Why is Julian Glover so miserable about imported trains?

A familiar gripe from an unexpected source. The Guardian’s Julian Glover, usually a sensible liberal voice in the wilderness, thinks it’s bad that the new Thameslink trains are to be Made in Germany rather than Made in Derby.*

There are two objections to make to his protectionist position. The obvious one is from the consumer perspective: why should already hard-pressed passengers and taxpayers have to pay more just so the trains can be made in Britain? Why should the interests of Bombardier and it’s workers be put above those of the passengers who have to squeeze into Thameslink trains for their daily commute?

The second objection is more interesting. The American economist David Friedman wrote this classic fable showing why restricting imports of Japanese cars would not be good for America:

Growing Hondas. There are two ways we can produce automobiles. We can build them in Detroit or we can grow them in Iowa. Everyone knows how we build automobiles. To grow automobiles, we begin by growing the raw material from which they are made – wheat. We put the wheat on ships and send the ships out into the Pacific. They come back with Hondas on them.

From our standpoint, “growing Hondas” is just as much a form of production – using American farm workers instead of American auto workers – as building them. What happens on the other side of the Pacific is irrelevant; the effect would be just the same for us if there really were a gigantic machine sitting somewhere between Hawaii and Japan turning wheat into automobiles. Tariffs are indeed a way of protecting American workers – from other American workers.

(I first came across this argument in Steven Landsburg’s excellent book The Armchair Economist. Read a review of the book by Monevator.com here.)

The argument is simple: in order to import German trains, we have to export something in return (it’s now too late to demand them as payment in kind for Germany’s reparations for World War I). In order to export goods or services to Germany, we have to produce them here – and so employ people to do that work.

Assuming that the entire £6 billion price tag of the Thameslink Programme is the cost of the trains (which it isn’t), there are plenty of ways Britain can “grow trains”. We can assemble them in Cowley and Sunderland: Britain exported £23 billion worth of motor vehicles last year. We can brew them in Tadcaster and distil them in Scotland: foreigners downed £5.6 billion worth of British beverages in 2010. We can even create trains in law firms and in film studios: Britain exported services worth £10.6 billion to Germany alone in 2010. We exported £159 billion worldwide. (Sources: Goods exports from HM Revenue & Customs, services exports from the Pink Book 2010, page 132.)

From our standpoint, “distilling and filming trains” is just as much a form of British production as building them in Derby. If the government decided to court popularity by insisting on the Thameslink trains being built in Britain they would create jobs (and profits) at Bombardier but destroy them in every industry that exports to Germany. And we would get worse value for our money. That would be reason to be miserable.

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*Actually, some of the components will be made in Hebburn, Tyne and Wear. The Department for Transport estimates that this will create 600 jobs.

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9 Responses to Why is Julian Glover so miserable about imported trains?

  1. Fred says:

    The USA is a bad example. They have strict “Buy America” rules explictly designed to ensure that public funding only goes to trains (or anything else) which are built in the USA. You want to do business there, you open a factory there. And US firms export to the UK, because we have no competing industry left.

    A number of European countries support local manufacturing, whatever EU theory says. When Siemens won a huge order to supply trains to Brussels they were obliged to subcontract to a factory in Bruges because the Belgians thought it was desirable to keep “their” factory in business, rather than try to export chips and mayo (or whatever) to pay for future German trains. Look at the lengths the French are going to in an effort to stop Eurostar (in which the French state owns a maor stake) from using German Siemens trains rather than French-built Alstom ones.

    And I’m not sure that selling beer to Germany is going to be a great business model…

    • Niklas Smith says:

      Thanks for your comment. As you point out, most countries try to monkey about with heavy industry because their big and visible things that politicians can point to and say “I got Company X to build this here, re-elect me!” But I would still say that the “Buy America” policies and the like are pretty dumb (especially given that the Obama administration wants to increase American exports…).

      What it boils down to is this: protectionism favours domestic producers who sell mainly to the domestic market over domestic producers who sell mainly abroad. In other words, it robs Peter to pay Paul – and both Peter and Paul are British.

      And while we’re not big on making trains, we have a lot of highly competitive manufacturing. Just look at those goods export statistics I link to in the post: while our top export product by value (petroleum and petroleum products) is a commodity, the rest of the top ten exports are all manufactured goods, often near the top of the value chain (motor vehicles, pharmaceutical products, power generating machinery, electric machinery and appliances and so on). Low value goods like textiles, paper and plastics are near the bottom.

      P.S. Surely selling beer to Germany is a great business model – think of the demand from the Oktoberfest alone! 😉

  2. Fred says:

    I’m not convinced that people at Oktoberfest are going to buy British export beers, rather than beer from local producers working to their local 16th-century quality standards…

    And is there not a problem when we let every industry go to the wall on the assumption we can pay to import from more protectionist countries by exporting something else to them? Eventually, we run out of the something elses.

    • Niklas Smith says:

      As I was trying to demonstrate, we are not “letting every industry go to the wall” – even if you only count manufacturing we still have lots of highly competitive industry in Britain. I see no problem in concentrating in the industries were best at and letting other countries do the things they can do better. We all win from this exchange, which is why there have not been any big reversals in trade liberalisation since the end of World War II.

    • Unfashenomic says:

      The possibility that every industry might “go to the wall” violates the law of comparative advantage, and will never happen. Even if the Germans had absolutely higher productivity in every single good, the British would have a relative advantage in some, making trade beneficial to both. This insight is not intuitive, which is why it usually takes economic education and working through the math before people will believe it’s true. But it is.

      The only sure-fire way to make every industry fail is to get government involved with them. Protectionist barriers do far more to hurt an economy’s future than trade.

      I really enjoy the parable of growing Hondas (and also encountered it in The Armchair Economist). Great blog!

      • Niklas Smith says:

        Thank you for your comment and your kind words 🙂

        Comparative advantage is such a fundamental principle that sometimes I feel that everybody should be taught about it at school (though I’m not usually in favour of prescriptive national curricula!).

  3. Good post. His tweet surprised me a bit too.
    But then I thought that perhaps it was Julian-the-train-geek tweeting, thinking about this (apparently) lovely train factory and being sad it missed out on a big contract.

  4. Adam Corlett says:

    I really enjoyed this article – thanks! – but a couple of questions have occured to me since I read it.

    Firstly, isn’t it fair to say that though we may essentially trade goods of equal value for trains, not all goods & services are equally labour-intensive? As an extreme example, the export may be the work of a few investment bankers, compared to an import representing scores of manufacturing workers. So the idea that America could have 10 farm workers instead of 10 auto workers is perhaps misleading. While trade may be balanced in terms of money, one side may come off better in terms of employment, and that’s perhaps what the protectionist (rightly?) cares more about.

    Secondly, isn’t it also true that trade often isn’t balanced?

    My knowledge of economics clearly isn’t as good as yours so I look forward to your response!

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