Margaret Thatcher and Deng Xiaoping were both on a mission when they came to power within months of each other at the tail end of the 1970s. Thatcher wanted to reinvigorate capitalism in Britain, while Deng launched a programme of reform and liberalisation that he called socialism with Chinese characteristics.
Since then, the economies of Britain and China have been transformed, but in different ways. China was essentially a peasant economy when Deng took control, but it has since become an industrial powerhouse, while Britain has ceased to be a major manufacturing player and instead became a country dominated by services.
As Keir Starmer may have noticed on his visit to China last week, somewhere along the way the two countries have swapped places. In the early days of Deng’s reforms, there was a concentration on mass-produced goods where China’s much lower labour costs gave it a competitive edge. That is no longer the case, with China the dominant producer of electric vehicles and vying with the US in artificial intelligence.
To be sure, there are many good things about Britain, just as there are many bad things about China. Yet if the comparison between China’s manufacturing prowess and the service-sector dominated British economy makes Starmer uncomfortable, then so it should. China is what a country that still cares about making stuff looks like.
The prime minister’s trip to China has quickly been overshadowed by the latest revelations about Peter Mandelson, yet there are three important lessons from the visit. The first is that manufacturing matters. Britain will not prosper again without rebuilding its productive base. The alternative to a strong and thriving manufacturing sector is not an economy dominated by highly paid “knowledge workers”, but a low-tech service sector in which finance dominates.
Services now account for about 80% of the British economy, 10 times the size of manufacturing. Yet it is much harder to improve the efficiency of a labour-intensive service-sector job than it is a job in a factory. Britain’s weak productivity performance since the financial crisis of 2008 should not really come as that much of a surprise.
The essence of Thatcherism was that market forces should determine which businesses thrived. If Britain excelled in financial and business services, then so be it. That’s what the country should concentrate its efforts on, while other nations made the ships and the machine tools. Yet services are not separate from the productive side of the economy; rather they depend on machinery, transport systems, data infrastructure and energy systems. If a country doesn’t manufacture these things, then it has to import them, which is precisely what Britain does. Exports of services do not compensate for a trade deficit in goods that has persisted since the early 1980s. What’s more, the dangers of an over-reliance on imported manufactured goods were brutally exposed during the pandemic of 2020 as global supply chains froze up.
The second lesson is that, despite the dismal record of the past 50 years, it is not too late to rebuild Britain’s industrial base. This is a rich country with abundant reserves of untapped talent. Denmark’s successful wind-turbine sector shows that small, rich western countries can still enjoy industrial success. It is over-pessimistic to assume that the manufacturing ship has sailed and that the best Britain can do is rely on the City and the few remaining pockets of industry, such as pharmaceuticals.
The final lesson from Starmer’s visit to China is that rejuvenating the manufacturing sector will require a colossal effort. Clearly, Britain is never going to be the workshop of the world again – as it was in the 19th century – but even the more modest target of raising manufacturing’s share of the economy from 8% to 10% of gross domestic product would be no mean feat. Industrial strategies designed with that in mind have come and gone with depressing regularity.
Charting a course and sticking to it for longer than a couple of years matters. A dedicated economic ministry with the power to face down the bean counters in the Treasury would help greatly, because investment – public and private – will be vital. Any industrial strategy will struggle unless the right foundations are put in place, so it is hard to see how manufacturing can be rebuilt without a thriving domestic steel sector.
Problems are immediately apparent. Even if the UK puts serious effort into building industrial capacity, won’t the new factories face being strangled at birth by already well-established overseas competitors? How, for example, could a UK company making electric vehicles prevent itself being undercut by cheaper Chinese models?
The answer is that there is no way of preventing such an outcome without active steps being taken by the government. This could involve stipulating a domestic component for goods sold in Britain. It could involve a “buy British” procurement policy. It could mean subsidies and tax credits for UK manufacturing plants of the sort Joe Biden introduced in the US. There is a whole range of measures – from tax to tariffs – that developing countries regularly use to protect their infant industries as they find their feet.
Despite becoming the world’s second biggest economy, China still picks winners and has strict controls on capital. If Britain is ever to emerge from its post-industrial decline, the same approach would not go amiss. The bottom line is that to rebuild manufacturing Britain has to see the world through the prism of a developing country not a developed one.
Larry Elliott is a Guardian columnist
