May 2024

By Paul Atkin

The last few weeks have seen a series of statements, by Ursula Von Der Leyen and Janet Yellen complaining about “imbalances” caused by state investment in Chinese industry that makes competition “unfair” (von Der Leyen) and declarations that the US will not stand by while its industries are “being decimated” by Chinese imports (Yellen).

A lot of this focuses on rapidly developing green transition technologies in which China is accused of having “overcapacity”; as if the world could really do with fewer inexpensive solar panels, wind turbines and EVs.

So, the EU is launching an investigation into China’s ability to undercut EU prices in cars, steel, wind turbines, solar panels and medical devices. For example, BYD has launched an EV that retails at below E30,000, wind turbines made in China are 50% cheaper than EU models; and they offer better terms for deferred payment.

The conclusion of this should be evident to anyone who takes a passing interest. China is able to do this because it takes long term strategic decisions about what the key sectors are that need investment, and it invests in them on a large scale with a long-term consistent commitment. This approach has been derided here as “picking winners” and interfering with the unconscious genius of the market. The results of that are evident in undercapacity in the US allied countries in all these sectors.

In reality, countries such as Britain and the US provide huge subsidies to fossil fuel companies. These take the form of tax breaks for investment and opening new fields and decommissioning them. Given their costs and their destructive capacity, China’s critics are in effect picking losers.

The Chinese approach is crucial for the green transition. It is their investment that has made solar and wind more than competitive with fossil fuels and gives us the slimmest of slim chances of limiting the damage that we are already inflicting upon ourselves by transitioning too slowly. China is able to do this because, in the final analysis, it is the state not the private sector that drives strategic planning. If the EU and US (and Britain) want to catch up, they will have to do the same. Because they put the private sector first, they won’t, thereby holding the world back.

That explains why the level of investment in energy transition in China that in 2022 was already almost double that of the EU and US put together, and the gap has widened since.

Rather than rise to the level of this challenge, the EUs response is summed up by the Guardian; “The EU has been arguing that it is the largest free market in the world and that China is essentially abusing its hospitality by dumping products in Europe rather than reducing production“ (my emphasis).

So, rather than invest on a comparable scale, which is what would be necessary to get on track to meet Paris targets – because doing so would require taxation on the wealthy and big corporations and deficit financing – the EUs response is to demand that China cuts back to the inadequate levels the EU is currently capable of; thereby putting the future of the planet at risk. This is posed as “Europe will not waver from making tough decisions needed to protect its economy and security”.

This is in lockstep with the approach of the US, which has just imposed tariffs on the same sectors, among other things;

• from 25% to 100% on EVs,
• from 7.5% to 25% on lithium-ion EV batteries and other battery parts
• from 25% to 50% on photovoltaic cells used to make solar panels.
• Some critical minerals will have their tariffs raised from nothing to 25%.

More tariffs will follow in 2025 and 2026 on semiconductors, as well as lithium-ion batteries that are not used in electric vehicles, graphite and permanent magnets.

The last time the US imposed sanctions on Chinese solar panels in 2021, this did not lead to an increase in US manufacture, but the restriction in supply did lead to a jobs crisis for US workers employed to install them. This time too, the effect of these measures will be to increase costs for US consumers, restrict the supply of essential transition technologies, and therefore slow down the US transition, and that of the EU if it follows suit.

Although the United Auto Workers are arguing that these tariffs will ensure that “the transition to electric vehicles is a just transition”, and the New York Times proclaims that “China is flooding the world with car exports”, the US currently imports very few Chinese made cars (just 1.2% of its car imports in 2023; the same level as Belgium and well behind Mexico on 21%, Japan on 19%, Canada on 16.6%, South Korea on 14.9%, Germany on 11.3%, the UK and Slovakia on 3.1%, Italy on 2.4% and Sweden on 1.9%).

However, 7% of US car exports went to China in 2022. So, if you add the additional costs to US factories of the new tariffs on the 77% of the world’s lithium batteries that are manufactured in China to the inevitable tariff retaliation on US car exports to China, this will hit those exports and also domestic competitiveness. So, the impact of these tariffs on US car workers will be negative.

Hitherto, the Chinese response has been to argue that the growing demand for green tech – which has to be exponential from here on if we are to avoid the catastrophic 2.5 C increase in global temperatures that is now the average prediction among IPCC scientists – means that there will be more than enough work to be done for all economies: and that this should be approached, according to President Xi, with “strategic partnership” involving “dialogue, cooperation, trust and conscious coordination”.

This is also relevant to the economic and political course likely to be pursued by the UK under a Starmer government.

In her Mais lecture, Rachel Reeves argued that the economic stagnation of the UK economy since 2008, and regression in the last few years, can be overcome with “vision, courage and responsible government”, which sounds like an act of will in place of policy, wedded to “new economic thinking shaping governments in Europe, America and around the world”. She has codified this hitherto as “Bidenomics” or, more lately, “Securonomics”, both of which come down to support for a greater government industrial activism. However, the commitment to a £28 billion a year investment in green transition that was the core of that has been gutted; leaving little more than is already pencilled in by the Conservatives.

This leaves little more than the slogan and the act of will; which won’t go very far. A recent report from Nicholas Stern and others published by the LSE spelled out the need for the UK to invest an additional 1% of GDP – doubling its current level – in infrastructure to stop it falling behind the EU and US. Keeping up with China has long gone over the horizon. 1% of GDP amounts to £26 billion. A failure to do this will result in continued decline of the public realm, a failure to make the transition we need and a continuation of the impoverishment of the population that has led Labour focus groups to describe the state of the economy as “damaged”, “fragile” and “unbalanced”.

In relation to the car industry, if the Chinese EV manufacturers are indeed the most efficient and cheapest and, contrary to Western myths, technologically ahead (with no need to “steal” intellectual property that it is already beyond) then the surest course to preserve motor manufacturing in the UK would be to seek investment here from those companies.

The £1.2 billion that Chinese battery firm EVE is planning to invest in a gigafactory outside Coventry, creating 6,000 jobs, is an indication of what might be possible; so long as there is not a deepening of the economic self-harm already seen in the removal of Huawei from 5G provision and CGM from Sizewell C on “security” grounds; helping create political tensions and drum up the war drive that will make everyone in the world far less “secure” and cut off that potential supply of investment.

By Michael Burke

The latest British GDP data are being hailed not just as the end of the recession but as the beginning of a strong recovery. These are widespread evaluations, but they are evidence-free. The actual data show that the private sector of the economy remains in recession. Instead, there is a splurge in government spending, both Consumption and Investment. This is not sustainable with current economic policies and structures, and the government’s own forecasts show they have no intention of continuing beyond the election.

The British economic situation is chiefly characterised by prolonged stagnation. This is primarily driven by weak private sector investment which is creating falling living standards on broadening horizon. Structurally weak private investment has recently been temporarily boosted by tax breaks, as will be shown. The government response in an election year is to make up the shortfall in the hope it will take it through to the election date.

The medium-term stagnation of the economy is clear from the fact that real GDP is now just 1.6% higher than the pre-pandemic peak in the 3^rd quarter of 2019, 4½ years ago. At the same time, as a result of negative redistribution, from poor to rich, average living standards (GDP per head) are now 1.3% below their pre-pandemic peak. All of this is driven by weak business investment which is just 3.1% higher than its previous peak in the 3^rd quarter of 2016, 7½ years ago. It is clear from these data alone that the fundamental trends in the British economy have not been altered by the latest quarterly data.

Private Sector Remains in Recession

But the contrast between the claims of recession end and an accurate analysis becomes quite stark once the data is examined in greater detail and the factual trends are revealed. Grant Fitzner, the chief economist for Office for National Statistics (ONS) was widely quoted as saying the economy is now “going gangbusters”. The reality is quite different.

In the first instance, it is impossible to examine real trends by highlighting the change in economic activity from one quarter to the next. The year-on-year date is much more useful, because more accurate in that light. On that measure, real GDP rose by just 0.2% in the 1^st quarter of 2024, effectively a continuation of stagnation.

However, examining the sources of spending that comprise GDP shows a remarkable picture, completely undermining any idea that a self-sustaining recovery has begun. In effect, almost every major category of spending is contracting, the sole exception being Government spending.

Table 1 shows the changes in key components of real GDP in the 1^st quarter. For completeness the changes are shown on the basis of both quarter-on-quarter and year-on-year terms.

Table 1. Changes in Real GDP and its components in 1^st quarter 2024

	GDP	Household Consumption	Government Consumption	Investment (GFCF)	-of which Business Investment	Exports	Imports
Q-on-Q	0.6	0.2	0.3	1.4	0.9	-1.0	-2.3
Year-on-Year	0.2	-0.4	+3.7	-0.3	-0.6	-2.1	-2.7

 Source: ONS National Accounts, Q1, first estimate, Table C2

In addition to its role in the economy through Consumption, the government also plays a significant role in Investment, although usually Gross Fixed Capital Investment (GFCF) is presented as a total, with Government Investment included in that total. As can be seen from Table 1, Business Investment (which accounts for the bulk of GFCF) fell faster than total GFCF in the 1^st quarter.

In fact, general Government GFCF rose by 9.5% from a year ago in the 1^st quarter. This magnifies the role that the public sector has played in boosting GDP. Inevitably, it also reduces further the role played by the private sector in rebound in GDP in the 1^st quarter.

Chart 1. Below shows the recent trends in GDP and the main expenditure components. As can be seen, Business Investment has previously been stronger, based on tax breaks given to businesses which encouraged them to bring forward investment. This has now petered out and has become negative, along with other private sector expenditure (separately, both exports and imports are declining from a year ago). Only Government Consumption and Investment show a rising trend.

Chart 1. UK Real GDP and Expenditure Components, Q4 2022 to Q1 2024, % change y-o-y

These diametrically opposed trends in the public and private sectors becomes evident when examined in monetary terms. In year-on-year comparisons, real GDP rose by £1.169bn. The combined level of Government Consumption and Investment (GFCF) rose by £6.295bn over the same period. The private sector (including the statistically tiny non-profit sector) contracted by £5.126bn on the same basis. These are shown in Chart 2., below.

Chart 2. Real GDP and Public and Private Sector Sources, Q4 2022 to Q4 2024, change £bn

A Political Splurge of Spending

SEB has long argued for both an increase in Government Investment and Consumption as the alternative to austerity, although it has placed much more emphasis on Investment than others. That is because without an expansion in the means of production through Investment, it is not possible to sustain increases in Consumption. From ancient times farmers have understood that the greater proportion of this year’s crop preserved (Saving) for sowing next year (Investment) the greater the next crop will be, all other things being equal. Unfortunately, this is largely forgotten in modern neoliberal, and other Consumption-based economics.

But the conditions do not exist to allow this type of increase in Government spending to be sustained. First, from tax breaks to companies who respond by cutting Business Investment, to ignoring the effects of climate change, to stupid and reactionary spending on the military and deportation policies, a large proportion of the recent increase in Government Consumption is either wasteful or actually counter-productive. There is a huge misallocation of resources.

Secondly, given the acute requirement to adopt an Investment-led recovery programme which also tackles the crisis in public services, there is simply not the tax structure in the British economy to sustain this splurge in spending. The tax burden falls overwhelmingly on those who can least afford it, workers and the poor, and not on those who can, big business and the rich. This would need to be reversed to generate the tax revenues required.

Thirdly, the government itself does not intend to sustain either rising Investment or Consumption. The Office for Budget Responsibility (OBR) forecasts for government spending and its components are based on briefings from government departments about ministerial intentions. The government plans to cut both its own Consumption and Investment next year, if re-elected.

Excluding the welfare bill (which must rise because of an ageing population) the OBR estimates (pdf Table 4.4) that combined Government Consumption and Investment outlays will be cut in real terms by 7.1% by the end of the next parliament compared to the fiscal year just ended in April 2024. The government has no intention of sustaining these increases in spending and could not sustain them without a radical transformation of fiscal policy.

In 2014 and 2015 the Osborne/Cameron-led Coalition increased both government Investment and Consumption in the run-up to the 2015 election. It was a pre-election giveaway which worked, and they promptly slashed both once re-elected. Sunak and Hunt may be hoping to repeat the trick. The data certainly suggests that.

It would also be no surprise then to see the spending splurge continue all the way through to the election. But, extending unsustainable Government spending does not make it sustainable. Like any sugar rush, the comedown will only be harder the longer the binge continues.

The government is attempting to bribe its way to election victory, or least limit the scale of their losses. As this rise in spending is not sustainable, for the reasons shown above, the greater will be the next planned round of austerity after the election.