Dan Byles is MP for North Warwickshire & Bedworth, and a member of the Energy & Climate Change Select Committee. ‘Better resource productivity for a resilient economy’ will be launched on Monday 29th September as part of the Green Conservatism project.
The UK has a long history as a global trading nation. For centuries we have viewed free trade and an open economy as the route to prosperity, and history has proved us right: Britain is the second largest exporter of services after the United States, and according to government analysis every ten per cent increase in trade openness raises national income by four per cent.
But during the 20th century, free trade flourished during a time when the real price of the raw materials that power the economy dropped rapidly. As we enter a new era in which demand for resources is increasing sharply and driving significant price volatility, openness to trade risks leaving the UK exposed. For example tensions between Ukraine and Russia have caused UK gas prices to rise sharply, even though Britain does not import gas directly from Russia. Looking at the longer term, since 2003 half of the occasions the Bank of England overshot its inflation target were caused by imported resource price rises. The impact of climate change only makes price fluctuation more likely.
So how do we balance our support for free trade against the greater exposure that brings to potential resource price shocks? What we must not do is row back from the free market and put our faith in resource nationalism. That would be a mistake. Trade underpins Britain’s relationship with the EU, our special relationship with the United States and our growing links to the rising economies of the East. These relationships will be critical to Britain’s future success.
Instead, we need a smarter solution to our resource security dilemma, one inspired by the cut and thrust of our vibrant market economy. Just as any good businessman knows that the best response to competition is to cut waste and innovate, the UK’s response to resource risks should be resource productivity and mission-led innovation. In fact, leading businesses, as usual, are ahead of government: according to PwC’s latest global survey, over half of global CEOs see high or volatile raw material costs as a threat to growth, and over a third see innovation as the solution to deliver growth.
How does government start to craft a smarter response? We could begin by reviewing waste regulations that prevent businesses from remanufacturing, a process which saves at least 70 per cent of input materials. The best businesses already remanufacture half of their products, but the UK’s overall remanufacturing rate is only around one per cent.
We could sharpen our innovation spending, by tasking Innovate UK to fund risky, path-breaking projects which could lead to a step change in resource productivity, whilst accepting that stretching goals will mean that not every project succeeds.
Finally, these efforts must not be blindly applied. Not every resource is risky. A sensible response to resource risk needs to be underpinned by a robust, government-led analysis of where the UK has most to lose from rising resource volatility.
Our historic wealth was built on free trade and a dynamic economy, responsive to threats through innovation and imagination. Global resource markets are likely to become more volatile in the coming decades, not less. If Britain is to maintain its competitive edge as an international, outward looking economy we will have no choice but to get smarter with resources.