Speech made by BCC President Andy Haldane at the BCC’s Driving International Trade Conference – Thursday 26 March
The Case for Trade, Remade
As new President of the BCC, I am pleased to be offering some opening remarks at today’s conference. Events in the Middle East mean it is difficult to imagine a backdrop less propitious for driving international trade. And these comes at a time when many were already questioning the virtues of free trade. Indeed, some have declared the death of globalisation, a fatal rupture in the old world order.
Today I wish to strike an altogether more optimistic note. These are both the worst and best of times for trade. Reports of the death of globalisation are premature and under-appreciate the adaptability of global supply chains. If there is a rupture in the world order it is to the Achilles, not the aorta. In other words painful but – provided we play our policy cards right – not fatal.
“The worst of times” for world trade is of course a simple story to tell. Global tariffs have been raised to their highest levels since the 1930s, when they helped propel the Great Depression. As damaging as their level is the accompanying uncertainty about where tariffs might go next. Uncertainty is as much a tax on trade and growth as tariffs.
At the same time, fragilities in global supply chains have been brutally exposed by recent events. First Covid, then Russia/Ukraine and now the Middle East crises has exposed those fragilities in the face of extreme events. Perceived certainties around supply of essential goods such as food, energy and medical equipment have been replaced with uncertainty.
This experience has further intensified calls for reduced reliance on global supply chains, with free trade replaced by on- or friend-shoring, certainly for essential goods. This is thinning and shortening global supply chains in the name of resilience. For companies, it has meant “just-in-case” is now taking priority over “just-in-time”.
This powerful cocktail of forces has already contributed to a stalling in the growth of world trade in the 21st century, after a half-century of near-continuous growth. Indeed there is a real risk, amplified by recent events, of a retreat from globalisation of the type last witnessed in the 1930s with devastating economic and social consequences. So far, then, so bad.
What, then, of the “best of times”? Many economies around the world, certainly in the UK, are suffering from a double whammy – a cost of living and a living standards crisis. For the average UK household, real incomes are little higher today than at the time of the Global Financial Crisis. Meanwhile, the cost of living has risen by a fifth in the past 3 years alone.
These twin crises have no singular, much less simple, solution. But evidence suggests one very clear conclusion: there is no more surefire road to sustained improvement in living standards than through trade. Turning our backs on trade and global supply chains would be an act of monumental self-harm for living standards at the time that is least needed.
As it is, so interwoven is the cats-cradle of international trade, it seems highly unlikely global supply chains will unravel. Far more likely, global trade will rewire itself. Although painful and costly, that rewiring is already underway. Those writing early obituaries for globalisation under-estimate this agility and resilience.
This means globalisation is not dying. It may have entered a period of less exuberant growth with supply chain resilience rightly given greater emphasis. But there remains no better engine for tackling the twin challenges of lifting living standards and curbing the cost of living, no more adaptable and resilient global network.
To provide some scene-setting for today’s conference, let me first build the case for trade at the macro-economic or economy-wide level and then at the micro-economic or business level. I will then conclude with some brief thoughts on the trade strategy we need to harness the benefits of trade while guarding against its fragilities.
This strategy is built around twin pillars: deepening and diversifying. Deepening to harvest the living standard and cost of living benefits of trade when both are challenged. Diversifying to lower the chances of supply chains fracturing in future, thereby protecting living standards from external shocks the like of which we currently face. This is the case for trade, remade.
The Macro-Economic Case for Trade
The macro-economic case for trade has never been better, or more influentially, made than by Adam Smith, the father of economics. His Wealth of Nations, which celebrated its 250th anniversary a few weeks ago, identified clearly the benefits from trade in lowering the cost of living and raising livings standards.
It is no coincidence that, at around the same time Smith was writing, Chambers of Commerce were beginning to spring up across the UK, with the purpose of supporting businesses to trade. Indeed, as an island nation, these trading benefits were the first fruits of the Industrial Revolution in its homeland, the UK.
Smith’s key point was that the gains from trade were not just large but mutual, enjoyed by importer or exporter alike. Importing countries benefitted from access to a wider and cheaper set of goods and services, lowering the cost of living. While exporting nations benefitted from the increased income and, longer-term, productivity benefits that came from trade. In that way, trade lifted all boats.
That was the theory. And over the intervening two and a half centuries, Smith’s theory has found overwhelming empirical support. That evidence was particularly compelling during the second half of the 20th century – the Golden Era of Globalisation – during which measures of trade intensity rose rapidly in most nations around the world and in some were transformed.
Isolating the distinct effects of trade on growth during this Golden period is not straightforward. Other things – the quality of Government, the rule of law – improved at the same time. But based on a wide range of cross-country studies, a reasonable ready-reckoner would be the following.
Every extra percentage point of GDP in trade intensity – that is, rise in trade relative to GDP – is worth an around extra 1% in national income over the medium term.[1] That makes it nice and easy to remember, but let me bring out its quantitative significance.
The UK is an open economy with exports plus imports accounting for around two-thirds of GDP. But if the UK had levels of trade-intensity similar to the Scandinavian countries – exports plus imports north of 80% of GDP – that could be expected to boost annual UK GDP by between a fifth and a quarter. Or roughly £1/2 trillion each year.
It gets better. Those are permanent gains to national income. This means their net present value to the UK would be multiple trillions of pounds, multiple years of national income. These, then, are the growth benefits of trade deepening. And to be honest I’d defy anyone in the room to point me to a dimension of public policy yielding a larger growth dividend.
What about the benefits of trade diversification? Well, what is true of the relationship between the level of trade and living standards is true too of their respective volatility. A more diversified pattern of trade has been found to reduce significantly the volatility of growth and living standards.
A deepening and diversification of trade is thus a twin-win – a rocket-booster for living standards, a dampener for their volatility. And these benefits extend beyond the living standards to the cost of living.
Increased trade expands the range, and reduces the cost, of things people buy, lowering the cost of living. And this effect is powerful. Studies suggest increased trade in the second half of the 20th century may have lowered the prices of certain goods by between 5-30%. Moreover, these cost of living gains were felt most strongly by the poorest households.
So if you take combined effect of higher living standards and a lower cost of living, and multiply them by a half-century of rapid globalisation, what do you get? Well, you get exactly what Adam Smith first described a quarter-millennium ago – sustained, massive, mutual gains from trade.
Nowhere have those gains been more important than in reducing levels of poverty. It is no surprise that levels of global poverty collapsed during the Golden period of globalisation in the second half of the 20th century. Trade alone is estimated to have lifted perhaps as many as a billion people out of poverty, many of them in Mainland China.
All told, then, this evidence suggests the elegant prose of Adam Smith 250 years ago now has the strongest possible empirical endorsement. And in a world of challenged living standards and an elevated cost of living, that endorsement could scarcely be more timely.
The Business Case for Trade
If that is the macro-economic case, what are the micro-economic or business-facing benefits of trade? Adam Smith also set these out clearly and compellingly. Trade fostered specialisation within, and competition between, companies in ways which spawned innovation and boosted productivity. In short, trade helped drive business dynamism.
These business benefits are not distinct from the growth benefits of trade. Indeed, they are the very source of them. It is firm-level boosts to productivity from increased trade, that pay for the pay rises of workers in these firms. In other words, the link from trade to livings standards runs directly through businesses and their dynamism.
The evidence on these business-facing channels is as clear and compelling as on the growth side. The average exporting UK business is over 40% more productive than its non-exporting counterpart. Now, some of that is likely to reflect reverse causality because more productive firms are also more likely to enter foreign markets in the first place.
Nonetheless, a number of detailed studies have controlled for that reverse causality and the evidence still clearly points to a significant link between the trade-intensity of a business and its innovation, investment and ultimately productivity performance, just as Smith predicted.
For example, studies have looked at the impact of increased tariffs – a tax on trade which reduces trade intensity – on firm-level productivity. A one percentage point rise in tariffs is found to result in a fall in firm-level productivity of anywhere between 0.5% and 2.5%. That is a sobering diagnostic as we contemplate the 10 percentage point rise in global tariffs over the past year alone.
These firm-level effects of trade are particularly resonant in the UK where productivity has under-performed for approaching two decades. As the number of UK firms exporting has fallen over recent years, this will have imparted an additional unwelcome headwind to UK productivity and, with it, UK growth.
What Did We Get Wrong?
If the empirical case for trade is so strong, how do we explain the increasing questioning of its efficacy, and the accompanying stalling of world trade growth, over the course of this century? The painful truth is that most economists and policymakers miscalculated two crucial adverse consequences of freer trade for economies and societies.
The first was wilful blindness to its distributional consequences within, rather than just between, countries. The most important of these was the loss of jobs and livelihoods, sectors and regions, due to increased foreign competition. This was felt acutely in the de-industrialisation of parts of the West – from rust-belt America to Northern England.
While a large majority of consumers and workers were net gainers from globalisation, a significant minority not only lost but lost large – jobs, livelihoods, communities – leaving lasting scars. Often, these were blue-collar manufacturing jobs in already struggling communities. The gains were sustained and spread, the losses sharp and severe.
The failure to recognise, much less remedy, the trade-induced plight of these people and places was among the greatest public policy mistakes of the 20th century. It was the handmaiden of much of the popular discontent and lack of trust we see today, not just in international trade but in politics and policy. It sowed the seeds of today’s populist insurgency.
The second area of wilful blindness was in failing to appreciate the fragility of global supply chains, particularly at times of stress. Covid brought exposed latent fragilities, as subsequently have the Russia/Ukraine and on-going Middle Eastern conflicts. They are why security of supply has become such a central issue for businesses and Governments, and rightly so.
As these two factors came together, political and popular resentment to trade rose – and, with it, tariff and non-tariff barriers. This has mean some disentangling of the complex knitting of global supply chains has, and is, taking place – work-arounds to supply chains, on-shoring to strengthen their resilience, policies to protect domestic industries and jobs.
I think this response, while understandable, carries risks. In particular, we risk reaching for the wrong policy lever, or exercising it in too muscular a way, to tackle the legitimate concerns that have emerged about the adverse societal consequences of freer trade, while preserving its crucial economic and societal benefits.
No-one is more seized of the economic and social costs of de-industrialisation than me. These scars cannot be left to heal themselves, laissez-faire. The market will not, left to itself, re-seed the ground. That re-seeding requires an active industrial policy, the like of which many countries are now putting in place, including the UK.
So a Government and business response is needed. But the right response to the hollowing-out of industries and communities is an active industrial strategy, not a defensive trade strategy. The former helpfully re-seeds the ground, while the latter risks starving the seedling of the competitive nutrients needed to flourish, at the long-term cost in lower jobs and living standards.
We risk a similar misdiagnosis when it comes to the fragility of supply chains. Yes, these need strengthening. But the route to such strength is through diversity of trading partners, not a divorce from then. The latter may create the mirage of stability. But this would be the stability of the graveyard for business dynamism, living standards and jobs.
Politicians and policymakers under-estimate the agility and dynamism of these supply chains – and do so at their peril. An unravelling of global supply chains is as unlikely as it is undesirable; they are simply too embedded in our business and growth models. For sure, some re-wiring of that network is needed and is being undertaken. But that is diversified rewiring not destructive unravelling.
As with the global financial system after the GFC, the long-term result of this re-wiring will be a more resilient global trading system, albeit a costlier one – provided we do not overshoot. Despite recent traumas, the overall volume of world trade has not fallen. The global trading system has shown itself remarkably resilient and adaptable, neither dead nor dying.
How Do We Get Things Right Again?
While globalisation is far from dead, the stalling of its growth does suggest the running repairs and a new approach to trade: harnessing the best bits, in particular for living standards, while guarding against the worst, in particular for the volatility in living standards. This calls for a twin-pronged strategy of deepening and diversification, the double D.
The starting point for the UK, lest we forget, is a qualified positive one. By international standards, the UK is already an open economy given its size. In some areas of trade the UK genuinely rules the waves, notably services where it is the world’s second largest exporter and has run a large and sustained trade surplus.
But UK trade is far from an unqualified success story. The UK has been running a significant external deficit in goods for the whole of this century, swamping its services surplus. As a result, the UK has run an overall trade deficit in every year this century (bar 2020 when the picture was distorted by Covid), averaging almost 3% of GDP.
That accumulated sequence of deficits has resulted in a dramatic swing in the UK’s external assets. During the 20th century, those assets averaging around 20% of GDP. That swung to a net liability position at the end of the century and now totals over £350 billion or over 10% of GDP. Not for nothing did Mark Carney talk of the UK relying on the kindness of strangers.
This picture of an open, but challenged, trade position is borne out at the business level. Around 300-350,0000 UK businesses export, spanning all sectors, regions and sizes. This is around 10% of (VAT-registered) UK firms, a healthy starting point. But this number, latterly, has been falling. There is still huge scope for making inroads into the 90% of businesses not exporting. In Germany, the share of exporting firms is close to a quarter.
There is also huge potential among existing exporting firms to do more. Their desire to do so is clear from BCC surveys. Yet at the same time exporter sentiment among UK businesses has been on a downward trend for at least a decade and, even before recent events, was at low levels. That begs the question why?
Surveys of BCC members provide some clear answers here, from rising regulatory complexity and higher compliance and custom costs to rising tariffs and geopolitical uncertainty. The Government’s trade strategy, set out in June last year at the BCC’s Annual Conference, recognised those concerns and suggested some ways they might be addressed.
- Macro Measures
On the macro side, the recent trade agreements reached with the US, India, South Korea and China are concrete steps in the right direction. There is further to go in widening the scope of these useful, but ultimately quite thin, deals. Their cumulative impact on UK GDP, even over the medium term, is estimated to be modest.
Other potential trade deals in the pipeline include those with the Gulf states, Turkey and Switzerland. These too are likely to be individually modest in their impact, but importantly collectively for diversifying the UK’s trading base in an increasingly fragile world.
Research by the BCC has identified a range of other markets where there is scope for deepening and diversifying trade including Mexico and Canada and, looking further ahead, the Mercosur bloc, Indonesia, Thailand and the Philippines. I look forward to the regional sessions planned at this conference to progress these conversations.
The largest prize would be a significant reset in EU trade, the destination for almost half of UK goods exports. BCC surveys suggest rising discontent among those exporting into Europe. And the setting out of some principles for an EU reset by the Chancellor in her Mais lecture last week was timely and welcome.
Ultimately, though, this will come down to a practical question – the ambition and pace with which EU trade negotiations proceed. At present, paces appear to be in short supply. That is not just my view. It was the view recently expressed by Chris Bryant, the UK’s Minister for Trade.
There is further to go too in aligning the UK’s trade and industrial strategies. These were published together last year, but the key is that they are implemented in partnership. The BCC has recently demonstrated how practically that might be done through its work with Nat West on a trade accelerator for life science businesses seeking to trade with Singapore.
The broader point here is that trade policy can no longer be viewed in a silo. Resilience and efficiency of supply chains is now crucial for national security and prosperity. Trade is critical national infrastructure and needs to be managed as such in a coordinated fashion across a range of Whitehall departments, from trade to business to the foreign office. We are, at present, some distance from that destination.
Later this week we have the WTO Ministerial conference. Its timing too could scarcely be worse – or better. “Worse” given the difficult external environment. Better given the opportunity to push ahead on key issues for the UK as tariff-free services trade and e-commerce. The BCC is a signatory, along with 140 other organisations, of the ICC’s Global Business Statement supporting progress at the Ministerial at this crucial time.
(b) Micro Measures
Macro measures, like trade and industrial strategies, will take time to bear fruit. Meantime, there is plenty more that could be done at the micro level to support and encourage businesses to enter or expand their export footprint. Truth be told, the starting point here is far from ideal.
A recent survey of BCC members suggested high and rising levels of dissatisfaction at the adequacy of export support provided by the Government to businesses. There is an increasingly important local, as well as national, dimension here. Large parts of England, outside of Mayoral Combined Authorities, are seeing budgets for business support cut. That is plainly a retrograde step from a trade and growth perspective.
As Shevaun will describe in greater detail later, the BCC has long played a key role providing that business support. Through its unique network of over 50 domestic and over 70 international Chambers, the BCC is the world’s second largest business network. At last year’s trade conference, we announced we were working in partnership with the FCDO and embassies to support UK businesses’ trading efforts.
Those efforts have been bearing real fruit over the past year, including over recent weeks. In these troubled times internationally, that fusion of commercial and diplomatic expertise will be crucial for helping businesses ride the rapids of geo-political risk. Our partnership with the FCDO is providing that mix of expertise to support UK firms drive international trade. We will be looking to deepen and diversify it in the years ahead.
Conclusion
If you had asked me at the start of this century if, only a quarter in, I’d be remaking the case for free trade I’d have scoffed. The argument had seemingly been won. The jury was in. The fruits of the golden era of globalisation seemed only too clear in what my former boss Mervyn King called the NICE era – No Inflation, Continuously Expanding.
Today, the macro-economic environment is nasty, not NICE. Indeed, the alternative acronym I used a decade ago to describe the situation was VILE – Volatile Inflation, Limited Expansion. Alas, that remains only too true today. Breaking free of this vile environment is the challenge of our times.
In choppy international water, the risk is that we turn away from the very things that could help turn the tide of static living standards and an elevated cost of living. A world of high and uncertain tariffs, splintering supply chains, and rising non-tariffs barriers risk making a bad situation worse. That is why now is the time to remake the case for trade.
We should do so recognising the errors of the past where too little attention was paid to the costs of deindustrialisation and the fragility of global supply chains, with severe societal consequences. Yes trade needs surgery. But this should not and need not be life-threatening. The gloomsters, doomsters and undertakers of globalisation need putting back in their box.
What the UK needs instead is an open and ambitious strategy to boost its trade-intensity by deepening and diversifying its trade links, harvesting the gains from trade for living standards while mitigating its downsides. Doing so requires a deeper partnership between Government and business, the like of which the Chambers have been championing since Adam Smith.
In the remainder of this conference, I look forward to discussing further the ingredients of that plan and that partnership, to deepen and diversify trade at the time there is pressure to thin and narrow. At this time of acute geo-political uncertainty, the case for trade needs remaking and trade itself remoulding to rise to the challenges of our time.