The Death of British Business

It is hard to exaggerate the scale of the disaster the British people have inflicted upon themselves with their decision to leave the European Union, taken in the referendum last June. More than three and a half months since the vote, some of this damage is difficult to quantify, including loss of influence with the US, Europe, and the wider world, the flourishing of insular nationalism, especially in England, and growing hostility toward immigrants—a tendency that had been already visible during the referendum campaign and was disgracefully exploited by the Leave campaigners. But in recent weeks, there have also been stark indications of a kind of damage that is readily quantifiable and severe: the damage that Brexit has and will continue to inflict on the UK economy—an economy that, after decades of mismanagement, is overwhelmingly dependent on foreign enterprise and foreign capital.

At the beginning of September the Japanese Government sent a blunt “message to the United Kingdom and the European Union” warning that, without Britain’s present trading relationship with the EU and the full access to European markets it guarantees, Japanese financial institutions “might have to…relocate their operations from the UK to existing establishments in the EU.” The UK’s other leading trading partners have been issuing similar warnings. On September 6, Eric Schweitzer, head of the German Chambers of Commerce and Industry, warned that amid the current Brexit “deadlock”—the uncertainty about how Britain’s arrangements with Europe will play out—many investments in the UK are now “held up and will not be carried out.” At the G20 summit in Hangzhou in early September, Barack Obama himself acknowledged the risk that Brexit could “unravel” American business investment in the UK.

Especially ominous for Britain are the warnings coming from the US and European investment banks which now dominate the City of London, which in turn dominates the UK service economy. On September 21, Daniel Pinto, chief executive of JPMorgan Chase’s corporate and investment bank, told the Financial Times, “It’s hard to see how we can serve all of our European clients, and the European economy, without access to the single market.” And other “senior executives and advisers” in the City of London cited by the FT now estimate that 20 percent of all investment banking and capital markets revenue generated in London—worth some £9 billion ($10.9 billion)—could be “disrupted” if these companies lose their free access to the EU single market in financial services. In a September report, the London consultants Oliver Wyman have estimated that the kind of “hard” exit from the EU toward which the UK Government is now moving could cost the UK

The supporters of Brexit should have seen this coming. A large-scale flight of foreign capital from Britain in both manufacturing and services would be a mortal blow to UK economy. In 2015, for example, roughly half of all Japanese investment in the EU was in the UK, with a thousand Japanese groups using the UK “as an effective springboard into Europe,” in the words of the Financial Times, and with Nissan, Toyota, and Honda’s UK assembly plants making up the core of the UK-based auto industry. Now, Kenichi Ohmae, who as head of McKinsey’s Tokyo office in the early 1980s advised Nissan to set up its main European plant in the UK, is already advising his Japanese clients to keep clear of the country: “If you have to make an investment beforehand, then you have to invest in continental Europe. This is no longer a country-by-country decision, it is one country versus the whole EU.”

The UK has long depended on heavy flows of investment from abroad to make up for the weaknesses in its own corporate and financial institutions. In 2015 the UK ran a deficit in its external trade in goods and services of 96 billion pounds ($146 billion in 2015), or 5.2 percent of GDP, the largest percentage deficit in postwar British historyand by far the largest of any of the G-7 group of industrialized economies. By comparison, the US ran a deficit of 2.6 percent of GDP, while Germany earned a surplus of 8.3 percent, Japan a surplus of 3.6 percent, and France broke even. In the memorable words of Mark Carney, the Canadian-born Governor of the Bank of England, the UK must depend on “the kindness of strangers” to remedy its trade gap.

The reason for this unusual dependency is that for decades the UK has been unable to produce enough goods that the rest of the world wants to buy. According to WTO statistics, between 1980 and 2011 the UK’s share of global manufacturing exports was halved, from 5.41 percent to 2.59 percent, so that by 2011, according to UN statistics, the dollar value of UK merchandise exports at $511 billion was not far off the level of Belgium’s at $472 billion, an economy with one six the UK’s population, (and not included in the Belgian figures, the value of German exports routed through Belgium ports).

Looking at export industries such as IT products, automobiles, machine tools, and precision instruments, all strongly dependent on advanced R&D and employee skills at all levels, the UK’s performance looks even worse. The period of 2005-2011 is especially revealing because it includes both the years of the Great Recession and the collapse of trade between the advanced industrial economies, but also years in which their trade with China and other BRIC economies such as India and Brazil grew rapidly. Since one of the chief claims of the Brexit campaigners has been that there are now these exciting new markets in BRIC countries waiting for British exporters to conquer, it is worth looking at how British companies actually performed during those years.

All the leading industrial economies increased their exports of advanced goods between 2005 and 2011, some spectacularly. South Korea, with its proximity to China, was the big winner with a 93 percent increase in the value of advanced goods exports, followed by Germany with a 46 percent increase, Italy with a 35 percent increase, Japan with 31 percent, France with 24 percent, and the US with 22 percent. The UK could manage just a 7 percent increase, even though it benefited from an 18 percent devaluation of the pound. What has saved Britain from relegation to the European lower echelons—to the level of Italy, Spain, or worse—has been the pursuit over several decades of an economic strategy that has encouraged global corporations in both manufacturing and financial services to come to the UK and fill the British business vacuum.

The UK’s favorable financial and legal environment helped draw foreign capital. But it was access to the EU that allowed this to happen on a large scale. Since the early 1980s, leading global corporations have located plants and offices in Britain, sometimes taking over British businesses in the process, using British soil as a terrestrial aircraft carrier to assault the single European market. Trade figures for the past three decades show with brutal clarity how dependent the UK is on this aircraft carrier status, and how much it stands to lose if a full Brexit is carried out. Even with the benefit of major inflows of foreign capital the UK’s trade performance has been the weakest of all the G-7 industrial economies. What will it look like without them?

How the UK got into this situation is told in detail by two books: Nicholas Comfort’s Surrender: How British Industry Gave Up The Ghost 1952-2012, which deals especially with the collapse of British manufacturing in the late twentieth century, and David Kynaston’s The City of London: Club No More: 1945-2000, which chronicles the corresponding failure of British financial institutions and their displacement by international competitors. (Club No More is the final volume of Kynaston’s four-volume history of the City of London, one of the outstanding achievements of contemporary British scholarship.) Kynaston and Comfort are best read in tandem, and the cumulative impact of their histories is devastating.

The most telling chapters of Surrender are those dealing with the 1980s, 1990s, and early 2000s, because they give the lie to the claim that Margaret Thatcher as prime minister arrested and reversed Britain’s industrial decline. Some of the most damaging cases of British industrial collapse took place during and following her period of office, and are well described by Comfort. Among them was the implosion in 2004 of GEC, a sprawling engineering conglomerate and a rough British counterpart to GE as the UK’s market leader in power generation, industrial control systems, and defense electronics.

In the early 1980s, GEC employed 250,000 workers in Britain, but it was brought to its knees in the early 2000s by its last CEO, George Simpson, who made a series of disastrous acquisitions of American IT companies just as the dot-com bubble was collapsing. Much the same fate has befallen the British car industry, part of an industry that following World War II ranked second in the world to its US counterpart. From the 1960s onward the leading British car manufacturer was downsized in a series of poorly-executed corporate restructurings, first as the British Motor Corporation, then merged as British Leyland, and finally as Rover Group.