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Artillery Row

Britain must develop economic resilience

The Houthis have exposed our devastating economic insecurity

The Red Sea has become so critical to Britain’s economy that Grant Shapps is willing to start World War Three to defend it.

Speaking shortly after another Houthi attack on commercial shipping in the Gulf of Aden recently, Shapps said Britain is “as committed as ever” to maintaining security in the region. The Defence Secretary claimed that “it is our duty to protect freedom of navigation in the Red Sea” and that the Houthis must “cease threatening the global economy.”

This proclamation came shortly after Shapps, reflecting on the turbulence we have seen in the region over the last few months, said that Britain was entering a “pre-war world” that will see us at war with China, North Korea, Iran, and Russia by the end of the decade.

While his bellicosity is absurd if not deranged, Shapps is right to emphasise the economic importance of the Red Sea. In 2021, almost a quarter of all Britain’s imports came from Asia, with around 13 per cent coming from China alone. With the Red Sea and Suez Canal now unviable for commercial shipping, that cargo will now have to be rerouted around the Cape of Good Hope, adding 6,000 nautical miles to the journey and delaying delivery times by up to a month. This will inevitably mean fewer goods arriving in Britain and, as a result, higher prices.

While the government is currently boasting about halving inflation, Britain’s exposure to the Red Sea now means a new wave of price rises is practically guaranteed. Indeed, the economist Andreas Steno Larsen found that there is an almost direct correlation between international freight rates and goods inflation, with about a five-month delay.

In other words, whenever shipping costs start to spike — as they are now because of the violence in the Red Sea — inflation follows a matter of months later. Britain should start bracing for a bout of inflation at least as bad as that which followed the coronavirus pandemic.

Shapps has used this economic context to justify Britain’s participation in US-led strikes against the Houthis and rattle what’s left of our rather weak sabre. But has Shapps or anybody else in the government considered how exactly Britain’s economy came to be so exposed to events in a stretch of water over 3,000 miles away — and considered why that might not be a particularly good idea?

Britain’s deindustrialisation … has made the country’s economy more vulnerable to the volatility of an ever-more dangerous world

There’s no inherent reason why a small island in the northeast Atlantic should’ve become so dependent on a tiny stretch of water in the Middle East. It’s a result of deliberate policy decisions stretching back to the deindustrialisation of the country, which took particular hold under Thatcher in the 1980s but which had started before, and the subsequent decision to shift whole swathes of British manufacturing to Asia and other parts of the developing world.

The economic orthodoxy continues to be that this is simply the nature of a modern, globalised economy. However, quite aside from the social havoc that rapid globalisation has wreaked, it’s become increasingly clear in the decades since Britain’s deindustrialisation that this has made the country’s economy more vulnerable to the volatility of an ever-more dangerous world.

Of course, there is little political will to address the issue or even admit that this might be a problem. Last month, Tata Steel announced it will be closing its remaining blast furnaces by the end of the year. The company was allowed to collapse despite the fact this will make thousands of people unemployed and leave the country reliant on India and China for this essential commodity.

Ignoring the point that domestic steel production would be critical if Shapps was serious about bringing Britain into a global conflict, this is only going to make our economy even more exposed to the Red Sea. The shipping route is used for as much as half of all Indian exports, and 60 per cent of Chinese exports to Europe. How does this make sense given we have just found out how unreliable Red Sea routes can be?

Of course, it wouldn’t be possible to eliminate the risks entirely, nor desirable to cut out many of the imports we receive from Asia and other markets. However, the current situation in the Middle East is demonstrating the limits of globalisation and how fragile economies become when they constantly outsource critical industries and simply assume everything will be fine. We saw this during the pandemic, too, when the government was forced to scramble for medical supplies from abroad just as demand began to surge.

What could be done? It seems pretty straightforward logic to say that producing more goods at home, rather than importing them from distant markets, would mean there’s less reason to fear the economic consequences of events that we cannot control in some of the world’s most turbulent regions. This is easier said than done, of course, but the government could start by not allowing what’s left of British manufacturing simply to crumble and disappear. Longer-term, politicians and central bankers should be thinking carefully about how a chronically overvalued pound sterling, for example, could be a barrier to British exports and encouraging our ever-widening trade deficit. 

To argue for establishing a proper industrial policy, reshoring critical industries, or addressing Britain’s chronic balance of payments deficit is dismissed as terribly protectionist and outdated. However, as geopolitical tensions continue to rise — everywhere from Eastern Europe to the Middle East, to East Asia and beyond — it’s time to consider how Britain can make its economy more resilient and less vulnerable to the increasing number of global risks. Rather than trying to start a war at a time when we have few ships and not enough personnel to man them, the government should instead be thinking about how to make sure our economy is never so exposed again.

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