The Daily Telegraph - 19.08.2019

A

s I have repeatedly

argued, trade deals are not

an essential prerequisite

for a successful trading

relationship, as evidenced

by the fact that despite

there being no US-UK trading

agreement, the US is our largest single

export market. Nevertheless, they can

bring some advantages and, as we may

be about to lose some or all of the

benefits of our current trading

arrangements with the EU, the UK

Government is keenly investigating

the possibility of securing trade

agreements with other countries. Far

and away the most important of these

is a possible trade deal with the US. The

Trump administration has recently

made some encouraging noises about

the prospects.

Yet critics have suggested that even

if we were able to secure a deal with

the US, it would not amount to what it

is cracked up to be. They point out

that not only is the US economy

approximately seven times the size of

the UK’s, but because of our precarious

economic and geopolitical position

after Brexit, we will be a desperate

supplicant, whereas the US will regard

a trade deal with us as a “nice to have”

rather than a “must have”. Accordingly,

there will be a massive imbalance in

negotiating power and we will be

lumbered with a very bad deal.

This argument is misconceived. For

a start, the US has concluded several

trade agreements with countries

whose economies are a good deal

smaller than the UK’s. These include

Canada, Australia and many more. Yet

it seems pretty clear that they have

benefited from their trading

arrangements with the US.

But there is a more important issue

at play here. To listen to most members

of the commentariat, as well as most

politicians, you would get the

impression that trade negotiations are

all about trying to gain maximum

“access” to the other party’s market,

while conceding as little access as

possible to your market, in order to

“protect” domestic producers. So,

having to open up your market to

imports from the other party is to be

viewed as some sort of negotiating

defeat or, at the very least, as a

concession that you have had to grant

in order to gain access to their market.

Britain should be more careful

playing hardball on US trade

The most important

thing is to secure

cheap US imports.

Our negotiators

should seek

reciprocity, but

should not be

playing hardball to

the extent of

jeopardising a deal

REUTERS

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bootle

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tttle

T

he flotation prospectus
that office space provider
WeWork submitted to
the New York Stock
Exchange last week
contained an impressive
display of linguistic acrobatics in
making the company sound like a
spiritual movement, and not a
business that leases desks.
But perhaps the most telling in the
220-page document was WeWork’s
claim to be selling “space as a service”.
The phrase is used 40 times in the
stock market document, and is central
to justifying the $47bn (£39bn) it has
been privately valued at.
“X as a service”, describing a trend
towards something being rented
rather than sold, is one of Silicon
Valley’s favourite phrases. Companies
like Adobe and Microsoft once sold us
CD-Roms containing a computer
program; today they sell “software as a
service”: charging
us a monthly fee
to access those
same programs
over the internet.
Businesses
used to buy
expensive
computer servers
to store and
process their
data; now
“infrastructure as
a service” lets them rent out server
space from an enormous Amazon data
centre hundreds of miles away.
The business model is one of the
tech industry’s most successful:
revenue comes in monthly, and
customers pay more as they grow.
So it is unsurprising that WeWork
might want to piggyback off the
phrase. “Space as a service” certainly
has a better ring to it than “Renting
out offices and subleasing them to
start-ups at a slight markup”, which is
how one might describe what the
company does in layman’s terms.
WeWork is hardly unique in
succumbing to the lure of thinking it’s

‘By far its

biggest cost is

renting and

operating the

office space

that tenants

occupy’

We Wo r k

isn’t a tech

company – it

just dresses

like one

James

Titcomb

es

mmb

a tech company. Beyond Meat, the

vegan meat substitute company that

has been one of the year’s hottest

flotations, talks about its “plant-based

beef, pork and poultry platforms”.

The founders of Sweetgreen, a San

Francisco-based salad chain, said in an

interview last year that it will be “more

than just a restaurant ... evolving into a

food platform”. Others such as Blue

Apron (meal kit delivery) and Stitch Fix

(clothes shopping) have also been

valued, at times, like tech companies.

Being perceived as a tech company

has clear benefits: tech stocks tend to

command significantly higher

earnings multiples than those in other

industries, and investors are more

willing to put up with continuing

losses and an absence of dividends. So

it is unsurprising companies that are

not traditional tech firms might want

to position themselves in this way.

In a sense, the question of what is

and isn’t a tech company is

meaningless. No company is immune

from the changes brought by the

internet, the smartphone and

automation. Major oil companies,

supermarkets and banks all have

thousands of people working on

software. As does WeWork.

But in another way it does matter.

Tech companies command the

valuations they do because of their

enormous profit potential. Typically,

they are characterised by high fixed

costs, largely research and

development costs, but low variable

ones: the iPhone might be expensive

to design, but it is cheap to

manufacture. Thus, each additional

gadget Apple sells is extremely

profitable. This is even more true of

companies such as Google, which

spends billions on developing its

search algorithm, but little on actually

delivering search results to each

additional user.

It is hard to see the same being

true of WeWork. As the company’s

listing document details, by far its

biggest cost is renting and operating

the office space that its tenants

occupy. And unlike a piece of

software, which costs the same to its

creator whether it sells one copy or a

million, WeWork’s costs grow as its

revenue does. Despite its revenue

roughly doubling in the first half of

this year, its “contribution margin” – a

measure of the profit from each

additional tenant, fell from 12pc to

10pc. The tech companies that

WeWork is trying to rub shoulders

with tend to enjoy margins several

times higher than that.

Add in all of WeWork’s other costs,

and the company made a $900m loss

in the last six months. It is an eye-

catching figure, but losses on their

own should not trouble investors:

many companies grow out of them.

WeWork may do the same, but it

seems unlikely to ever do so with

Silicon Valley-style margins.

If its float is a success, more

companies may try to convince

investors that they are tech

companies, rather than merely

dressing like one. It is not a tactic that

should be rewarded.

This mindset clearly sees the gains

from trade as accruing largely or

entirely to producers. Yet this is

completely against the whole thrust of

classical economic theory. The end of

economic activity is, after all,

consumption, not production. Equally,

exports are not, in themselves, what

we should be trying to secure. Rather,

they are the price that we have to pay

for imports.

If you took the “productionist” view

you would regard the policy known as

unilateral free trade (UFT) as

absolutely bonkers. Under this policy,

countries adopt tariff-free trade of

their own volition, thereby willingly

opening up their markets to imports

from abroad without simultaneously

securing access to overseas markets.

Yet this is the policy that has been

adopted by a number of countries,

most notably by Britain in the 19th

century after the abolition of the Corn

Laws in 1846. More recently, Australia

and New Zealand have unilaterally

reduced tariffs across a broad swathe

of goods without demanding (or

securing) reciprocal treatment from

other countries. They have seemed to

do pretty well as a result. Meanwhile,

Hong Kong and Singapore have

thrived under a policy of zero tariffs on

virtually all imports.

I don’t want to give you the

impression that I think UFT is the

first-best policy for Britain in today’s

circumstances. The first-best policy is

one that secures trade agreements with

as many of our trading partners as

possible. But the gains to our exporters

from these agreements are typically

exaggerated, while the benefits of a

policy of UFT are widely

underestimated. The reason is that a

huge proportion of the gains from

trade occur through being able to

secure imports at a lower price. This

both displaces more expensive imports

and puts competitive pressure on

domestic producers to increase their

productivity or be forced to move into

other sectors. (Of course, in the

short-term this normally causes

disruption and some sectors may

require government help to adjust).

So the supposedly disastrous,

“lopsided” trade deal that many people

fear the US will effectively impose on

us could end up being a jolly good

thing, and not that much worse than

the best sort of trade deal we could

achieve. The most important thing is to

secure cheap US imports.

This is particularly true in current

circumstances. If we leave the EU

without a trade deal then we will be

imposing tariffs on our imports from

the EU, presumably at the rates laid

down by the Government in March.

How these arrangements work out and

with what advantage to ourselves

depends to some extent on what

Continental producers decide to do

when faced with these tariffs. Will they

pass them on fully to UK consumers, or

will they absorb them in reduced profit

margins? It is in our interest that as far

as possible they do the latter.

This result would be greatly

encouraged by the flow of cheap

imports from America. If, in the face of

these cheaper imports, Continental

producers tried to pass on the full

effect of the UK’s new tariffs they

would risk losing market share

considerably. Accordingly, cheaper

imports from America are likely to

have the added benefit of keeping

down the price of imports from the EU,

as well as from the rest of the world.

Of course our trade negotiators

should seek to get reciprocity from the

US. But they shouldn’t be playing

hardball to the extent of jeopardising

the signing of an agreement. Like all

trade negotiators, ours have to bear in

mind that much of the benefit of

tariff-free trade flows to consumers in

the form of cheaper imports. Precisely

what they fear as the problem happens

to constitute a large part of the solution.

Roger Bootle is the chairman of

Capital Economics

[email protected]

‘Cheaper imports from

America are likely to ...

keep down the price of

imports from the EU’

‘It should be clear that

infrastructure investment is

a multiplier and each pound

spent drives more growth’

Business comment

Chancellor must be bold with

his infrastructure spending

T

he UK infrastructure

sector is in desperate

need of clarity and

conviction, which is

causing uncertainty at

an unprecedented

level. It is understandably hard for

senior leadership and boards to

commit to the investment we need to

grow. That lack of confidence is

putting our world-leading delivery

expertise at risk.

The sector contributes to 7pc of UK

GDP, a figure that dramatically jumps

to 30pc if you take into account the

economic benefits it creates for the

entire economy. Despite this, investors

are being even more cautious with

whom they invest; whether that’s in

specific projects or companies that

wish to innovate to bring new, better

solutions to market.

Our supply chain, which is already

being hit by forthcoming reverse

charge VAT changes, is nervous about

committing to delivering the big

projects that will make or break our

economic performance over the next

decade. The UK’s construction

industry is hugely biased towards

small businesses and sole traders;

businesses that live and die based on

the next month’s financial

performance. In those circumstances,

uncertainty is a disaster – and so you

can forgive our sector for being

nervous about what the future holds.

The Chancellor has now announced

a short spending review, due by

September, which will shape our

public finances through the next

12 months and beyond. Although it is

likely that it will be overshadowed by

the continuing brinkmanship over

Brexit, this is a crucial juncture for the

UK economy; and certainly a big

moment for Sajid Javid.

The decisions made now will define

his tenure as Chancellor. Will he be

bold and brave and put forward a

positive, pro-growth agenda? Or will

he hedge his bets? If he does have the

courage to stand strong and be bold,

he has in his hands a huge opportunity

to provide industry with the

confidence it desperately needs to plan

for the future. That means a tangible

commitment to infrastructure

spending – a clear statement that the

days of indecision and prevarication

are done, and that Prime Minister

Johnson’s administration wants to

build a genuine legacy for the future.

The National Infrastructure

Commission has argued for a

guarantee that we’ll spend 1.2pc of our

GDP every year on delivering the

infrastructure we need. That 1.2pc

would secure jobs across the UK,

ensure that our infrastructure

continues to improve – and crucially, it

would unlock the growth that we’ll

need to make our post-Brexit economy

a success. For my business, it would

mean that we have the confidence to

continue to invest in our people, our

projects and the research and

development we need to deliver

world-beating innovation. Beyond

that, it would send a clear message to

the world about the Government’s

ambitious vision for the future.

By now it should be clear that

infrastructure investment is a

multiplier and that every pound spent

drives more growth. A guaranteed

annual spend of 1.2pc would recognise

that. But that 1.2pc by itself will not be

enough. Alongside that guarantee, I

would also argue that we need to

commit to the big projects that will

shape our country for decades to

come. At the moment a huge question

mark hangs over our ambition.

Northern Powerhouse Rail, HS2, the

third runway at Heathrow and our

nuclear power pipeline are all crucial

programmes that have the potential to

deliver huge benefits to the economy.

A commitment, up front, to deliver

all of them would be transformative

for UK industry. At a stroke, it would

give us the confidence that we need to

make the decisions that will unlock

our future growth. Combined with a

guaranteed infrastructure spend every

year, it would ensure that our post-

Brexit prosperity was set in stone.

I don’t envy the task that our new

Chancellor faces. Delivering a

spending review that will be resilient

in the face of any potential Brexit

outcome is a challenge beyond most of

us. But without clarity and conviction,

there is a risk our sector’s expertise

and delivery capacity will waste away.

The signs are positive. It is clear this

Government recognises infrastructure

spending is an important element of

any positive vision for the future.

However, with a no-deal Brexit on the

horizon, we need to recognise that any

big spending commitments are a risk.

Committing to the big projects and a

guaranteed annual spend won’t be

easy – and it certainly won’t be

popular with parts of the Tory faithful.

Let’s all hope that our new

Chancellor is up for the challenge.

Mark Reynolds is chief executive

of Mace

Sajid Javid’s short spending review will shape our finances over the next year or so

mark

reynolds

REX

28 ***^ Monday 19 August 2019 The Daily Telegraph

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