Obama, growth, and manufacturing

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A late night last night but in the end Obama's victory seems conclusive enough.

A lot of analysis now is going to swivel to what this might mean for growth with G20 finance ministers reportedly begging the U.S. this week to do something to avoid the impending 'fiscal cliff' in January 2013. I'm sure none of those finance ministers see any irony between advocating avoiding fiscal tightening in the U.S. while simultaneously holding the course on austerity at home...

But another aspect of the election that deserves some consideration over here is Obama's stance on manufacturing. While I'm no political analyst, it does seem that Obama's support for the sector may have been an important factor.

Not only does his car industry bailout in 2009 seem to have gone down well in Michigan (home of Motor City - Detroit) but the key swing state of Ohio includes many industrial centres in the north, areas that also benefitted from the bailout and where voters delivered the coup de grace to Romney's hopes of securing 1600 Pennsylvania Avenue.

Rising inequality in the U.S., coupled with the steady decline in middle-class manufacturing jobs, may have also acted to help make the candidates' positions on manufacturing a more salient issue for the electorate.

But Obama is about more than just the auto bailout for U.S. manufacturing. This Washington Post article from July looks at the development of the president's increasingly strident support for manufactuing.

Policies the president is now advocating include:

Tax breaks to encourage investment (he already temporarily increased depreciation allowances in 2010/11);

Loans to help exporters;

Tougher trade rules enforcement;

Investments in clean energy and 'high tech' clusters.

Much of this has some currency on this side of the pond too. 'Tax breaks' isn't quite how we'd put it but we certainly do see a role for tax reform to help promote stronger investment in UK manufacturing.

Loans to help exporters - in fact loans generally to help firms, especially SMEs - is certainly topical here made particularly urgent in the wake of the financial crisis.

Investments in clean energy and 'high tech' clusters are central to the industrial policy debate. Vince Cable has certainly set out a role for targetted technology investment and sector strategies. For our own part, while we definitely see an important role for technology investment, we are more focused on horizontal policy levers e.g. tax, regulation, skills where improvement is probably more important for the prospects of our sector.

The one point on Obama's list that stands out as being challenging to accept is the 'tougher trade rules enforcement'. The reference here is surely to China towards which both Obama and Romeny have made bellicose noises in this election. This is a tricky line to walk.

While an argument can definitely be made that China may engage in some activities (particularly holding the value of its currency down) that potentially unfairly support their manufacturing exports, the advantage of China as a manufacturing location is slipping.

Wage growth in China is very strong (perhaps 15% pa) and challenges protecting intellectual property and ensuring quality standards are maintained are making some companies think twice about relocating production to China.

And exports to China are growing strongly - UK exports are 22% up in the year ended 2012q2. This growth is especially important when some of our traditional European markets are shrinking.

So the real risk here is that Obama potentially stokes some kind of trade war with China, putting this important source of growth for the UK at risk.


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