Does the UK need the DTI?

Written by Malcolm Bruce MP and published in Trade House Magazine on Thu 25th Nov 2004

It may not be the workshop of the world anymore, but the UK has managed to maintain a position as a major trading nation in the global market.

Nevertheless, we continue to operate at a record balance of payments deficit. The UK has to adapt to ensure its products remain in demand in a market where services can be provided from anywhere in the world and basic commodities can be manufactured cheaper. In short, we must add value.

The most obvious first step is to remove barriers to UK companies trading cost-effectively. The Liberal Democrats view British membership of the euro at a sensible exchange rate as one of the most important measures towards removing these barriers and securing greater prosperity for the UK overall.

Although trade and investment with North America is important and fluctuations in the dollar affect significant sectors of our economy, our home market is in Europe. Sterling is not a significant currency and continues to be tossed around between the dollar, the euro and the yen to the detriment of British companies.

A common currency would reduce uncertainty for importers and exporters, thus increasing trade. As a eurozone member Britain is also more likely to be able to influence the rules of the single European market, upon which we depend for the majority of our exports. If the UK was an equal player in our home market British competitiveness would undoubtedly benefit; increased trade by definition increases competition.

While we stand on the sidelines and procrastinate, the European and world markets are adapting to the euro in a way that will disadvantage the UK for as long as we remain outside the single currency. This is strikingly clear in the fall of foreign inward investment Britain attracts, which according to the UN has fallen from 28% of all foreign investment coming to the EU in 1998 to only 6.7% in 2002. Foreign companies evidently prefer the steady euro to the fluctuating pound.

So while the trade to GDP ratio has increased by 5% in Germany and 3% in France, it has fallen in the UK. The increase in trade within Europe reflects European companies' taking advantage of the euro to re-organise production, and create European supply chains. The longer the UK stays out, the more complete these new supply chains will be by the time of entry, reducing the opportunities for British firms to become part of them. The long term cost of staying out of the euro for Britain will be low-integration, low-productivity and low-pay.

The emerging powerhouses of China and India are not necessarily a threat. Large British corporations need open markets if they are to continue to innovate and develop. By outsourcing operations to these countries, UK companies will make savings which can then be ploughed into R&D and their UK workforce to improve skills. Establishing short-termist, protectionist policies intended to ward off job losses to developing nations will clearly only damage British competitiveness.

The growing economic might of these countries also transforms them into investors and buyers: Britain has traditionally been one of India's biggest investors but over the last five years India has also become a significant investor in Britain. As China becomes more prosperous so its consumers have more disposable income and are more receptive to British brands and goods. China is a formidable competitor, an important market and the potential saviour of MG Rover.

British companies will clearly benefit from establishing an early presence in new markets and rising consumer spending in countries like Russia, Iran and Saudi Arabia is already driving increased retail investment. The investment risk remains high however given adverse political climates.

Domestically, the role of Government is to create a strong and competitive economy, developing skills and improving infrastructure. Abroad, the Government provide good value in the commercial services offered through their overseas posts (although quality varies), ensuring their people on the ground have sound market knowledge and good contacts. We would like to see greater use of such assistance by small companies looking to export.

None of the above particularly requires the DTI. The DTI has outstayed its usefulness and is little more than a bureaucratic burden to business. Its system of business support creates competition between companies for Government aid, not between British companies and overseas competitors. The Liberal Democrats believe that many of the DTIs useful functions - like regulating markets, promoting employment rights and equality and protecting the consumer - can be carried out by other Departments. We support the abolition of this Department.