The Huawei incident points to a deeper lesson for Great Britain Larry Elliott | Technology


The debate over whether the Chinese telecoms company Huawei should be involved in building Britain’s 5G network has centred on two questions: was the former defence secretary Gavin Williamson the source of the leak from the National Security Council and would Huawei represent a security threat.

These are certainly important questions but there is a third issue that deserves an airing, namely why a country that emerged from the second world war with a technological edge in computers and electronics should require the assistance of what is still classified as an emerging economy to construct a crucial piece of national infrastructure.

It is indeed a sign of how diminished Britain is as a manufacturing force that it now passes almost without comment that the rivals to Huawei are not the great names of the past such as Marconi and Plessey but Finland’s Nokia and Sweden’s Ericsson.

UK’s balance of payments

The UK’s balance of payments Photograph: Office for National Statistics

The Huawei affair should help to puncture a few myths. In the early years of China’s rapid industrialisation, the UK took comfort from the fact that it was only low-cost manufacturing that was migrating east. Developed countries like Britain, it was said, would do all the clever, high-end, profitable stuff while the Chinese would have to be content with churning out cheap toys and clothes.

It seemed highly complacent to assume that China – a country which was making technological breakthroughs while Europe was stuck in the Dark Ages – would be content with being an assembly plant for western consumer goods, and so it has proved. China is now one of the world leaders in artificial intelligence and solar panels. When the government wanted to build a new nuclear power station at Hinckley Point, the Chinese got the contract.

A second myth China has well and truly busted is that all will be well provided market forces are not hampered by state interference. China has had an industrial strategy over many decades, and has stuck to it, while during the same period Britain has seen the state’s role wane and manufacturing become an ever smaller part of the economy.

Britain’s mid-20th century edge in computing, jet engines and radar was a direct consequence of putting the economy on a war footing between 1939 and 1945. What’s more, the reason the UK retains a global presence in aerospace and pharmaceuticals is that companies have been able to rely on the state – in the form of the Ministry of Defence and the NHS – being an important customer.

There were, of course, plenty of other reasons for the decline of UK manufacturing. In part, it was the result of complacency: British industry, for many years after the war, relied too heavily on the captive domestic and imperial markets. While Germany and Japan were forced to modernise as a result of the devastation caused by military defeat, British firms rested on their laurels.

This failure to compete with more efficient and hungrier rivals was not helped by prolonged periods during which the pound was over-valued. Again, attempting to cling on to the remnants of empire played a part. It was thought vital to have a strong exchange rate to sustain the pound as a reserve currency and to protect the overseas investors who kept their money in London. This was good for the City, not so good for exporters.

Governments of both left and right knew there was a problem and came up with a succession of different cures. These included indicative planning copied from the French; a national plan; industrial reorganisation; bailing out “lame duck” businesses, and attempts at trade union reform.

Yet these well-meaning attempts foundered through a lack of consistency and a series of policy blunders. Harold Wilson’s national plan, for example, was rendered still born by the determination to resist devaluation until 1967 by which time it was too late.

And then there was Margaret Thatcher and her monetarist experiment of the late 1970s and early 1980s. High interest rates were used to squeeze inflation out of the system but proved fatal to manufacturers already struggling with weak global demand and the appreciation of sterling caused by the arrival of North Sea oil in the mid-1970s.

There were debates – as firm after firm went bust – about whether it really mattered that a good chunk of industry was wiped out. Nigel Lawson, when he was chancellor in the 1980s, said it didn’t because services would fill the gap. Over the years, as Britain has become more and more services dominated, that theory has been fully tested and the results are now in. Britain is certainly good at exporting services – especially financial and business services – but it can’t sell enough of them to compensate for a whopping deficit in trade in goods. It is more than two decades since the UK ran a current account surplus.

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Turning Britain into a global money hub has had two other harmful consequences. It has made the economy more vulnerable to financial crises, as was witnessed by the damage caused by the banking crash of 2008. And it has made Britain more socially riven by concentrating wealth in one corner of the country.

To all that can now be added another conclusion: the benign (and sometimes not so benign) neglect of manufacturing now poses a threat to national security. What should be done? The answer is to learn lessons from the City, the one sector that has been blessed with long-term bipartisan planning and plenty of tender, loving care.

That means having a vision for where manufacturing should be in 25 years time, deciding which industries are the future not the past, having a strategy that has buy-in across the political spectrum. And sticking to it.

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