Two cheers for Mr Jenkins
BUSINESS VIEWPOINT PHILIP COLEBROOK
When President Johnson hurled his economy bombshell into world trade at the beginning of this year, it was estimated that Britain's balance of payments might suffer to the ex- tent of £100 million. Of this, the reduced flow of us capital investment, taken in conjunction with the likely increase in repatriation of profits by us subsidiaries here, may account for a little over £70 million. (The remainder is expected to result mainly from a reduction in tourist dollar earnings.)
How should Britain react? A vociferous section of the left wing of the Labour party is in no doubt. They would like to see a yet tighter clampdown on the export of private capital in conjunction with the liquidation of Britain's vast overseas portfolio investments (mainly in Canada and the us), the proceeds going to pay off our long-term debt to the IMF and other creditors. Mr Jenkins has refused to countenance this rake's-progress solution. To do so would aggravate our long-term balance of payments problem (we earned £160 million from overseas portfolio investment in 1965, and the amount was steadily increasing).
Besides vetoing this proposal, Mr Jenkins has taken a more positive step. At the end of last month he announced that he was going to release £15 million to £20 million of foreign exchange for the use of exporters who wanted to invest in overseas markets. There are still considerable restrictions. The capital outlay Philip Colebrook is chairman of the Pfizer Group in the United Kingdom and vice- priesicient Qf Pfizer lnternatipnol. , must be recouped and remitted home within eighteen months and the sums available will serve for sales and servicing organisations rather than for manufacturing plants. But this measure is a welcome, though slight, improve- ment.
But has this Government yet understood the direction which world trade is taking? We think in terms of our industries, and our economy, without realising that the very terms are becoming obsolete. It has been estimated, for instance, that £1,900 million, or 7 per cent, of 'le assets of non-financial companies in Britain are American-owned. In several in- dustries the proportion is in excess of 40 per cent. Are these our assets or theirs? Do we consider it dangerous that so large a propor- tion of `our' resources should be in foreign ownership? If so, how do We justify our own overseas assets, which amount to £17,800 mil- lion compared with liabilities of £16,400 million?
The truth is that while France, Britain, and now the United States, struggle to put their national economies in order, events are pass- ing them by. Today world trade is increasingly dominated by a few scores of multi-national companies which have made their market the world. Their activities are diverse—oil, vehicles and computers are among the more important —but their methods are similar. Instead of looking to exports as their main source of ex- pansion, they manufacture in the countries where their main selling effort is. They have learnt by experience that direct exports will not give them a stable and substantial share of a foreign market. They know, moreover, that it is essential for them to build up and maintain large sales of their products in foreign markets, since whatever its size, their home market can- nqt by itself support the huge R and D costs incurred by modern research-based industry.
As one of the technologically advanced nations, Britain has naturally been both a re- cipient and a provider of direct overseas in- vestment, and it is clear that, so long as no restrictions were placed upon her fulfilment of this dual role, she benefited enormously from it. Between 1955 and 1965, Britain's overseas investment income rose from £517 million to £1,003 million, leaving in the latter year a net £476 million after the payment of all dividends and interest to foreign investors with holdings in the United Kingdom. Since 1965, this trend has been reversed. While inward investment and the consequent outflow on current account has continued to increase, the Government has deliberately restricted the flow of British over- seas investment. The result is that the net investment income surplus, which hitherto has allowed us to pay off seemingly impossible tmF debts, is getting smaller. Should it dis- appear altogether, not all our efforts to in- crease direct exports will avail us much.
Furthermore, visible exports themselves suf- fer from this policy, as Mr Jenkins's belated and inadequate gesture acknowledges. What happens, in effect, is that our exporters are sent into action with one hand tied behind their backs. Debarred from setting up even skeleton organisations to supervise their overseas busi- ness on the spot, they have to struggle against German and American competitors who can point to efficient local servicing networks. Even if lucky enough to establish a foothold, the Luc exporter has no likelihood of being able to 'follow-through' with the direct investment which will inevitably be needed to underpin his position. It will take more than £20 million to put the balance right.
Eventually, if only to prevent Britain's finan- cial position from deteriorating further, Mr Jenkins will have to decide whether to check further inward investment or to allow out- ward investment to expand to a point where their effects roughly balance. Long-term there can be little question which any Chancellor would choose. To attempt overseas investments at the level required may, of course, be tem- porarily beyond Britain's capacity. But the question at stake is whether Mr Jenkins really
has a better understanding of the need to re- sume the outward flow than did his pre- decessor.
A more liberal investment policy would not only allow firms to compete on more equal terms but would also give exports a quite separate stimulus. According to the Reddaway interim report, fl(X) spent on direct overseas investment generates immediate direct exports of £9 (in plant, machinery, etc) and an annual continuance at a lower rate. But the over- riding necessity for a more liberal direct investment policy lies in its ability to reconcile two apparently conflicting economic needs: the need for companies in technologically advanced industries to develop world-wide markets to support their massive R and D expenditure; and the need of countries to keep their trade in balance by restricting the importation and encouraging the domestic production of manu- factured goods.
When this Government says that it is going to take steps to put us in substantial and en- during surplus, is it thinking of our total balance of payments from all sources? Or does it confine itself, as its past actions suggest, to visible trade only? If the latter, then it is pursuing an impossible dream. During the last 175 years Britain has shown a visible surplus seven times only. On the other hand, invisible surpluses have always balanced the visible trading deficit and nearly always government overseas expenditure as well. Direct overseas investment, like many other good ideas, origin- ated here. Today, when national protectionist policies make its tariff-jumping potentialities all the more desirable, we have made it almost im- possible for British companies to go ahead.
The knowledge and experience are there, but the purse-strings are closed. It is up to Mr Jenkins to open them.
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