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4.30 pm

Dr. Vincent Cable (Twickenham): The motion helpfully identifies a real problem. I broadly subscribe to the view that the British economy is generally in good shape in respect of inflation and growth in output and employment. However, it is clear that in the parts of our economy involved in international trade--notably manufacturing, but also agriculture, trade and services such as tourism--there is great distress, some of which is typified by the events at Llanwern today. It is right that we focus on that. I agree with the motion's highlighting--albeit in a rather exaggerated way--of the problems and costs of regulation.

None the less, aspects of the motion puzzle me. The punch line is a call for an industrial strategy. That sounds like the right hon. Member for Chesterfield (Mr. Benn) during his heyday in the 1960s; if there was a problem in industry, one created an industrial strategy. One of the better lessons of the Conservative years is that industrial strategy is created by companies and not by Ministers and Government officials.

I am also puzzled by the fact that the motion specifically highlights the loss of 300,000 jobs in manufacturing industry. That invites the obvious riposte: according to House of Commons figures, 3 million jobs have been lost in manufacturing industry since 1979. That process is continuous; it is not inherently a matter to be alarmed about, because 4 million jobs have been created in other sectors. Because of productivity growth, manufacturing employment in most industrial economies is declining. The matter is important only if one believes that manufacturing is fundamentally different from the rest of the economy.

I think that the first person to advocate that theory with any conviction was Marx; he believed that manufacturing creates surplus value and that services are rather parasitic.

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However, we no longer believe that argument these days--I should certainly be surprised if such a belief was held by a right-wing party. It would surprise me if the Conservatives held that view--especially given the fact that the share of manufacturing in the United States economy is about half that in Japan and no one could seriously suggest that the United States is a less successful country than Japan.

Manufacturing is important in this context because it is the largest sector of our economy involved in international trade. It shares its problems with farming, tourism and other traded sectors. It would be helpful if we could get away from the mechanical distinction between manufacturing and other parts of the economy. I often refer to the Twickenham shipbuilding industry, because although we have no shipyards in Twickenham, much of the value-added in the industry is created in London suburbs by designers sitting at computers. With information technology, manufacturing and service industries have become completely interconnected.

My starting point is slightly different from that of the Conservatives. In many respects, the British economy is doing relatively well--certainly in regard to the past and to comparable economies--but it is extremely unbalanced: one large sector, involved in international trade, is seriously under-performing. We can see that in various ways.

The investment indicators for industry from the CBI and others suggest that manufacturing investment declined by about 15 per cent. last year. That has not remotely been cancelled by this year's moderate recovery. The CBI's evidence on investment intention shows a continued negative outlook in industry. Although there is plenty of evidence that output growth is relatively strong in the whole economy, it is below 1 per cent. in manufacturing, and has been for the past few years.

There are two basic reasons why the traded bits of the economy are under-performing in many ways, and they have already been mentioned in the debate. At the centre of the Conservative party's argument is the idea that the problem is entirely caused by regulation. Clearly, that is an issue, but if regulation is the problem, why is not the same pain being experienced in other parts of the economy? After all, the working time directive and similar regulations apply across the board, but we are discussing the fact that a key sector of the economy is under-performing relative to the others. Nevertheless, it is useful to reflect on some of the problems that regulation brings.

I have an example that explains, with some clarity, why the issue exists. Last week, I was approached by representatives of the compressor industry. They are the people who make pneumatic drills and equipment with pneumatic action--an important part of industry. Workers are genuinely concerned about a health problem in the industry. If people work with high-pressure drills, they experience extreme vibrations, which affect the nervous system and their hearing. Clearly, strong health protection is needed. As a result of that problem, the Health and Safety Executive recommended that a regulation should be introduced to put a specific quantitative limit on the amount of vibration that could occur.

Full of enthusiasm, the Government ran off to the European Union and got all the other member states to sign up to a directive, binding across Europe. It was then

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pointed out that they had gone about the directive in an unhelpful way and that the same objectives could be achieved at far less cost through a different way of defining the regulation. Obviously, they had not consulted the companies.

The British officials set off, chasing around Europe trying to withdraw the directive that they had initiated, but I understand that it is now too late and the directive will come into effect, unnecessarily costing industry about £2 billion over 10 years. The symptoms are always there--no consultation and a lack of proper impact assessment--although in this case a study showed that the costs outweighed the benefits by about 7:1. However, such things happen every week, which is a real problem.

Reference has been made to the climate change levy, but it has not yet had any impact because it has not yet happened. We are stuck with a rather sterile controversy, because the argument is that some people want to do nothing about climate change and the specific proposal of the climate change levy. The Government know that there are other ways to act and that if they had introduced, by stages, an upstream carbon tax, applied throughout the economy, related to the carbon content of product, they could have achieved all their objectives without the discriminatory burden on manufacturing industry, but they pressed ahead with it.

I acknowledge that there are regulatory problems and costs, which are often insensitively applied, but none of us would seriously argue that that is why manufacturing and the rest of the traded bits of the economy are now struggling in a way that the service sector is not. What is the problem? As the right hon. Member for Wells (Mr. Heathcoat-Amory) and the Secretary of State for Trade and Industry briefly suggested, the problem relates specifically to the workings of the exchange rates, but not, as the Conservative spokesman said, simply to the euro-sterling exchange rate. Korea is the steel industry's main, efficient competitor, and there has been an enormous divergence between the appreciation of sterling and the depreciation of the Korean won. That is why Korean steel massively undercuts British steel; it is largely due to the enormous movements in the exchange rate.

Mr. Bercow: The hon. Gentleman wants to talk about the fluctuations in exchange rates and the effects thereof, but he cannot be allowed so speedily to skip away from the subject of regulation. Given that more than 99 per cent. of British companies employ fewer than 100 people, that they account for 57 per cent. of the private work force and that they produce two fifths of national output, can he tell us whether he signs up to the deregulatory agenda that the Conservative party has announced? In particular, can he tell the House, with all the authority of the Liberal Democrat Front Bench, what assessment he has made of the American Regulatory Flexibility Act and the Small Business Regulatory Enforcement Fairness Act?

Dr. Cable: I am sure the hon. Gentleman is well read and has digested my report on unnecessary regulation. It has been endorsed and enthusiastically supported by the Federation of Small Businesses, no less, not just because it sets out an appropriate deregulatory agenda, but because it does something that he and his colleagues rarely do, which is to be specific. My party has identified 25 major categories of unnecessary regulation. Clearly, regulation

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is needed to protect workers, consumers and the environment, but some of it is unnecessary, and we have tried to identify where that is the case. I thank the hon. Gentleman for allowing me to highlight that matter.

The enormous divergence in exchange rates is not simply a matter of the respective rates of the euro against the dollar and sterling. Figures published by the Organisation for Economic Co-operation and Development show that sterling has appreciated since, I think, 1995, to the extent that Britain has now lost competitiveness, in terms of the unit cost of labour, by about 45 per cent. However, Korea has gained in competitiveness by about 20 per cent. The eurozone as a whole has gained in competitiveness by 15 or 20 per cent. Those are enormous margins. No conceivable improvement in productivity at a factory level will offset that, no matter how hard working the employees or inspired the management.

The central issue is how we make exchange rates stable so that we stop the divergence, and some hon. Members have touched on that matter. That consideration goes to the heart of our position on the European currency. When we argued two years ago that British industry would incur costs because of the lack of clarity on economic and monetary union, we were laughed at and told that we were crying wolf. However, we now have concrete examples to support our stance.

The Nissan management made it clear that its decision to locate new production in either Sunderland or France will be heavily based on being confident that Britain will enter the common euro area. It specifically stated that any industrial incentives or grants will be a secondary consideration. More important in the long term was the statement by Ford of Europe a couple of weeks ago in which it said that unless it is clear that Britain will be part of the European monetary union area by 2006, it will not remain in this country. That employer directly provides 50,000 jobs, and that number can be doubled or trebled if one considers its subsidiary activities. Those are clear and explicit statements by important manufacturers.

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