Wednesday, 27 June 2018

Tories’ Brexit and Trump will only damage the economy

By Tom O’Leary

US President Trump seems to be stumbling towards a trade war. At the same time a large section of the current UK government seems intent of crashing out of the EU without a deal.

In both cases, there will be economic damage inflicted on other countries (in Trumps’ case, consciously so). But the main damage will be inflicted on their own economies.

Damage done

The damage is easy to identify. In the UK, a string of large manufacturers have highlighted the risks to their business arising from the prospect of a Tory ‘Hard Brexit’ or even no deal leading to the adoption of World Trade Organisation (WTO) rules. Airbus issued a statement (pdf) which was very clear. In summary, it said that a no deal outcome would inevitably mean that they would leave this country, and that until there was a deal which allowed product pre-approval (vital for the safety-conscious aerospace industry), and the free movement across borders of its goods and its people, they would be making no investment in the UK.

The UK CEO of Siemens said that, “If the Brexit we end up having provides significant friction, provides significant cost then of course that will be an argument against making investments here in the UK,” and argued for continued membership of the Customs Union until an equivalent friction-less system for goods is put in place.

BMW, which make Minis and Rolls-Royces said it had no plans to cut jobs and close plants, but “We always said we can do our best and prepare everything, but if, at the end of the day the supply chain will have a stop at the border, then we cannot produce our products in the UK.”.

In addition, the Society of Motor manufacturers and Traders (SMMT) (pdf) revealed that industry investment had halved in the last year and that sales and exporters were expected to fall. The SMMT’s chief executive said, “There is no credible ‘plan B’ for frictionless customs arrangements, nor is it realistic to expect that new trade deals can be agreed with the rest of the world that will replicate the immense value of trade with the EU. Government must rethink its position on the customs union. There is no Brexit dividend for our industry, particularly in what is an increasingly hostile and protectionist global trading environment.”

In the US, the Trump administration has already imposed tariffs on imports from a number of countries, primarily in an effort to corral them into a concerted anti-China trade policy. He threatens further trade tariffs, on a wider array of goods.

Clearly, the countries targeted will suffer directly. But the policy will also inflict jobs losses for US workers, loss of markets for US farmers and higher prices for US consumers. For US consumers, ‘Trump’s tariffs are already backfiring’ as the Washington Post neatly characterises the situation where US tariffs have led to a 17% jump in the price of washing machines in the US, hurting US consumers who buy almost 10 million washing machines each year at an average cost of over $400. 

The hit to US consumers, and money they cannot spend on other goods or services in the US, is around $680 million a year, with no appreciable increase in jobs created. Any jobs ‘saved’ will be at enormous cost and can lead to job destruction in other sectors, as US consumers pay Trump’s effective tariff taxes.

US farmers are worried that they will bear the brunt of Trump’s trade tariffs. US agriculture is enormously productive and US agricultural exports amount to around $140 billion per year. China offered to buy additional foodstuffs as a way of reducing its bilateral trade surplus with the US. But Trump refused to remove tariffs and now China and other countries will respond to Trump’s tariffs with their own, which will hit US farmers.

It is also clear that Harley-Davidson’s decision to shift production overseas will hurt US manufacturing jobs. The shift is necessary because of retaliation by the EU against tariffs imposed by Trump on European steel and aluminium production. But it is not only the retaliation which is destroying US jobs, but Trump’s initial actions themselves.

Self-inflicted damage

This is important, and key to understanding how both Trump’s protectionism and the Tory Brexit will damage the US and the British economies respectively. There is the obvious point that tariffs on steel will raise the input price of imported steel for all production where it is used. Either more costly or inferior steel will be used (if possible), which will hit jobs and living standards in the US.

But there is a more important and more fundamental reason behind the self-inflicted damage from protectionism. Production globally is integrated. There are single, global prices for nearly all commodities and for many semi-finished goods. Raising the price (through tariffs or other mechanisms) nationally tends to raise them internationally.

In addition, production is integrated through international, sometimes global supply chains. In the US, EU-owned car producers will be hit by tariffs on parts and other inputs from Europe and elsewhere. This is already happening. It will deter new investment in US-based investment for car production by overseas producers, and it will raise costs and act as a deterrent to expansion for existing producers.

The same logic applies to UK-based manufacturers and Brexit. If the UK link of multinational supply chains is broken, the chain will be reassembled without the UK. This is irrespective of the companies’ ultimate ownership, British, European, or third country. It is not a question of nationalism, but of markets, production, profit and jobs.

Airbus is obviously a transnational corporation. It relies on parts and inputs crossing national boundaries, sometimes several times as each plant adds new value to the production process.

Airbus cannot realistically have an integrated multinational supply-chain where one country imposes tariff barriers, operates separate rules (impacting safety standards) and where it cannot move key personnel around Europe to facilitate the integrated production process. If one locale unilaterally imposes tariff barriers, separate safety standards and monitoring or prevents free movement of skilled workers, it endangers production in that locale entirely.

UK-based car producers, like BMW, operate under the same strictures and require the same effective free trade regime to make their existing supply chains work. It is the threat of disrupting those supply chains, or even severing them altogether, which is the cause of the plunge in UK car industry investment in the last year.

Trump’s tariffs and the Brexit being pursued by the Tory government have the effect of severing these supply chains. It is the US and the UK respectively that will be the broken link, with the consequent loss of investment, productivity and jobs.

Socialised production

‘Making America Great Again’ and a ‘Global Britain’ are crass sound-bites when economic policy has the effect of reducing each country’s participation in the global division of labour. There is a fundamental economic underpinning to the damage Trump and the Tory Brexit will cause.

In his economic writings, Marx was primarily concerned with the analysis of the capitalist mode of production and its replacement by socialism. Socialism too is firstly a mode of production, one which allows the development of society and of the people within it; the producers collectively determining production to meet human needs, without value being extracted by capitalists. But as a materialist, Marx demonstrated that the basis of the new socialist society was the new mode of production itself.

The term ‘socialism’ derives from this socialised production. That is, the integrated production of all the necessary goods and services to satisfy human wants using the highest possible development of all the productive forces in society. These include labour and capital, as well as their integration into the production process through what Marx terms the socialisation of production.

The socialisation of production long precedes the development of capitalism. When we lived in forests and caves, some of us honed sharp instruments, others created weapons and others prepared the meat that had been hunted. Each successive society, based on successive modes of production raised the socialisation of production to a new, higher level, allowing it to be the dominant mode of production and the dominant form of society.

Capitalism raised this level of socialised production to a new, far greater height, as Adam Smith demonstrated in ‘The Wealth of Nations’, (which Marx drew on heavily, transforming Smith’s division of labour into ‘socialised production’.)

Volume 1 of Capital is shot through with reference to both ‘social production’ and ‘social division of labour’. The former appears 23 times in Volume 1 alone and the latter 16 times. And Smith’s own term, the ‘division of labour’ appears 164 times. They were staging posts on the way to Marx’s unified conception of socialised production. In addition, Marx’s Chapter 13 ‘Co-operation’, examines the increase in productivity arising even from the simplest forms of the division of labour.

Socialisation of production.

This socialised production of labour is ultimately the material basis for socialism. Socialism is necessary to replace capitalism precisely because, in Marx’s terms, “at a certain point the social relations of production come in conflict with the development of the productive forces”. That is to say, capitalist ownership of the means of production (from which they are solely concerned to derive profits) prevents the development of the productive capacity of the economy, and is the cause of if its deep, recurring crises. Only socialism can realise the full rational, socialisation of production to meet human needs.

It is incorrect to suggest, baldly that Marx was only in the first instance concerned with production. Volume 1 of Capital begins with commodities and money, not production, as the unique and specific feature of capitalism is that commodity production becomes generalised, and money becomes the universal substitute for all commodities. This is what is specific to capital.

Instead, the socialisation of production is a general phenomenon. It is a given throughout all modes of production. Capitalism raises this up to a new higher level, and Marx examines how this takes place within the capitalist system.

Socialised production is necessarily international. In Smith’s famous example, it was as easy to ship coal from Newcastle to European ports as it was to London. In the modern era, as we have seen, just-in-time manufacturing and complex supply chains mean that inputs for final products cross borders on multiple occasions.

Marx argued that capitalism really begins when individual capitalists employ larger numbers of workers, and the level of production becomes extensive and large amounts of commodities are produced. And the scope for the development of the productive capacity of the economy, the employment of large numbers of workers and of the degree of socialised production are all limited by the size of the market itself.

So, there is little incentive to build a smelting works if the ultimate sales of the commodities produced are very small. The development of the productive capacity and the scope for the increase in socialised production are in part determined by the size of the market.

Therefore the response of one Tory MP to the Airbus statement, to the effect that this country should establish its own aerospace industry instead, highlights the grave misunderstanding of fundamental economic forces.

The two main antagonists in global aerospace competition, Airbus and Boeing have a market value or around $100 billion and $200 billion respectively. This is the scale of investment that would be needed simply to establish a UK competitor. But, even with that investment, where is the market for this new production?

It could only come from a head-on struggle with the two market leaders who dominate the world market, And this while the UK imposes tariffs on parts, operates its own rules on product safety and bars highly-skilled overseas workers who would bring the expertise necessary to make that production feasible. It is more fantasy.

Like Trump’s protectionism, the Tory Brexit project will break global supply chains, reduce access to markets and interrupt the socialisation of production, the most important factor in economic growth.

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