The Buy British campaign isn’t as daft as it looks

The big reveal on the new UK government’s economics will have to wait for the Budget on 28th October. However, over the last three weeks, one defining characteristic of Labour’s new administration has emerged - a more explicit national interest approach to procurement, and the government’s Industrial Strategy. New Chancellor, John Healey, spoke last week of making it a “leading priority to back British, not just if possible but by design, so that procurement supports British jobs, British apprenticeships and British innovation”. These weren’t throwaway remarks. This was a clear message to public sector leaders on how he expects them to use the spending power of the state.

This is of course nothing new. Britain’s leaders from Ramsay MacDonald in the 1930s, to Harold Wilson in the 1970s, Gordon Brown in the late 2000s, and now the government led by Andy Burnham have channelled various versions of “Buy British”. All these leaders faced tenure-defining economic challenges and found solace in fusing nationalism with commerce. The narrow economics of this approach remain undimmed – a damaging disruption of the benefits of comparative advantage, and trade. But is it possible that global politics has now changed to such a degree that this trumps (pun intended) the economics?

One of the failings of economic theory can be when it defines the market failure in overly narrow terms. And narrowly defined, a renewed Buy British campaign is folly. Cheaper or higher quality products provided by the UK’s trading partners risk being rejected in favour of inferior domestic alternatives. Frictions to trade mean that in any given transaction the buyer end up with “less bang for their buck”, or perhaps better defined in a UK context as “less quality for their quid”.

So is this case closed? The UK government is on the wrong track and have set the conditions for stretched public sector procurement budgets to be spent even less efficiently? Not so fast.

A wider definition of the economic problem the UK government now faces is that the backdrop to global trade has decisively shifted in recent years. China has curbed imports as its surging exports move up the value chain, most visibly in Electric Vehicles and Frontier AI. The US has taken a mercantilist shift that will outlast President Trump, whilst the UK’s trading relationship with the European Union has irrevocably altered since Brexit. This is hardly a favourable backdrop for unfettered free and fair trade. Active industrial strategies with explicit national interest objectives are characteristics of the world’s three largest economies. As Canada’s Prime Minister, and former Bank of England Governor, Mark Carney, wryly observed at Davos this year the middle powers “must act together because if we're not at the table, we're on the menu”. He went on to note that middle power countries like Canada and the UK “must develop greater strategic autonomy, in energy, food, critical minerals, in finance and supply chains”.

Greater strategic autonomy is Davos-speak for not being reliant on less reliable trading partners for essential and critical goods and services. Even if such an approach would lead to overall losses in economic efficiency. Carney - who for a long time was a poster child for unfettered globalisation - has recognised and defined the change. Burnham and Healey are simply channelling the same justification. Whilst it would be easy to take a swipe at the UK government for not pushing back and being a free trade counterweight, the judgement in Whitehall - or perhaps in Heron House, the site of No.10 North - must be that the UK is insufficiently relevant across enough industries for such unilateralism to be effective.

There is also another aspect to this focus on sovereign economics. The global economy is going through a period of extraordinary technological change with nascent industries across the low carbon economy and AI sphere receiving extraordinary levels of public and private investment. The World Trade Organisation (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), has always had provisions to allow developing economies to support infant industry capacity. Article XVIII of GATT provides something of a theoretical safety blanket in a world where the US and China pay scant regard to the utterances of the WTO. For the UK, from a legal standpoint Article XIX - designed to avoid dumping of subsidised imports - provides the basis for intervention. The tension surrounding the impact of the likes of China’s Shein and Temu selling consumer goods on an unlevel playing field illustrates the problem of dumping. UK consumers like the choice and price, whilst the UK government likes the disinflationary impact. But the lack of a level playing field with UK retailers has triggered the closing of widely used tax loophole later in this Parliament. Similar actions have been taken by US and EU leaders.

You can already see evidence that this legal framework is influencing the language used by the new government. It was noticeable that Ministers talked of UK jobs and UK impact, not an explicitly favouring of UK firms. To date the ownership question, apart from in refence to Chinese ownership of British Steel, has been the dog that hasn’t barked. Newly restored Business Secretary, Jonathan Reynolds, speaks about the right ecosystem for firms to “scale and stay in the UK”. Labour has prioritised voluntary pension fund allocations, including the new Scale Up Fund co-ordinated by the British Business Bank, Sovereign AI fund, and balance sheets of the National Wealth Fund, UK Export Finance, National Housing Bank to backstop UK investment. Despite these efforts UK assets continue to fall into foreign hands at a rapid pace. It can be confidently predicted that when the corporation tax and capital gains implications of these moves become apparent the calls for more intervention will grow.

And this speaks to the route out of what looks increasingly like a costly protectionist cycle. If this a means to an end to provide a window to bear down on costly energy, labour, land and capital that has hampered competitiveness then this can be seen as a means to an end for middle power countries, including the UK, that got high on their ‘luxury beliefs’ during a period of low interest rates and favourable demographics. If, however, it is used to plaster over these failings - and allow them to endure - then it will be a costly mistake where taxpayers will again pick up the tab. When Andy Burnham lays out his ten-year vision in the Autumn, financial markets will be watching for clues on which of these paths he will take.