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FLIGHT Howard 2

Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004.  He is now chairman of Flight & Partners Recovery Fund.

Allister Heath has been virtually a lone voice in defending free trade with regard to the Pfizer Bid for AstraZeneca.  I congratulate him for this and mostly share his views, but I cannot agree with the “purist” free trade case.  In a global, as well as EU context, I also believe in the nation state and, with this, comes the concept of the national interest.

The first area in which I suggest due regard needs to be given to the national interest is defence.  While mostly it makes sense to buy the best value equipment wherever it is available, it must surely also be essential to retain core production skills within the UK, in the event that politics and hostilities could result in us being unable to buy key defence equipment from overseas.  This is a difficult issue to manage in that, clearly, it can result in over-paying and an element of cronyism in awarding contracts, but it seems to me the principle has to be correct.

As well as defence, there are clearly other areas where it is in the national interest to retain key production competences.  It is, by way of example, undesirable that there is no major UK business capable of building a nuclear power station; we thus have to over-pay to get one built by a non-UK consortium.

The second key area where I suggest there is an important national interest is new technology and the success or otherwise of new, small businesses driving new technology.  The extent to which brilliant UK inventions have been exploited in the US rather than the UK is legendary.  Until small businesses have grown to an established size it is only too common for them to run out of money and fail.  But the successful exploitation of new inventions is the generator of the large businesses of tomorrow.  I believe, therefore, that there is a “mercantilist” case for providing some “nursery” support for British new technology businesses, which too often is otherwise vulnerable to the power of global oligopolies.  Here, again, drawing a line between supporting the national interest and protectionism is a difficult one, but it is apparent that, since the UK embraced free trade in the second half of the nineteenth century, too often we have been the inventors of new technology, but its successful exploitation has happened elsewhere.

The issue which strikes me as the most important within the free trade debate is the support of open competition and the successful curbing of monopoly and oligopoly powers.  Here there is a danger that the interaction of demanding and expensive regulation can serve to be a powerful anti-competition agent.  The irony of the EU’s single market is that its interaction with demanding EU regulation serves, in net terms, to buttress the power of the large, established oligopolistic businesses, making it difficult and expensive for new entrants to compete.

It is also important where “R and D” activities for large, global businesses are based.  Not only is it likely that the fruits of R and D will be developed in the country where the R and D is occurring, but also corporate R and D can sometimes lead to new technology businesses being spun out.  The R and D issue is not just about where the related jobs are, today, but where new jobs will develop in the future.  Seeking to have as much as possible R and D here, in the UK, must surely be in the national interest.

Thus I regard myself as a “mercantilist free trader”!  From a purist perspective, this is an inherently self-contradictory stance, but it is one which history suggests is practically correct.  It was essentially mercantilist policies which got the new commerce and manufacturing going in Britain in the eighteenth century, and which Britain was then able to exploit internationally in the nineteenth – albeit that, in the second half of that century, we over-embraced free trade at the cost of not exploiting adequately in the UK the second wave of technology inventions.

There are two other issues which the Pfizer/AstraZeneca case illustrates.  The first is that Pfizer, like Cadbury’s previously, was able to make a particularly generous offer because of the US tax system, under which global US businesses have been able to build up cash balances offshore, free of tax.  This gives US giants an essentially anti-competitive buying power.

The second is the macro-economic weakness of the UK since the Second World War in having an inadequate Savings Rate.  Not only has this tended to reduce investment but it has also led to the macro-economic need to sell assets to pay for excess consumption.  While, with an open economy, large current account deficits no longer lead to “balance of payments” crises in the short term, these get finance in the long term by the sale of assets which can be contrary to the national interest.  The cost to consumers of the services of utilities in the UK is now arguably higher than it would otherwise be as a result of most utility businesses now being internationally owned.

Thus, while some of the political arguments put forward with regard to Pfizer/AstraZeneca may be misconceived, there are national interest issues to take into account, as well as straightforward free trade principles.  It is not surprising that there is thus a political focus and debate, in which the purist free trade argument rightly needs to be set against the perceived national interest.

38 comments for: Lord Flight: Free trade and the national interest

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