While I believe in Globalisation as the ultimate route to peace in the world, there are many thorny issues along the bumpy way. UK Economic policy has focused on Government deficit since the credit crunch, instead of the wider issue … our trade deficit. We can only "pay our way" in the world by keeping our external trade in balance. Failure to do this will ultimately result in the assets of the UK being owned by foreign countries!
Yesterday it was announced that PizzaExpress had been bought for £900 million by a Chinese Private Equity company. Sounds like nearly a billion pounds coming in to the country.
An interesting question arises. Is this an inward investment to the UK or a disinvestment by the UK?
It is very easy to put whatever spin you like onto this transaction. Our politicians will tell us that it is a sign of confidence in the UK economy … and well it might be. However I would like you to consider the following;
The UK is operating at a trade deficit as well as current account deficit of between £40 billion and £60 billion annually, the non trading flows … interest, dividends and royalties have moved into clear negative territory since 2012. In 1998 we had a small surplus on trade account and around £5 billion surplus on non trading flows.
This has had the result that we have a net indebtedness to the rest of the world rapidly approaching 60% of our gross annual consumption. This is financed mainly by the EU zone, as well as China and Japan who also have substantial annual trade surpluses with the UK.
We could just as easily say that the PizzaExpress deal amounts to a payment of part of our trade deficit. There has simply been an exchange of UK physical assets for some of the promissory notes we have issued in the past!
Are we worse off as a result?
Yes. For example if PizzaExpress were making a profit, of say 5% of their turnover, this amount would have flowed back into the UK economy by way of corporate taxes and dividends. From now on it will only be corporate taxes that flow back into the economy … and we know how easy it is to avoid corporate tax once cross border situations exist. Don't expect the Chinese not to organise the affairs of PizzaExpress so that there is very little corporate tax!
From now on 5p in every pound we spend at PizzaExpress will flow to China over time!
The position is probably far worse … PizzaExpress were owned by a UK private equity company who were probably charging PizzaExpress at least 5% of turnover for management, interest and other fees, so it may well be 10p in the pound going to China!
If you think this is an isolated instance consider the following;
Weetabix were bought by a Chinese company in 2012.
China already have a stake in one of our water utilities.
Popular belief is that the London property bubble is largely created by foreign demand, with the Chinese being at the vanguard.
or consider this from the BBC on 17th June during the Cinese Premier's visit to London;
"Sir Gerry said that his discussions with CDB (Chinese Development Bank) on Tuesday morning revealed that they were focused on three specific sectors.
"They are interested in nuclear, high speed rail and telecommunications," he said. "High Speed 2 was one of the things they specifically mentioned [in the meeting this morning]. Knowing the finance is available is an important part of any project. This is an important development."
Are we seeing early consequences of running our economy at a loss (International Trade deficit) for the last 14 years?