Book review: Manufacturing Matters: The Cornerstone of a Competitive Green Economy
‘Manufacturing Matters’, a recent report from the Institute of Public Policy Research, advocates for the development of critical manufacturing sectors and products in the UK to support a competitive green economy. There are five steps in the argument:
Boosting competitiveness of the UK’s manufacturing sector is central to reviving UK economic growth.
The net zero transition presents a perfect opportunity.
Britain already has comparative advantage in one in three green products, scattered around the country. The UK is particularly strong in making products and components used for monitoring, measuring and analysing things, with applications in industrial decarbonisation, the electricity grid and renewable energy. Britain is also strong at making electric trains, essential for green transport.
The UK government should adopt a ‘pathfinding’ economic strategy, to choose which green industries to focus on, considering: the potential size of the domestic market; the potential size of the global market; existing strengths in green manufacturing; green potential of existing industrial capabilities; and supply chain resilience.
Based on this framework, Britain’s immediate green manufacturing priorities should be: wind manufacturing; heat pumps; and green transport
The IPPR report points in the right direction in relation to linking the need to facilitate the transition to net zero and, simultaneously, addressing the structural problems of the UK economy by selecting target sectors.
However, there are problems with the pathfinder approach.
First, the analysis is carried out by identifying a series of green products where the UK might have a comparative advantage. The approach is attractive because of its potential impact to contribute to the energy transition and to achieving net zero. But also, because it may help to address one of the most economic and socially sensitive issues affecting the UK: the decline of manufacturing in its economic structure.
The report relies on the use of Balassa’s (1963) Revealed Comparative Advantage (RCA) indicators to identify wind turbines, heat pumps and green transport as the critical choices for specialisation. But the RCA is calculated with reference to the rest of the goods produced in the UK and not with respect to the rest of the global output. In this sense, this RCA would only be valid if the UK were a closed economy. Once it is considered that more efficient producers of these products are available worldwide, it is hard to understand how the UK could be a competitive producer. For example, there are basically no UK companies among the top global producers of these products. Production of these products is dominated by large American, German, Chinese, French and Japanese corporations.
Second, the pathfinder strategy, that the IPPR advises to use to identify the industries to focus on is also problematic. The first point to assess is the ‘potential size of the domestic market’, which it does not require much analysis to characterize as small, considering the large minimum efficient scales involved in these sectors. Fortunately, this is fixed in the second point ‘potential size of the global market’, making the first point irrelevant. The bottom line is that any manufacturing strategy must focus on the possibilities of supplying the global market first, and the domestic market as a subsidiary. The UK should eventually focus, to take one example, on producing heat pumps for the whole world market, not only for the UK.
This pathfinder strategy also lacks the innovation dimension, critical when dealing with technologies that are in constant evolution and exhibit a high degree of technical obsolescence. In this sense, it is essential that there is a good volume of UK research and development in these technologies to put its producers ahead of the innovation curve. Otherwise, the comparative advantage can vanish if UK producers are catching up rather than leading the introduction of innovations.
A new report from the Tony Blair Institute for Global Change, on Reimagining the UK’s Net Zero Strategy, picks up this point on innovation. It argues that
‘Innovation in technology and business models is ultimately the route through which we can contend with the domestic and international dimensions of the challenge to deliver net zero. Our strength as a country in the fight against climate change does not solely lie in our own emissions reductions; it also lies in the spillover effects our actions could produce. . . With more than $1.8 trillion being spent on the energy transition globally last year – a number that is growing rapidly year on year – the UK could reap crucial economic advantages from leading innovation and fostering future clean-technology companies.
This requires an update of the underpinning strategy and policy landscape for the delivery phase:
Enhancing the UK’s net-zero legislation for the delivery phase to align with clean-technology innovation, consider whole-system impacts and drive international delivery.
Improving coordination and responsiveness of government delivery to make government a platform for clean-technology innovation and delivery.
Creating the conditions for transformative climate R&D by aligning innovation funding with how innovation happens and supporting commercialisation, treating data as a competitive asset and setting up a new AI and materials-science national laboratory.
Reforming regulatory regimes to enable innovation in clean technology and make the regulatory system more agile and responsive to technological change.
Using government funding and regulatory powers strategically to create and shape the markets for clean technologies by updating the retail and wholesale energy markets to align with the physics of the system and technologies, and introducing new tailored market-shaping and funding schemes.
Increasing UK climate leadership globally by leading international cooperation on research and innovation and instigating deployment and innovation of clean technology everywhere for maximum impact.’
Putting these two reports together suggests that the UK’s green industrial policy should still be based on assessing competitiveness, but in both static (e.g. be global competitive) and dynamic (e.g. addressing innovation) dimensions.
It is unlikely that the UK would ever present a comparative advantage to produce most of the green goods required to support its net zero transition. This does not mean, necessarily, that the UK cannot participate in their production. Following Ricardo’s principle of specialisation, the UK’s transition to net zero could be achieved by importing more efficient green products produced somewhere else and specialize (although, making more efficient and greener the necessary production processes) in other products or services that could be inputs or intermediate goods in the production of green goods. In fact, the structure of its productive factors indicate that the UK has a comparative advantage in the provision of business, professional and financial services, including environmental services and green finance. In this way, UK value added could even be embedded in the green products imported to facilitate its transition to net zero.
UK-generated innovation can also increase the value added embedded in green products produced elsewhere by linking UK universities and research institutions with manufactures and provide the necessary support and framework. In fact, there is a great opportunity for the UK to support developing countries in the acquisition of the capabilities to produce these green products, combining UK research and development and services. In this way, a three-cushion cannon could be achieved by continuing the commitment to support global development, making more efficient and cost-effective the production and, eventually, acquisition of green goods and increase UK value added and income in the process.
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Max Mendez-Parra is a Principal Research Fellow in the International Economics Development Group at ODI - the global affairs think-tank.
Perspective pieces are the responsibility of the authors, and do not commit Climate:Change in any way. Guest posts are published to explore issues or stimulate debate. Comments are welcome.