It is unclear that the ‘support and assurances’ the government has supposedly given to Nissan (which the company said were crucial in securing their new investments) constitute direct subsidy to either the company or the car industry as a whole. From listening to Greg Clark on Question Time, I suspect not. Direct support or targeted tax breaks would certainly fall foul of EU state aid rules, and even trading under WTO rules these could be construed as ‘dumping’-like activities, leading to retaliatory tariffs being imposed by the EU.
My guess is that instead that government have given political assurances that they will lobby hard in negotiations to maintain two-way tariff-free trade in automobiles, and have also given policy commitments to regulatory certainty and potentially support for broader R&D investment in the sector (maybe around new technologies).
The fact that these commitments have been made in secret and seemingly following threats from a company that it might leave the UK nevertheless creates a dangerous precedent. Leaving the EU will (to varying degrees depending on the arrangements) lead to changed trade patterns which will affect the UK’s industrial structure. Lots of industries will be affected. The car industry is relatively small in terms of proportion of domestic value added of gross exports (3%) and employs far fewer people than many other affected industries. It also exports two-thirds of its cars to non-EU countries anyway. Many larger industries, and especially those more EU trade-dependent, will now surely see the opportunity to lobby government for special deals and assurances in the negotiations.
If the government is promising things to particular firms or to particular industries, this can have very damaging long-term effects. The direct, observable effects of support are celebrated, but these come at the expense of other industries. Support also tends to be targeted at the big, the visible and those firms that already exist now rather than the small, the dispersed and future firms. This deters innovation, not least through insulating incumbents from competitive pressure.
The history of overall industrial strategies and policies in the UK is extraordinarily poor. Between 1945 and 1979, the failures of the nationalised industries and national champions is well documented. Since then, there have of course been some success stories from state support (Rolls Royce etc) but there tends to be survivorship bias when it comes to this form of analysis. There are many counter-examples of technological breakthroughs partly or wholly funded by government – for example supersonic passenger flight – which have not led to saleable output.
Of course, there’s pure politics here with Nissan. Despite the sums involved, volume cars are held up as totemic industry that could be adversely affected by Brexit given potential high tariffs on exports and disruptions to integrated supply chains. It fits in with politicians’ fetish for manufacturing and their Ross Perot-like ‘ordinary man on the street’ preference for “real things” to be seen to protect them. Sunderland was also an important Leave-voting region.
Transitional support or a ‘glide path’ to a new industrial structure outside of the single market would be one thing. But if this is a commitment to permanent or semi-permanent support to almost ‘make up for’ changed trade arrangements then it is hugely misguided. The long-term gains to productivity from leaving the EU come from trading globally at world prices on our comparative advantages. Attempts to mitigate that permanently will end in tears.
Instead of actively picking sectors for support, the government should seek to set the broad conditions for economic flourishing (this is sometimes described as a ‘horizontal industrial policy’). This will be the subject of a forthcoming IEA publication.
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