News of a record, near £6bn deficit in Britain's balance of trade in goods for November passed yesterday with barely a flicker of interest from currency and equity markets. Even taking account of the traditional surplus in services, this apparently grim picture of economic ill health isn't much improved. Time was when a deficit of this order would have plunged the country into full blown financial crisis.
Today, the fashion is for thinking that providing the economy is growing and attractive to foreign investors, a burgeoning trade deficit doesn't much matter. The difference is made up by inflows of foreign capital, allowing the data to be weathered without prompting a currency crisis. None the less, the issue of how Britain pays its way in the world is fast becoming a pertinent one again.
For more than three decades, Britain's balance of trade has been flattered by the windfall of North Sea oil and gas, which has made the country more than self-sufficient in energy. These reserves are now dwindling fast; Britain has become a net importer of oil at a time when in nominal terms the price has risen to record levels. As North Sea production declines, our balance of trade can only deteriorate further in the absence of compensating factors.
As things stand, it's hard to see where these will come from. Our service industries continue to expand, and these are now important, high margin sources of overseas earnings. Yet they do not make up for our apparently insatiable appetite for foreign goods. Meanwhile, what's left of Britain's manufacturing sector seems still to be in a state of near terminal decline. There's no chance of rescue from that direction. On present evidence, rather the reverse.
Is the present deficit remotely sustainable, or must there eventually be a violent currency correction to restore the balance? It wouldn't just be foreign holidays that would suffer in such an eventuality. A currency collapse would also drive up import prices, inflation and interest rates. This in turn would crunch demand, causing a slowdown in growth or possibly even a recession.
In this regard, Britain is of course only a microcosm of the US, where the issues are essentially the same, but in much larger form. A debt-fuelled consumer boom has created a record current account deficit which economists the world over have labelled "unsustainable". Miraculously, however, it seems to have been sustained for an awfully long time now. Every year, learned economists wring their hands over these global imbalances and warn that eventually there must be a terrible reckoning. The longer it gets delayed, the worse it will be. Yet somehow or other, this apparently inevitable and disastrous denouement never seems to happen.
As the late Herb Stein, economic adviser to President Nixon, once remarked: "Economists are very good at saying something cannot go on for ever, but no good at all at saying when it will stop." Wisdom indeed, yet the truth of the matter is that the unsustainable can be sustained for as long as you like provided everyone is happy with it.
As things stand, there is a continued demand for American assets from foreign investors, not least from Asian central bankers, who in order to keep their currencies stable against the dollar, thereby supporting the Far East's export-led boom, need to keep buying dollars. Just as a current account deficit has to be paid for with countervailing inflows of foreign capital, any surplus has to be supported by outflows of domestic capital.
It's a funny old world that has the savings of some of the poorest countries in the world paying for the consumption of some of the richest, yet that's the underlying reality, and, for the moment, it seems to suit both sides. Nobody has any particular interest in seeing it come to a grinding halt.
The US and Britain benefit from lowly priced goods, helping to keep inflation and interest rates low, while the Far East is able to put its wealth of low cost labour to productive use in booming export industries. Everyone, apparently, is a winner.
At least that was the picture of economic nirvana painted yesterday by John Snow, the US Treasury Secretary, in an interview with Radio Four's Today programme. What would happen, he was asked, if the Chinese suddenly withdrew their support for the dollar? China accounted for only 10 per cent of trade in US dollars he said; it wouldn't matter. He's wrong about that. If China removed its support, the whole edifice would come tumbling down, such would be the calamitous effect on confidence.
If something cannot go on for ever, eventually it will stop. But when? Another Steinism, which ironically came out of a question on how the US current account deficit of the 1980s might most appropriately be addressed, was that he belonged to the "don't know school of economics". Quite so.
Flawed extradition law bites back
From Sarbanes-Oxley to corporate taxes, the long arm of US jurisdictional ambition is a growing source of alarm to British business. America is entitled to set the rules as it likes for its own nationals, but should it be allowed to impose those rules on others?
New extradition laws which give the US carte blanche to extradite and jail UK nationals accused in America of white collar crime have become the latest battleground. As our story on page 60 reports, the Government has rejected calls from the CBI among others to reform the law so as to make it less one sided, arguing, rightly in some respects, that a crime is a crime and there is no reason why financiers should get special favours.
This is to misunderstand the nature of the complaint. The CBI's contention is not that there should be one rule for the rich and another for everyone else, but in an area as complex and open to interpretation as fraud, UK citizens must have adequate rights of appeal in their own jurisdiction. If they don't, it's plainly going to deter British companies from doing business in the US.
The new extradition act was put in place as a way of fast tracking the extradition of terrorist suspects post the atrocities of 11 September. At the time, the UK Government gave assurances that UK citizens would not be liable for financial crimes under the extradition treaty, which substantially lowered the burden of proof by requiring prosecutors to demonstrate only probable cause rather than present prima facie evidence.
Yet in practice, more than half of all extradition requests from the US since the new law came into force have been for financial crimes. Make no mistake, those accused of price fixing, bribery, false accounting and deceit need to be brought to book. These are intolerable practices in business wherever they occur. Yet the point is that the new treaty has so far been ratified only on this side of the Atlantic. It may be years before the Senate gets round to doing the same thing in the US.
The effect is that while there are only limited legal grounds of appeal for UK citizens against US extradition requests, US citizens can continue to use the US courts to challenge British requests as much as they like. In any case, these requests require a higher burden of proof to succeed.
Post Enron, the US stance on financial crime has become much harsher than it is here. From the NatWest Three to the luckless Ian Norris, former chief executive of Morgan Crucible, British executives suddenly find themselves facing extradition and long jail sentences for alleged misdemeanours which might not have been prosecuted in the UK at all and would certainly command far less severe punishment.
A reasonable line of argument is that if you go doing business in a foreign jurisdiction, you should expect to abide by its standards, conventions and rules. Yet it is a curious law which allows Americans to practise financial and other crime in the UK and expect to escape scot free, but UK citizens to be shipped off without so much as a by your leave when accused of similar offences in the US.Reuse content