Kwasi Kwarteng: Britain needs a manufacturing base - and pure free markets cannot be relied on to deliver it

Kwasi Kwarteng was Conservative Candidate for Brent East at the General Election of 2005, Chairman of the Bow Group in 2006 and a candidate for the  London Assembly in 2008. He holds a doctorate in Economic History from Cambridge University, has worked as an investment analyst, and is currently writing Ghosts of Empire, a book about the international legacy of the British Empire.

It’s not often I find myself agreeing with Lord Mandelson, but during his interview on the Today programme yesterday morning he did say something with which many Conservatives would agree: Mandelson said that he thought we should, as a nation, have a manufacturing base, as well as a financial one.

This is common sense. We tell people in tough times to learn new skills. We tell communities to diversify their sources of income. This also applies to countries. Sovereign nations like Kenya are constantly being told by the IMF not to rely on coffee or a few basic commodities, but to develop other industries and revenue streams.

What is the situation, however, of our own country, UK plc? We were the manufacturing nation of the world in the nineteenth century, but towards the end of the twentieth century we became reliant, to a very considerable degree, on financial services. Where did that lead us?

I believe the City of London to be one of the greatest achievements in the history of capitalism. We should all be proud of our traditions of finance. Yet saying this does not mean we should neglect manufacturing.

For too long, a crude free market ideology has prevailed in which badly run companies like British Leyland were allowed to disappear. Tory figures like Lord Heseltine, who famously boasted about intervening “before breakfast, at lunchtime, in the evening”, were lampooned by the high priests of free trade.

Kwasi Kwarteng was Conservative Candidate for Brent East at the General Election of 2005, Chairman of the Bow Group in 2006 and a candidate for the  London Assembly in 2008. He holds a doctorate in Economic History from Cambridge University, has worked as an investment analyst, and is currently writing Ghosts of Empire, a book about the international legacy of the British Empire.

Yet the “high-priest” approach, the dogma of free markets, is actually alien to the Conservative tradition, and has rarely been practised by Conservative governments, anywhere in the world.

There is no country more committed to Free Market capitalism than the United States. Yet a short look at US history shows how the country was in fact built on the tariff and on protectionism. “I am an old tariff Whig”, declared Abraham Lincoln in 1860. He knew what he was talking about. He knew that after the 1812 War with Britain, the politicians of the North put a tariff on British goods and kept our manufactures out. They protected their industries based in the North Eastern States. Southerners complained about expensive machinery and favoured free trade so they could buy cheaper British machines, with which to develop their agriculture.

The North knew better than to give in to these demands. They built the industrial base which would ultimately defeat the South in the Civil War. It was this same industrial muscle which was crucial in defeating Nazi Germany in the Second World War. What they don’t tell you at school was that this industrial base was built behind a wall of protection. Indeed, before income tax was introduced in the US in 1913, the tariff provided the Federal Government with 50% of its total revenue.

Ronald Reagan himself, the apostle of Free markets, put a 50% tariff on Japanese motor bikes to save Harley Davidson in the early 1980s. Obama’s Government has bailed out the appallingly incompetent Ford and General Motors to preserve a US presence in the biggest manufacturing industry in the world, the car industry. They were right to do this. Shutting down General Motors and Ford would be the death of US auto manufacturing. Keeping them alive ensures that the US can participate in the biggest growth market in the world, as tens of millions of aspirational Chinese and Indians buy cars in the coming years and decades.

Sarkozy tells Renault not to spend its bailout money on a plant in Poland, but to spend it in France. The Chinese keep the Yuan artificially low in order to preserve the competitiveness of their exports. The Germans and Japanese did the same thing from the 1950s to the 1970s. Obama puts a tariff on Chinese tyres.

No one tells you this, but the Detroit automakers had a market share of 90% of the Japanese car market in 1930. If you had been in Tokyo at that time, you would only have seen American cars. This did not change because of “market forces”, or Adam Smith’s “invisible hand”. It changed as a result of deliberate policy. The Japanese literally chucked General Motors and Ford out of Japan in 1939. They then built their car industry from scratch, with a very liberal dose of help from their government.

This is economic reality, as opposed to the stuff you learn in the textbooks. No doubt, as an undergraduate, I could trot out the facts about the repeal of the Corn Laws, or preach about Ricardo’s Law of Comparative Advantage. I was an orthodox free trader. But the real world is different from the textbook world. Economic history runs counter to the glib theories of Milton Friedman. The countries which rail against protectionism, like Japan and the US, have often been its most successful practitioners.

Of course, we can’t mention the P-word, Protection, in polite company, but everyone is doing it. They always have. Once we recognise this, we realise that it makes sense to harness our excellent universities and scientists and our manufacturing traditions to preserve and grow our industrial base. Nothing could be more conservative than that.