What Liz Truss got right

Soon after Kwasi Kwarteng’s not-so-mini-Budget, I found myself in conversation with former aides to David Cameron and Boris Johnson respectively. They were both irritated by the way Liz Truss was being praised as a ‘true Tory’ in some Conservative circles, compared with her more cautious predecessors. One of them remarked, as the other nodded, that people will soon ‘find out there’s a reason why we didn’t do those things’.

Sure enough, the mini-Budget collapsed spectacularly and cost Truss her premiership. One of her mistakes had been simply to reject what had gone before, rather than to try to understand why compromises had been made. Her year-zero approach was one of the things that led to her being ejected from office so quickly. So it is worth taking some time to reflect on the things Truss was right about and that the new government should seek to build on.

Truss often stated when she was foreign secretary that the UK needed to do more to reduce its dependence on autocracies. She argued that this was particularly true of those countries that sought to overturn the existing liberal international order.

Vladimir Putin’s invasion of Ukraine demonstrated the dangers of relying on an autocratic regime for vital supplies. Europe has paid a heavy price for its dependence on Russian gas; and even countries such as the UK, which did not import significant amounts, have been hit by the supply crunch as the Continent scrambles for alternative energy supplies. The Bank of England calculates that the increase in energy costs this year will be greater than during the oil shock that followed the Yom Kippur War in 1973.

Energy security and green policies are often seen as being conflicting interests; but in the medium to long term, they are allied. If the UK is to become energy independent, a far more consistent position on nuclear power is required. The temptation to abandon nuclear power whenever it looks like other forms of less secure energy might be cheaper will have to be resisted.

It is not just reliance on Russian energy, however, that could cause problems for western economies. Since its entry into the World Trade Organisation in 2001, China has become a critical part of global supply chains, a fact that could not be missed during the Covid pandemic. It can also be felt today, as Beijing’s zero-Covid policy continues to cause disruption to the supply of goods in western markets.

Western countries would be wise to reduce their dependence on China, especially now that under Xi Jinping the Chinese Communist party is becoming more autocratic, more aggressive in its approach to world affairs and less predictable. The temptation to continue to rely on China is strong. In Germany, for example, Olaf Scholz, the Chancellor, has allowed a Chinese company to buy a major stake in the port of Hamburg. The economic connections between the two countries are so strong that nearly half of German manufacturers have a Chinese link in their supply chains.

In the UK, attitudes to China have changed – partly as a result of Covid, but also because of Beijing’s dismantling of the ‘one country, two systems’ agreement in Hong Kong. The decision by the new security minister Tom Tugendhat to move to close all Confucius Institutes in the UK makes it very clear that the government views Chinese state activity in the UK as a problem. (It is vital, on the other hand, that these institutes are replaced with other ways of learning Chinese. Given China’s geopolitical importance, it is deeply worrying that the Foreign Office only trains on average 14 members of staff per year to speak Mandarin fluently.)

Washington’s attitude has also shifted, which has influenced Britain’s position. In 2020, under considerable pressure from America, the UK insisted that all of Huawei’s kit must be removed from the 5G network. Now that Washington is banning the export of high-end semiconductor chips and equipment to China, it is clear that the decoupling between the US and China is only going to accelerate.

If this is going to be the new 21st-century reality, the question is how to adjust to it with minimal costs. There is no doubt that the turn-of-the-century model of globalisation had economic benefits and that the integration of China into the world economy was one of the factors in the decade of non-inflationary constant expansion.

Perhaps the best answer to this problem is ‘friendshoring’. Instead of attempting to restore domestic production at great cost to consumers, western countries should build supply chains that involve like-minded allies. This would make them less vulnerable to politically motivated disruption while maintaining some of the advantages of globalisation’s economic efficiency. This approach would put a premium on the G7 cooperating with each other. The impending US/EU spat over electric vehicle subsidies is a reminder that even this is far from a given.

The integrated review, the UK’s national security strategy, is being updated. The last iteration, published last year, started to reflect the fact that trade is political and that governments must take an interest in the resilience of corporate supply chains.

The effort to reduce dependence on autocratic states while at the same time preventing this effort from being used as an excuse for protectionism will be delicate and difficult. But Truss was right that this is essential for the country’s security and prosperity.