Why the plummeting pound is actually good news for post-Brexit Britain

Donald Trump's election and the vote to leave the EU were symptoms of the decline of our industrial heartlands. Now we have a unique chance to revive their fortunes

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The Independent Online

Much of the discontent demonstrated by the results of both the EU referendum and the US presidential election stems from the decline of manufacturing in the UK and US, the lack of good blue-collar jobs in our industrial heartlands. 

Only 8 per cent of UK employment is in manufacturing today, although this produces 10 per cent of our GDP, so productivity is about 25 per cent higher in industry than in services. No wonder that deindustrialisation has meant that a large proportion of our population is suffering and angry, fed up with low-paid and insecure service sector jobs.

It is impossible to argue that deindustrialisation is unconnected to the fact that it now costs far less to produce more or less anything in the Far East than it does in the UK. Despite assumptions, this has almost nothing to do with Chinese wages being lower than those in the UK, and everything to do with the fact that our UK exchange rate (pushed up by monetarism in the 1980s and then still further by massive UK assets sale since the 2000s) made the UK, along with nearly all the Western world, hopelessly uncompetitive with the East.

So why don’t we bring the exchange rate down again, to help us to start making, here in the UK, much of what we import at the moment? 

The most compelling argument against doing so is that it would not do any good, because UK exports of goods and services are nothing like price-sensitive enough to make any real difference. At $1.45 – the exchange rate for sterling just before the EU referendum – that is largely correct. Most services are not price-sensitive on international markets, whatever the level of the pound; all price-sensitive manufacturing has already been runout of business. All that remains are the high-tech industries such as arms, aerospace, vehicles and pharmaceuticals, sectors which are difficult to attack by low-cost competition.

But the EU referendum has changed everything. Now at about $1.22, sterling has fallen by around 16 per cent post-referendum. We are into very different territory.

Now we are getting reasonably close to the exchange rate – $1.00 to $1.10 – where it would become cheaper for the UK to manufacture much of what we import, rather than get it made in China.

Suddenly, the sensitivity of UK manufacturing to world competition would become much greater. Not because we would be able to sell more of what we already produce to the rest of the world – although we could – but, much more importantly, because decisions about where to locate production would change.

If it became profitable to produce low- and medium-tech products in the UK again (and it was Government policy to maintain a competitive exchange rate strategy) this is where manufacturing would be located – and both our export and import figures would be transformed. 

If we want to make sure that, from now onwards, globalisation benefits the majority of people and not just the lucky minority, we have a very clear choice: we either use a lower exchange rate to bring back enough of the good blue-collar jobs we have lost to give prosperity and hope to our industrial heartlands, or we opt of one of the alternative strategies that are doomed to fail. We could invoke populist policies for protectionism, or industrial strategies which concentrate only on supply (more infrastructure investment, better education and training), but neither combine the benefits of liberalisation with the crucial competitiveness and profitability.

To make globalisation work we are going to have to change our attitudes to exchange rates. The turmoil which the world is experiencing right now only exists because our liberal democratic consensus over economic policy is misplaced. Much of our future prosperity depends on whether this can be changed.

John Mills is an economist and entrepreneur, the founder and chair of JML, and a donor to the Labour Party

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