hte basic technologies needed.

It gets worse if you think about the next generation of chips, multi-junction ones (these are the ones which will actually work, actually produce electricity at a reasonable price).

Here you need a few more thins.

1) Chip design skills. This is something we’re very good at indeed. ARM and all that, every single one of the 6 billion or so of these chips is designed in England. But we don’t make any of them at all because we just don’t have the skills. Or the factories: each silicon fab costs about the same as a nuclear power plant.

2) Manufacturing skills which as a bove we don’t have.

3) A source of germanium. This is normally a lead smelter. We have one of those (near Bristol) but they recycle scrap, not process new ore. So no germanium.

4) A source of indium. For this we need a zinc smelter. Not got one of those.

5) A source of gallium. For this we need a Bayer Process plant. Not got one of those.

So, we have great design skills but none of the raw materials and none of he manufacturing skills. We should thus be designing (as with ARM) and getting them made elsewhere from raw materials made elsewhere.

As to the energy security: I can just about buy the idea for energy that we produce and consume right now. Natural gas say. Electricity.

But solar panels last for 25 years. To say that we need to build our own $10 billion (at minimum, possibly $15 billion, to build that supply chain) set of plants to produce capital goods like that is really stretching things.

For example, if you really think we’re going to get into a 25 year war (trade or a hot war) then we’ve all got other things to think about than where solar panels are coming from.

Just to add:

I think you’re getting confused Sunny. There’s a huge difference between having an industry capable of *installing* solar cells, which is what Jeremey Leggett does for example, and an industry capable of *making* solar cells, which is what I’ve been talking about.

Things like feed in tariffs do boost that first. But absolutely no one at all, not even in their wildest dreams, is thinking that we’re going to build a UK based solar cell manufacturing industry. Not even Caroline Lucas thinks that is going to happen.

on a related note, here’s some interesting empirical research suggesting competition with China has been driving technological advances in Europe:

http://www.voxeu.org/index.php?q=node/6072

Foreigners send us lots of goods …. seems quite a good deal to me …good luck to them trying to spend sterling anywhere else other than on sterling goods, services and assets.

well, quite. And what quantity of UK productive assets are we going to end up handing over to pay off our debts? What we’re doing by debt funded trade – swapping overseas manufactured consumption goods today for UK manufactured goods or UK assets tomorrow – may or may not turn out to be a good deal. It is quite possible to structure inter-temporal trade to the benefit of one generation and the cost of the next. I know Richard and Tim are reacting against the unintelligent view that debt funded trade is always undesirable, but I think it’s equally daft to assume there’s nothing to worry about.

There are also other considerations with “strategic trade policy”, to do with adjustment costs and technological path-dependency.

The thing is Luis, I think most of it is self-correcting. If we had a fixed currency then chronic and persistent current account deficits would be something to worry about but with a floating currency I am indifferent. The 2-3% in the UK is nothing to worry about. All these threads end up coming around to China as if we have huge trade with China. Our trade is predominately with the EU and US, China trade is relatively tiny. Moreover, with the modern supply chain of an interconnected world bilateral trade figures are pretty much meaningless in my opinion. Components are accessed from numerous places and the place of final assembly is counted as end value. However, that is totally misleading.

I have no problem with the government subsidising sensible energy R&D etc.

As previously stated our imports being higher than exports is because households do not save enough. The government can nudge things to higher saving if they think that this is undesirable. Forced pension savings like they do in Singapore is the easiest way. I think the UK have something called NEST starting in 2012 that will force workers to save. Although, I do not know much about it. Higher consumption taxes is another way. I do not support them putting VAT up to 20% at this time. However, I would support them raising it even higher if they radically altered the whole tax system. Denmark manages just fin with 25% VAT. All the incentives in the UK are towards present day consumption and it is no surprise that is exactly what people do. The inevitable result is high imports.

Richard

The fall in saving goes hand in hand with the rise in the indebtedness of the UK population – the very debts that neo-liberals have said caused the crash.

The Government’s solution appears to be to lower living standards (re Mervyn King speech), in which case it is likely that people will have to seek out even more credit to buy things.

If the rest of the world is holding sterling and bits of paper when the UK economy encounters problems in covering the cost then there will be a very serious problem.

I don’t think it is an immediate problem, but given that the deficit has been deepening since 1997 – during a period when the finance sector was supposedly leading us to economic Arcadia – and the deficit is stubbornly around the 40 billion mark in boom and in crash, then there does appear to be a serious problem of proportionality in the economy.