The analysis of the top 25 export economies’ changing competitiveness makes
fascinating reading. Remarkably, China was one of the great losers between
2004 and 2014 – and America one of the big winners, with the UK holding its
own and thus doing relatively well. Our costs are roughly 9pc higher than
America’s, which isn’t bad – and we are pulling away from the rest of the
western world, where competitiveness has declined dramatically. Germany is
now 21pc more expensive than the US and France 24pc more costly. Italy and
Belgium are 23pc more expensive, Canada 15pc, Sweden 16pc and Japan 11pc.
Overall, Britain’s competitiveness has improved by around 10 percentage
points compared with western Europe over the past decade, an important shift
that has gone largely unnoticed.
Perhaps most interesting of all, there has been a cost explosion in many
traditionally cheap emerging markets, helping the US and UK positions. A
decade ago, the productivity-adjusted cost of making manufactured goods was
around $4.35 (£2.60) an hour in China and $6.76 per hour in Russia. These
figures took the fact that both wages as well as productivity were lower
into account.
Today, the picture has dramatically changed. Productivity-adjusted wage costs
are up by around 200pc in both emerging markets, following huge pay rises,
taking them to $12.47 an hour in China and $21.90 in Russia. America’s are
up by just 27pc to $22.32.
Sure, it’s still cheaper to employ people to make things in China – but the
gap has narrowed dramatically. Once transport and energy costs are included,
shipping times, political uncertainty and the hassle of doing business in
China, the gap narrows further – and in some cases the US has now become
cheaper. In the case of China, the overall cost advantage relative to the US
has fallen from 14pc to 4pc. These sorts of calculations help to explain why
hundreds of firms are starting to reshore business back to North America.
Energy policy has been key: in the US, shale has provided a plentiful supply
of cheap electricity; in China, the price of electricity has rocketed by
66pc and that of natural gas by 138pc. The increases have been even greater
in Russia.
Many other economies have fallen back compared with the US. Brazil’s costs
used to be 3pc lower; they are now 23pc higher. Poland’s used to be 6pc
cheaper; they are now similar. Russia used to be 13pc cheaper; its costs are
now estimated to be the same as America’s. Among the winners have been
India, Mexico, Thailand and Indonesia: all countries that are now cheaper
than China and of course also the US.
Britain has done better than expected but now is not the time for
celebrations. Imagine how much better the UK’s performance could have been
had our politicians taken the right decisions over the past 15 years. Energy
is a case in point: natural gas prices have collapsed by 25pc to 35pc in the
US over the past decade, thanks to the wholesale adoption of fracking and
shale. This was a remarkable, bottom-up response to the energy crisis, and
one which has transformed America, entirely for the better. By contrast,
energy prices have shot up 100pc to 200pc in the likes of Poland, South
Korea and Russia, dealing these economies a devastating blow.
While prices in Britain didn’t rise by as much, of course, our obsession with
compelling the use of the most expensive possible form of renewable energy
has severely damaged our manufacturing industry. Imagine how competitive we
would now be had we not channelled all of our energies and cash into wind,
which has turned out to be extraordinarily costly.
Our obsession with seeking to decarbonise faster than anybody else and
inability to implement the right economic framework for shale – one which
allows winners to buy off losers, and truly incentivises locals – has been a
tragic missed opportunity. We are lucky that, despite this double blunder,
as well as an education system that remains deficient, UK manufacturing has
fared relatively well in terms of cost, if not yet in terms of output.
The Boston report is right to highlight Britain’s relatively flexible market
as a key advantage. Here too, however, many policies have eroded this,
re-regulating the workplace. Fortunately, profound cultural shifts in favour
of flexibility appear to have more than cancelled out the impact of extra
red tape.
The other lesson is that supply-side economics works and that we need more of
it. The sharp reduction in corporation tax has given Britain’s manufacturing
industry a fillip; it is just a shame that taxes on income remain so high.
allister.heath@telegraph.co.uk
Source Article from http://www.telegraph.co.uk/finance/newsbysector/industry/11042187/After-years-of-decline-its-time-to-be-optimistic-about-UK-manufacturing.html
