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Why a smaller Trade Deficit is bad for Britain

The UK’s latest Trade deficit figures are being lauded as positive news and the “best ever since 2003“. Now, when deficits get smaller it’s supposed to be good, right? In this case, wrong. It’s actually quite a bad sign, especially when you compare it to Germany which is in the supposedly hopeless Eurozone.

The Trade Deficit figure is calculated by subtracting the value of imports from the value of exports. So, if you have a Trade Surplus it’s a sign of growing wealth in a country; if you have a deficit it’s a sign your country is getting steadily poorer. And the UK has been getting poorer and more indebted for years, unlike Germany which as a major exporter of manufactured goods has been getting steadily richer.

Why is this? Well, British growth has been funded since the time of Maggie Thatcher by a consumerist economy and House Price inflation, underpinned by the Financial Services industry which has funded the debt needs of a population greedily buying more and more foreign made goods. As more manufacturing jobs moved overseas, predominantly to China and the Far East, the balance of the economy moved further away from exports and more and more to imports. This increased the deficit.

David Cameron, backed and prodded by his ultra right wing Tory Eurosceptics, has been arguing for quite a while that Britain is better off out of the Euro because it allows the UK to devalue its currency, thus making our exports cheaper and therefore more attractive. In Sterling terms, this should increase the value of exports, yes? Remember that it also makes imports more expensive. What are we importing a lot of? Fuel, food, and clothing, as well as luxury manufactured goods such as cars and electronics. That’s why UK inflation went over 5% last year, because despite a recessionary environment due to austerity cuts, more devalued Pounds were needed to buy the oil, food and other essentials the UK cannot provide for itself any more.

Surely then, news the deficit has shrunk to the lowest level since 2003 is good news? Well, to see that you have to split out this figure into its two components, imports and exports. Both fell, but imports fell by more because people were spending less. Fuel costs were lower due to lower economic activity, people bought less because they had either lost their job or were fearful they soon would. The exports fell because of lower world demand for what the UK produces. But don’t think it’s the same for everyone – the Germans have just announced record export figures of over €1 trillion so the markets are out there if you make the right things.

This highlights a mistake British industry, led by the City, has been making since the 1960s: that of reducing costs rather than investing in new methods, new machinery, new ideas. Germany expanded the technical abilities of its workforce while the UK was dumbing down industrial production to compete with Asian low cost producers. The last Labour government exacerbated things by announcing a target of 50% of all kids going to University. Well, sorry to break the news but 50% of kids are not well served by dry University learning. Not all of it was dry, admittedly, some of the courses were actually quite wet: how many Media Studies or Modern History graduates do we need? Surely not more than Engineers?

The UK has a shortage of many skilled and technical workers, particularly in areas such as plumbing, electrical engineering, computing and all those skills the Polytechnics were set up to provide before they became subsumed into Universityism. Hospitals have problems with aspects of personal care that old school nurses had no problems performing, while new recruits can find these ‘body fluid’ tasks challenging. So, the UK imports workers and goods while leaving our youth unemployed and unprepared for the needs of the reality of the society in which they live.

But how is this related to the Trade Deficit? Well, unless the UK begins to export goods other people want, we’re going to continue becoming more indebted, badly led, and in less and less control of our futures. A fundamental change in how the UK works and thinks has to come about so that not all the money is sucked into the City of London at the expense of the rest of the country. It isn’t just the money the City sucks in, it’s the influence it wields over industrial policy too. They say companies should minimise costs and maximise dividends, rather than do as their German counterparts do, which is retain profits through investment and work not for three year returns but for ten, twenty, thirty year returns.

Nigel Lawson, Maggie Thatcher’s ex-Economist editing Chancellor of the Exchequer said there was too much short-termism back in 1987. There still is. And the UK economy is just showing us how fragile that can be when the world is in turmoil. So who’s in control of the economy today? Is it a man with a wealth of practical experience of being Finance Director of a large multinational company, a man with a PhD in Economics such as Vince Cable? No, we have an ideological member of the old Anglo-Irish Aristocracy with inherited wealth and a degree in Modern History whose only work experience before becoming a SpAd (political special advisor) was pretty much refolding towels for Selfridges. Oh, I mustn’t forget the bit about counting the dead people in London. That’s an important prerequisite for being Chancellor of the Exchequer, isn’t it?

If you’re a Labour supporter reading this though, don’t think you’re off the hook. Much of the extra money you spent on public services wasn’t invested either, it went to increase salaries. They may have needed a boost, but you did it for political reasons not for economic ones, and now we’re paying for that mistake. I have to say though the new building program you went through was sensible, so many schools and hospitals had been built in Victorian times and needed replacing with more economic buildings more suited to modern needs. But perhaps you should have funded these projects through localised bond issues to the public, and not through Central Government which seems unable to cater for anything more than the needs of the economic area that those with their hands on the levers of power inhabit ie the South East, and Whitehall civil servants.

Maggie Thatcher introduced us to Popular Capitalism through share-ownership; well how about we introduce Community Capitalism with investment into local projects through bond issues, not shares? Local people would have real connection then with what goes on in their local services, they’d see how their money was spent, and what it gave them in return. The infrastructure would still be publicly owned, and not in private hands to suck out resources in the form of profits. At the moment some of the costs of funding these public-private financing deals make your eyes water. The profit makers should be the beneficiaries, with profits in the form of services provided economically but at high levels.

The really sad thing is that we keep on voting for these leaders who continue pushing the same old ideologies like two madmen on either side of a swing. Stability requires a sensible middle course, one that might be less ideological and less selfish perhaps, but one that brings long term growth as the Germans enjoy. Surely they are not the only ones with skill, inventiveness, creativity and hard work? So why are we sitting back and letting them have all the fun? Sod it, I’m off to the pub to get sozzled. It’ll take my mind off having to do anything.

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