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Talking Manufacturing podcast: Bryan Gould discusses how an overvalued exchange rate makes the UK's manufacturing sector uncompetitive

In the sixth episode of Talking Manufacturing, former MP and member of the Labour Party’s Shadow Cabinet, Bryan Gould, talks about the impact of the UK’s exchange rate policy on the country’s manufacturing sector.

Based on the third pledge of the JMI Manifesto released in 2021, Bryan Gould and host Brendan Chilton discuss the UK’s current exchange rate policy, and why the pound must be lowered if the UK is to be competitive with the rest of the world. The pair also discuss how the UK economy compares to those of other economies, including China and Japan, as well as how Brexit has impacted our domestic manufacturing sector.

You can listen to the episode below. Episodes will be released monthly, so be sure to follow the podcast to be notified.


Brendan (BC): Hello and welcome to the JMI Podcast. My name is Brendan Chilton and I'm the director of the John Mills Institute for Prosperity, and in this series, we're going to be discussing the issues at the heart of the Institute, working through each of our manifesto pledges and inviting guests to bring their unique perspective on the place manufacturing takes in the UK economy, and in our society as a whole.

So, today we'll be delving into another issue facing the economy and one that has been spoken about for decades – the exchange rate. In particular, how a high exchange rate is said to make the UK's manufacturing sector uncompetitive with the rest of the world.

To talk through this issue, I'm joined by Bryan Gould, former Member of Parliament and member of the Labour Party's Shadow Cabinet. Bryan also served as the Labour Party's Campaign Director in the 1987 general election. Having co-authored a number of books including Call to Action with our founder, John Mills, he is no stranger to the exchange rate and its effect on economic growth.

Welcome, Bryan!

Bryan (BG): Well, I'm glad to be here. Thank you, Brendan.

BC: Thank you very much for joining us today, and we should point out you're joining us all the way from New Zealand too. So, lets kick off with an overview of the issue at hand. So, in a nutshell, why is a lower exchange rate beneficial for the economy in your view?

BG: Well, the exchange rate is the means by which we translate, for the purposes of international markets, all domestic costs. And that, in turn, reflects itself in the price we charge for the goods that we manufacture, and the argument particularly rates to manufactured goods, where individual components of the price structure are easily identified.

If we have an overvalued exchange rate, we're asking our international customers to pay more for our goods than they would ordinarily do. And if we don't, that will then inhibit the sales we can make – we make fewer sales, therefore we earn less revenue, we have less money to reinvest in new product and in improvements. And, the whole of our manufacturing economy, and that's the part of the economy that we're particularly concerned with, the whole of the manufacturing economy falls behind and cannot compete with overseas markets, either overseas or at home.

And, as a consequence, we keep running into balance of payments problems, and in trying to deal with those, we do various other forms of damage to our economy, and this all relates to an overvalued exchange rate.

And we have an overvalued exchange rate because there is always a tension between the interests of manufacturers and exporters, on the one hand, and the holders of sterling assets at home, on the other hand. And since the holders of sterling assets tend to be wealthy and powerful people, and the interests of the financial economy tends to be given priority, we constantly have fallen behind in terms of international competitiveness when it comes to selling our goods.

And we see that at present in the balance of payments deficits and in the shrinking size, comparatively speaking, of British manufacturing. By comparison, just to take the obvious example, with the German manufacturing economy, where they have been able to take advantage of the opportunities provided by the European economic community, whereas we have found it very difficult to compete in that very important market.

BC: Bryan, one of the big issues that always comes up when talking about having a competitive exchange rate policy is the consequences for inflation. I just wondered, you know, because it's often an argument that's put against us, if you could maybe offer some sort of rebuttal to the argument that such a policy would drive inflation.

BG: Well, the obvious answer, I suppose, is that if inflation arises, if your prices are rising faster than your production, than your output, and if you want to absolutely ensure that inflation remains a constant problem, then you would sit about, as our policymakers have done, in having too high an exchange rate and therefore restricting the growth in production. And if you have falling or stable production and you then also have rising prices, well, you have inflation.

And that inflation, over time, then erodes the ability you have to produce goods at internationally competitive market prices. And so, you get caught in a terrible circular bind, in a sense. Your productive economy is handicapped because you're overpricing your goods, but because you are not being able to sell those overpriced goods, the incentive to produce more is much reduced, and so therefore, the size of your reel, that is the manufacturing economy, tends to decline. And that has been the whole history of the British economy over decades. It's a problem that has not suddenly arisen, it's been around for ages.

BC: And I think it's had consequences, hasn't it. Because the brand made in China is known everywhere. You know, it used to be brand made in the UK and I think the implications for, sort of, our soft power in the world, by having our brand so diminished because we're not making and selling as much as we used to, that also has consequences for sort of our image around the world, our reputation around the world, and our power and reach, really.

BG: It absolutely does that. I can remember years ago when I was serving as the Commercial Secretary in the British Embassy in Brussels, going to a motor show in Brussels and being dismayed to hear Belgian citizens, who were visiting a motor show which was exposing cars made from around the European Union – it wasn't the European Union in those days. And I heard them saying to each other "comme ils se retard" as they looked at the British cars, they were already saying at that early stage, the British car industry is falling behind.

BC: Very very sad story of decline, isn't it? I mean, drawing on your experience in Parliament, could you tell us about your stance on the European exchange rate mechanism and what your biggest concerns were at the time?

BG: Well, you can hardly have imagined a more destructive combination of policies than to have an overvalued exchange rate, and then to go into a free market, or allegedly free market, where our competitors had all the advantages of a much-enlarged market for their manufacturers. And we were also expected to help them out with their costs, by supporting the common agricultural policy. It was a deal that no one in their right minds – and there were very few people who were in their right minds at the time, but no one in their right minds could possibly ever have signed up for such treatment.

It required us to give away the one competitive advantage we had, which was that we had access to cheap, reliable food supplies. We had to give that away by adopting and signing up for the common agricultural policy, which required us to pay twice over for expensively produced food in Europe – we had to pay first as consumers and then as taxpayers to support the great cost of the common agricultural policy.

And, at the same time, we had to, as we were giving up that competitive advantage, we had to open our markets to efficiently produced German, in particular, manufactured goods, which ripped the heart out of our manufactured goods.

And because we were so reluctant to accept the idea that the pound might have been overvalued, given our pathetic economic performance, we insisted on the whole nationalistic nonsense of saying Britain's prestige relies on the strength of the pound. In fact, it did no such thing, the strength of the pound was what was killing us, but we weren't clever enough to see that, I'm afraid, and those of us who did try to warn about this were poo-pooed and side-lined as anti-Europe, which was always nonsense. But that's the way it went.

It was also the case, of course, that the Labour government, and successive Labour governments, had always been spooked by the notion that they would be associated with devaluation. And from the time that Harold Wilson fought a long rearguard action against devaluation and eventually had to yield, from that time onwards, it was always feared by Labour governments that they would again be tarred with that brush.

And so, there was a huge reluctance on the part of the senior reaches of the Labour Party to even contemplate devaluation. And I saw that even when Labour was in opposition under Neil Kinnock's leadership, he absolutely prohibited within the Shadow Cabinet and in all policymaking bodies at the Labour Party at the time, there was to be no discussion whatsoever of devaluation. It was taboo, it was bad news, it could not be contemplated.

There was the whole episode, which you may or may not remember, when at a Labour Party conference, I can't quite remember the exact year, but at a Labour Party conference, Denis Healey had to break away and travel off to do some deals with the IMF, because of the parlous state of Britain's national finances because of the huge amount that had been spent in trying to shore up the pound. When Healey eventually got a deal from the IMF to bail Britain out, most people thought that what we'd done was to spend unwisely. And that we were, therefore, having to accept some generosity from the IMF, to allow us to keep going with a range of government spending.

In fact, the reverse was the case – it was not the spending that was costing us, it was the amount we were spending on trying to defend the pound in international markets. And when the deal was eventually done, even Healey himself would not understand the terms that he'd been offered. He was allowed to run the economy as efficiently as he possibly could, maintaining the exchange rate so as to maintain the competitiveness of British production, and that was specified by the IMF, and he was then to run domestic inflationary policies, in terms of something called the domestic credit expansion, which had nothing to do with exporting and the exchange rate.

And that gave him the freedom, if he'd seen the chance, to reinflate the economy and get it moving again, but at the same time to allow exports rather than domestic consumption to generate the motive power of that economic revival.

BC: That is very interesting indeed. One of the discussion points that used to feature quite heavily at the time, and really hasn't for such a long time, is the phrase "balance of payments". One thing that no economic commentator today ever refers to is the balance of payments situation, and I suppose it goes hand in hand with, you know, essentially how we hauled out our industry.

But you've spoken there about some of your frustrations in terms of the Labour Party, its inability to see the wood through the trees, as it were. I mean, what were your main frustrations with the government of the day while you were Shadow Secretary of State for Trade and Industry?

BG: Well, I suppose the period that I remember most clearly, would've been at an earlier stage when I was simply a backbencher, and I took an early interest in the exchange rate. And I might just pause for a moment to explain why. I'd been to a Commonwealth Parliamentary Association, a conference, if I recall correctly, it was in Mauritius, very pleasant it was too, but the whole of the discussion at the time was about the run on sterling, the pressure on sterling. Because that's all the news we got, we'd get little type written sheets of paper each day about the latest news, and it was always about "sterling's under pressure".

And it was only when I went back to Britain that I thought I'd better find out why sterling is under pressure because I'd spent my time telling all my colleagues that there was nothing wrong with the British economy and that the foreign exchange markets had got it wrong.

But it brought home to me that there was something about the exchange rate that we were missing. And I used to therefore, go in to table written questions, as one did, to the clerks of the house and I would try to write and have answered written questions about the government's exchange rate policy, and they were extremely reluctant to accept questions on that issue. The exchange rate was taboo, it was not really to be discussed. It nevertheless brought my attention, my efforts, to the attention of two treasury ministers, Joel Barnett and Robert Sheldon, and they both found ways of indicating to me that they were sympathetic to the pressure I was trying to put on about exchange rate policy – and I found that that was extremely interesting.

The problem was that in the treasury itself were a couple of economists, Alan Budd and Terry Burns, and they called themselves the international monetarists, and they purported to be able to explain why a high exchange rate or lower exchange rate would influence the rate of inflation.

And in their view, and this was an astonishing bit of self-revelation, they said if you have a high exchange rate, it makes imports cheaper, and that therefore drives down the cost of domestic prices because domestic manufacturers have to match those lower prices. They completely escaped their notice that it also meant that our manufacturers were not able to sell profitably at those prices – the prices established by an overvalued exchange rate. And I always thought this was an astonishing acknowledgement, perhaps unwitting, of just how erroneous was the whole approach to the exchange rate.

BC: And, unfortunately, that orthodoxy is maintained today. Just looking at New Zealand for a moment, you're joining us from New Zealand. What's the sort of issue of the exchange rate there? Is it as prevalent an issue as it could be here in the UK, or do people take it seriously as an issue? But what's the feeling down there?

BG: I guess at the moment we are in a situation where a Labour government is doing it pretty tough, as it were, with worldwide inflation, with the Covid pandemic. And we've had a couple of very damaging cyclones recently, which is something completely unknown to me until now. Therefore, the exchange rate tends to be seen not as significant in its own right as a determinant of market behaviour, but simply as an indicator of how the New Zealand economy is seen by others.

And so, if the exchange rate against the dollar, and that's the one that they're particularly interested in, the US dollar, that is. If that exchange rate weakens, that is seen as an adverse judgment on the management of the economy by today's Labour government – its significance as a factor in international markets is largely overlooked. And I think that's true in many other countries, no doubt Britain as well.

BC: Looking then, perhaps if we can, to China, the big dragon in the room, as opposed to the elephant in the room. It's often seen as a success story of, you know, what a low exchange rate can do, it's got a huge manufacturing sector. Obviously, you know, they've got other variables such as a huge population, vast resources, but could that sort of trajectory of much higher growth be replicated in the UK through a lower exchange rate? Is there a model we should be following? Or can we look to them for any sort of example?

BG: Well, I think what you say about China is quite right, in the sense that they're no doubt appreciating currency, although slowly appreciating, I think they're doing no doubt what they can to slow that process. But that has been overtaken by the sheer size and growth of the Chinese manufacturing economy. And so, in some senses, their exchange rate is reflecting a huge manufacturing explosion and enlargement.

Perhaps a better example for us to look at is that of Japan, which in some senses was a somewhat smaller China, but at a much earlier stage. And they were much more, if you look at some of their writings at the time, and even today, at some of their very good economists, they were very aware of the importance of the exchange rate.

Particularly for Japan, you know, recovering from the atomic bombs and so on, they did a remarkable job in rebuilding an economy in a very short time, and they did that by quite deliberately holding back the growth on their exchange rate so that it had always lagged the growth in their output.

And that was a sensible thing to have done, and they had plenty of room in which to move because their potential was good enough, and they found ways with profitable export returns funding them, they found ways of reinvesting in Japanese industry, and we see the results today. And it's something we could certainly learn from.

BC: As we approached the end of the podcast, Bryan, I just wanted to ask you – the UK over the past few years, has had a pretty turbulent time. We've had a series of prime ministers in very short spaces of time, we obviously had the European referendum and then we had the pandemic.

There's a sense at the moment, I think, in the UK, that all is not well and things seem to be falling apart a little bit. Do you see opportunities for UK manufacturing, for trade, sort of, post-Brexit, post-pandemic for the UK?

BG: Well, I do, yes. I think there are always opportunities for people who've got the right goods at the right price, and that's what we should be focusing on. I mean, the markets will reveal themselves if you've got the right product, and that's what we should be trying to achieve.

It really astonishes me. I don't say Brexit has been a wonderful success, but it always astonishes me that The Guardian, a paper for which I have great regard, but that the Guardian is so keen to say how dreadful Brexit has been.

What a pity that some of those people didn't understand how dreadful the whole thing was from the very outset. It's not Brexit that has caused the problems, it was the original membership. When we were following an economic policy, which priced our goods out of the market, because we were so attached to maintaining the strength of sterling, even though we were facing a highly competitive new market and we were prepared to do that with one hand tied behind our backs by cutting off our own supply to cheap imported goods, from New Zealand and elsewhere, I might just say in passing.

Then facing up to fierce competition from a newly vibrant German manufacturing industry, which had the whole of Europe, you know, available to us, without tariffs or other difficulties. If people had seen what was in store from the original joining of the European Union, we might be in a better place now and not have needed Brexit, and we'd be in a much stronger position if that had been the case.

BC: Bryan, thank you so much for your comments and your contributions today. Thank you, especially, for joining us, I think it must be about eight o'clock in New Zealand now.

I think it's going to be very interesting to see how these things will unfold in these rather turbulent times. But, whether this government, or perhaps the next one, will look at the exchange rate as a key issue to driving growth and improving our manufacturing sector, only time will tell. But thank you very much again for joining us.

BG: Not at all, I just wish I felt a little more optimistic on that score. Thank you for having me on and listening.

BC: Not at all, thank you very much indeed!

Thank you again to our guests and thank you for listening. For more information on the Institute and what we do, visit

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