Manufacturers have fewer irons in the fire

Economics

Let's start with two rather different pieces of information. One was last week's comment by Tony Blair: "I do not believe that it is possible to trade our way primarily as a service-dominated economy." He believed that a robust manufact- uring base was a crucial element in our economy.

The other comes from the June Which? report. I noticed that virtually all the travel gadgets it was testing - travel hairdryers, irons and kettles - were made in China. The casual purchaser probably would not notice this. Most of the travel steam irons had familiar English-sounding names like Morphy Richards, Russell Hobbs, Remington or Kenwood. Yet every single one was made in China. The hairdryers also had familiar names but, with only one exception, were made in either China, Hong Kong or Singapore - the exception being Boots' own which was made in the UK. Only among the kettles were the majority made here, with two made in China.

The point is an obvious one. Among politicians Tony Blair is not alone in his attachment to manufacturing; Kenneth Clarke frequently makes the same point. But actually if you look at the sort of prices we pay for ordinary manufactured items, by the time the retailer and distributor have taken their cuts, there is only a tiny amount of money left to pay the people who make the products. We can just about afford British wage rates to make products which are uncommon abroad, like the electric kettle. But with hairdryers priced as low as pounds 8, and travel irons at pounds 14-17 it is terribly hard to pay our people enough to make them. It is even harder to pay continental European workers, with all the tax and social overheads: the Braun Travel Silencio is not made in Germany by skilled Bavarian craftspeople - it is made in Hong Kong.

It is a useful exercise for anyone interested in the shifts taking place in comparative advantage to look to see where it has been made. Names are useless as a guide to origin; indeed it seems almost as though they are designed to mislead. Even the label can confuse, by proclaiming in large letters that the product is designed in, say, the United States, and admitting in tiny ones that it is made in the Far East. Of course the Vidal Sassoon Helen of Troy VS-726DUK hairdryer is not made anywhere near Beverley Hills, or for that matter Troy. It, too, is made in China.

You can see why by looking at the graph. UK labour costs are reasonable by the standards of other European countries, and the US, particularly when non-wage costs are added in. But even the lowest European wages, in Portugal, are stratospheric by comparison with China. My colleague in Beijing, Tessa Poole, reports that in the southern industrial belt $100 a month is seen as a good wage. And only another $20 a month needs to be added to cover other costs, such as the company dormitories in which workers are housed.

This leads to the tough question: what can we do to justify wages that are 30 times those of the people who make Vidal Sassoon Helen of Troy hairdryers?

The assertions by politicians that we need a strong manufacturing base and that we cannot build an economy on services alone are silly. The more sensible approach is to try and answer the tough question. Some chunks of our manufacturing and of internationally traded service industries will be able to support our level of wages and some parts of both types of industry are likely to show growth over the next generation. But others will have to shrink, and it seems certain that most of that shrinkage will be in manufacturing.

It will be in manufacturing because it seems clear that manufacturing technology crosses national boundaries more quickly than service industry technology. Take the growth of the Korean car industry. In 1974 there was virtually no industry at all; in 1984 production was some 300,000 cars; by 1994 it was up to 2.4 million; and Fiat estimates that by 2004 it will be running at 3.9 million. In other words, it is possible in one generation to go from nothing to an industry the size of Germany's, despite having none of Germany's tradition of motor manufacture. In one sense that is more impressive than the surge in China in the production of relatively simple items like hairdryers.

By contrast there is much less evidence that technology in service industries is so easily transferred. That is partly because many services are, by their nature, not yet traded internationally on a substantial scale. Education and health care, two of the biggest, are still by and large provided nationally - though cross-border trade is growing in both. But in those services which are traded internationally it appears that know-how is much harder to transfer. Take the entertainment industry. There is no evidence that we face a flood of cheap imported films or pop music from East Asia. Insofar as we face a flood it comes from the United States, an even higher wage zone than the UK.

Some service industries will face greater competition from abroad. For example, it seems realistic to expect a lot more software and accounting services to come from India, instead of being provided locally, as trade in on-screen white-collar services increases. But this should be more than compensated by increased export opportunities in other services. It is fascinating to see how universities are setting up campuses in East Asia, as well as the numbers of foreign students who come to Britain.

Looking ahead, I would expect UK manufacturing to hold its ground, maybe even increase it, in three main areas. One is where there is a high craft element: where the items are to some extent bespoke, one-off products which can command a premium over cheaper mass-produced imports. A second is where manufacturing is associated with scientific development, for example in pharmaceuticals, racing cars, or military equipment, so that the purchaser is buying the research as much as the product. And the third is where there is some kind of cultural identity inextricably linked to some part of Britain: Scotch whisky, other specialist foodstuffs and the like.

But strength in these sectors will not mask the inevitability of an overall decline in the proportion of Gross Domestic Product taken by manufacturing. Throughout the 1960s, 1970s, 1980s and so far during the 1990s, manufacturing has been shrinking as a proportion of GDP. Similar trends are evident in every developed country. This ought not to be a political issue; it is an economic one. If politicians fret about a grand historical process they are liable to make themselves, and the rest of us, miserable.