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UK Seeks to Remove Brexit Sting with Industrial Strategy

Nov. 27, 2017
The industrial strategy is intended to provide an anchor for companies, many of which have already begun enacting contingency plans in case Britain doesn’t strike a trade deal with the EU.

Business Secretary Greg Clark said reviving Britain’s flagging productivity lies at the heart of the industrial strategy the government unveiled on Monday to help chart the future of Britain’s economy as the country leaves the European Union.

While Britain would pursue the strategy “regardless” of Brexit, the plan will take the sting out of the uncertainty sparked by the U.K.’s EU departure, Clark said in an interview in London. The flagship policy was published on Monday, accompanied by announcements that health-care company Merck & Co. and diagnostics provider Qiagen NV will set up new research facilities in Britain, investments totaling about 1 billion pounds (US$1.3 billion).

“Until we get a final agreement” on Brexit, “clearly there is going to be some uncertainty,” Clark said. “So it seems to me that it’s especially important to cast ahead to the long term and provide as much clarity as you can about what the fundamentals of our business environment are going to be. That’s what we’re doing in the industrial strategy.”

Two days before becoming prime minister in July 2016, Theresa May promised an industrial strategy “to get the whole economy firing.” She’s put the strategy at the core of an effort to define her administration beyond Brexit, which threatens to overwhelm the civil service and dominates the legislative calendar. It’s intended to provide an anchor for companies, many of which have already begun enacting contingency plans in case Britain doesn’t strike a trade deal with the EU.

Merck and Qiagen

The strategy “heralds a new approach to how government and business can work together to shape a stronger, fairer economy,” May said in the foreword to the document. “At its heart it epitomizes my belief in a strong and strategic state that intervenes decisively wherever it can make a difference.”

May is trying to persuade her 27 EU counterparts to agree in December to advance from exit negotiations to discuss future trade, as well as a two-year implementation period to provide clarity for business. To do so, May needs to demonstrate that she’s made progress in three areas: citizens’ rights, the border with Ireland and Britain’s exit payment.

Survey data from the Confederation of British Industry illustrate the urgency: Some 10% of companies have started implementing plans for a “no-deal scenario.” By March, that’s expected to increase to 60%. The CBI on Monday joined other industry groups in welcoming the strategy.

“This announcement shows the government has its eye firmly on the horizon, not just the next few yards,” said CBI Director-General Carolyn Fairbairn. “The hard work starts now. Today’s announcement must be the beginning of a strategic race, not a tactical sprint. And it needs to last. This is a time for consistency and determination, not perpetual change with the political winds.”

Today’s document follows a draft plan published by Clark in January, including proposed “sector deals” between different industries and ministers.

To highlight the immediate impact of those deals, the business department said in a statement on Monday that MSD, as Merck’s business is known outside the U.S. and Canada, will establish a new life-sciences research facility in the U.K. supporting 950 new jobs. MSD said it’s seeking a site in London. For its part, Qiagen plans to develop a genomics campus in Manchester, creating as many as 800 jobs. Clark said other investments will follow in the 64-billion-pound life-sciences industry, one of four to strike a sector deal.

Immediate Impact

“This shows adopting a long-term strategy can have an immediate effect,” Clark said. “There is a pipeline of investments that are going to be made over the weeks ahead by companies big and small in life sciences. These investments are because of the strategic commitment that we’ve made to the sector.”

The plan is Britain’s first explicit industrial strategy since Margaret Thatcher was prime minister in the 1980s. With it, May hopes Britain will seize the leadership in industries of the future, including robotics, clean energy and transportation.

"Our aim is that by 2030 we will have transformed productivity and earning power across the U.K. to become the world’s most innovative economy and the best place to start and grow a business,” the government said in the document.

The challenge that May’s government faces was laid bare in last week’s budget statement by Chancellor of the Exchequer Philip Hammond, who revealed forecasts downgrading growth predictions for the next five years as a result of flagging productivity and Brexit headwinds.

The U.K.’s low productivity -- workers produce in five days what Germans and Americans do in four -- has baffled economists and policy makers for years. Output per hour is back to levels before the financial crisis, but its rate of growth has yet to recover. Possible explanations include the U.K.’s reliance on services, which lag manufacturing in terms of efficiency growth, “zombie” companies kept alive by loose monetary policy, and limits on the flow of people between firms.

“Right from the outset, the focus of the industrial strategy has been Britain’s productivity,” Clark said, before citing Nobel Prize-winning economist Paul Krugman: “Productivity isn’t everything, but in the end it’s almost everything. You can’t pay yourself more, you can’t invest in public services, unless you are productive enough to be able to earn more and then invest.”

Last week, May and Hammond announced measures to buttress the industrial strategy, including investments in teaching mathematics, the establishment of a 1.7 billion-pound fund to invest in regional transport and a goal to boost research and development spending to 2.4% of economic output in 2027 from 1.7% in 2015. On Monday, the business department said it will plow 725 million pounds into a special fund to promote projects under the strategy, in addition to an already-pledged 1 billion pounds.

More Deals

The other industries to announce sector deals are construction, artificial intelligence and automotive. The government aims to devise plans with industries, towns and cities around the country that tie together policies on transport, broadband, education and skills development to provide companies with the staff, supply chain and travel and communication links they need.

Ministers also identified four “grand challenges” to shape the strategy: the rise of artificial intelligence, clean growth, new ways of moving people and products -- including driverless technology and drones -- and meeting the needs of an aging society.

“This is one of the most extraordinary times in the history of the world’s economy, when technology is changing almost every aspect of the way we work, the products we consume and how we move around,” Clark said. “This is a revolution, and you have to be prepared for that.’’

By Alex Morales

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