Response to Nigel Driffield in Financial Times

By Patrick Minford

Nigel Driffield’s letter can be found below

ND raises some points about my work with Edgar Miller Minford and Miller, 2017) on manufacturing prospects. Here are some answers.

First, he quotes my remark about the ‘elimination’ of manucfaturing. That remark concerned the ‘metal-bashing’ end; my point, as elaborated around it, was that manufacturing would raise productivity as it has in the past by going up the value chain and becoming more hi-tech. Given the UK’s comparative advantage in such skill-intensive industry, this could well imply a substantial expansion in that part of manufacturing.

Second, ND rightly says we did not examine the effects on profits of changes in input costs; we did so for reasons of simplicity and because they do not have a big effect, especially on the short term estimates. Had we done so, it would have boosted manufacturing profits further. Our best estimate of the protection of inputs is the same as for manufacturing as a whole- viz around 20% including non- tariff barriers. This according to our trade model raises the price of all inputs by 20%. Leaving the EU for free trade would eliminate this rise. However, in the short run, the fall in sterling largely counteracts that effect, raising input costs by 15%.In the long run, with sterling the same, the input cost fall boosts profits; in the long term we assumed that EU protection would fall to 10% following past long term trends, so the gain is 10% on input costs and diminishes the necessary offsetting growth in productivity. We made some allowance for these long run effects in car manufacturing but not in manufacturing as a whole. As noted a full allowance would strengthen our conclusions.

Third, ND notes that in the short run with a ‘tit-for-tat’ tariff exchange with the EU there would be disruption of supply chains. We agree about this and it is one reason we argue against the UK entering into a tit-for-tat exchange. Handling the effects of the EU’s solely levying (on average low) tariffs on us is fairly easy and could avoid supply-chain disruption, as we explain.

 

*(Nigel Driffield’s letter) Sir, Patrick Minford argues that Brexit will make UK manufacturing both more productive and more profitable (FT.com, March 16). This is in contrast to his pre-referendum argument that “we would mostly eliminate manufacturing, leaving mainly industries such as design, marketing and high-tech. But this shouldn’t scare us.”

The assertion appears to be that sterling will have significantly depreciated, and so profits of exporters will increase. While there are companies that will undoubtedly gain as a result of this currency depreciation, this assertion ignores one crucial issue. Nearly half of what we export is imported first. Professor Minford and his colleagues point to the recent success of the UK economy, and the extent to which exporters have gained. However, as those exporters restock their warehouses, they discover that much of the price advantage that accrued from the devaluation is eaten up in price increases in imported components.

The final issue that Prof Minford and his colleagues fail to capture is any understanding of the nature of supply chains that underpin UK manufacturing, and the extent to which World Trade

Organization rules affect those supply chains differently for different products. A high proportion of international trade is intra-company trade. In modern high tech manufacturing many components cross countries several times before they reach the final consumer.

This has perhaps been the biggest benefit to manufacturing of the single market. Companies are able to co-ordinate activities across many locations, taking advantage of the benefits offered by different locations, whether it be low wage costs, access to frontier technology or transport links. What we observe as final exports is simply the final stage of this process, which within Europe works relatively seamlessly.

Nigel Driffield
Professor of International Business, Warwick Business School

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