How to be a middle power in a superpower world. With Jenny Bates

0:00Think of the global economy as an increasingly dangerous ocean. The US is a pirate ship. The Chinese are driving a warship. The EU is a great slow merchant ship working out how to arm itself. And the UK is the awkward drifter, previously tethered to the EU, now unsure what to do with itself. But time is ticking. And the water is getting choppy. And as the water gets choppier, the other bigger players are increasingly turning to their economic weaponry. The Canadian boat is talking a good game about the middle powers working together. But what does that mean in practice? Can the UK do anything other than dodge the biggest players' cannon fire?

0:48Do middle powers have any power at all?

0:58This is The Economics Show with Samaya Keynes. This week, I am talking to Jenny Bates, a very senior civil servant in the UK government, but speaking in her personal capacity today. So Jenny spent five years as director of the UK Foreign Office and has just done the Haywood Fellowship at Oxford University, where essentially she got to think big thoughts about Britain's place in the world and how it should adapt to a changing geopolitical seascape. Jenny, welcome. Thank you very much for having me. Okay, we always start the show with a question where the answer has to be on a scale of 1 to 10. So on that scale, how scary is the world for the UK right now?

1:41So 1 is great, calm, harps playing in the background. 10 is terrifying, panic stations freak out. I would say about a 7. So above 5, but not yet panic stations. I think there are things we can do to manage some of the risks that we face. as we enter this new period. Okay, but thinking about those threats, what would you say the main ones are? So one, obviously, is the weaponization of economic levers, the use of economic linkages and the way that they're being used for wider foreign policy ends. And so there you mean Trump's tariffs, China threatening to withhold exports? Those kinds of things, exactly.

2:20But I also think there are some other challenges that if you're the UK trying to navigate this, you've got the rise of China and its economic model. It's a different kind of economy and it's not become the same as the Western capitalist economies and that's disrupting some of the system. And you also have other countries pursuing more interventionist economic policy, the rise of industrial policy, the move away from market mechanisms and all of those throw up challenges for the way the UK has done its economics. So just on that, you mentioned China and the rise of its economy and its sort of different economic model.

2:58And obviously, one of the biggest economic stories in the world right now is its massive manufacturing exports. But the UK is mostly a services-based economy, right? We import a lot of manufactured goods. And arguably, one of the challenges is that we don't really have the same interests as the EU, the US that have much bigger manufacturing bases. Is it really as much of a challenge for the UK as those other powers? I think that's a really good question. What I've come to the conclusion in my work is that it is true that China poses less of an immediate competitive challenge in some of the things that the UK is very good at, whether that's financial services or some of those other sectors.

3:43But China's rise and its scale is disrupting many of our partners. It's changing the way those partners are behaving. And it's disrupting the kind of rule system, the way that the trade system has operated. There's, of course, the question in the medium term, and my project was trying to think 15 years, whether China would become more of a competitive challenge in some of the things that we're good at today. And that's certainly possible. And just returning to the US, I mean, obviously tariffs have been in the news, but there does seem to be increasing fear in Europe about the US weaponizing some of its areas of dominance.

4:19You know, if the US wanted to hobble our economy, shut down the payment system, shut us off from cloud computing, we would be completely screwed, right? Well, the US is still the largest economy in the world. We're hugely integrated with it in the UK. So were the US to decide to weaponise its linkages, that would have very significant effects, not just on the UK, but on a range of other partners. I mean, we haven't seen that happen to date. I think, though, the bigger question is about how the US sees its role in the world. What is it that it's trying to do? What are its objectives? And that's something that has been structurally changing underneath.

5:01I guess my question, though, is whether the UK has experienced the same increase in fear as seems to have been experienced in the EU when it comes to concerns that it could shut off the payment system. I think there was an instance of sanctions that essentially completely cut off some people from having a functional life. And that really freaked out some European policymakers. and whether, you know, here the perception is, ah, they're our buddies, they wouldn't do it to us, or actually there is the kind of, that change in attitude towards the US. I don't know that I can say that there's been a particular change in attitude in the UK specifically to the US in that way, but what I'm advocating in my work, and I know it's something you've put in your book, is I'm saying, and it's quite an unusual thing, I think, for someone from my background, I was trained in economics, I started in the Treasury and I'm effectively saying the UK needs to work out where it's got leverage and know how to use it.

6:01And I'm not targeting that a particular partner. I'm just saying that the UK needs to be able to do that. I also think we need to try and think of ways of applying leverage working with others. And so I talk in my work about that, about how you could partner up with other affected countries. Yeah, I guess sometimes I detect a certain unwillingness of folks kind of very close to policy making to call out specific partners, right? There's almost a sense that, you know, if you say, well, we've got to develop this weapon to defend against coercion from the US, then that might itself kind of elicit retaliation, which would be a problem.

6:41Do you think there is the kind of, you know, sense from the bigger players that they don't want the smaller players developing their kind of economic defences? I think that's a very good question. I think some of it is it's just good diplomacy, not to necessarily specifically target another partner. And probably there's a bit that you're getting from government officials. Some of it is the challenge is we don't know what world we're going into. And by definition, those strategies are not particularly country specific. They are about having a range of tools in your toolkit and flexibility in how you deploy them.

7:18So I think it's bit that. In terms of whether the other partners care about what middle-sized countries are doing, I think they pay slightly less attention, actually, to what the middle powers are doing. It's one of the interesting things. There's a lot of focus on the big powers. So I'm not sure it's always fronts in their minds. Okay, let's talk about these middle powers. So we've got Mark Carney, Canada's Prime Minister giving some very good speeches but the pessimistic take is okay these middle powers are by definition less powerful than the big guys they are terrible at cooperating with each other and so the idea that you're going to get this coalition working together is just fanciful and realistically all the middle power can do is just find a big power and cling on to them and sort of hope for the best what is your take can the middle powers do anything constructive together are there historical examples of them doing that yeah so I'm much more on the optimistic side but within reason of what success is so I say in my paper that I don't think you can define the test of success as being equally powerful as the big powers that's an unrealistic I'm not saying you're saying that but some people have in their minds that the goal for middle powers is to create some kind of block that's equally powerful as the US or China.

8:40I think a more realistic question is, can we achieve things in the real world? Can we affect change in the real world? And I think we can do that. An example that I talk about in my work is Urenco. This is quite an unusual cooperation between the UK, Germany and the Netherlands. And it was set up in the 1960s as a mechanism for sharing a particular kind of nuclear technology that the Americans were not willing to share, even with allies, at a time of US strategic competition with Russia. It's still in operation today. It has developed that and sold it to the world. And it's the basis for the UK having a strategic advantage in nuclear technology today.

9:24So when you hear people talking about small modular reactors. Some of the reason that we are strong in that comes from that example. And it's particularly interesting if you think about it from a UK point of view, because we signed the agreement to do that collaboration before we joined the EU. We were a member of it all the way through our membership of the EU, and we're still a member of it today. And that's because the issues that it covers are not covered by the EU arrangements. The other example that lots of people are talking about today is CPTPP, which is the trading arrangements with partners in Asia in particular, but more global than that.

10:04And that group of countries are strategically holding a space of keeping trade going, but also being the place where lots of countries are starting to come together to talk about wider issues around trade, around how we might reform the system, how we might do things on the digital economy. Okay, so those sound like lovely examples, but they also sound a bit like let's all get together and bake a cake and sing nice songs. So take CPTPP, right, this trade deal that the UK is now a member of, that could promote trade liberalisation between the members, but there's no stick attached to that, right?

10:43If the challenge is you've got all these bigger players kind of weaponising their economies, I don't really understand how, you know, examples like, you know, technology sharing agreements or even liberalizing trade deals could give you any kind of framework to respond or defend against those bigger powers. Yeah. So I think a couple of things. Firstly, they give you diversification, which is what a lot of the competition and leverage is about. So in the technology space, people have said, can Europe or other partners ever do anything on AI to compete with the US and Chinese dominance of those areas?

11:26I just point to Urenco as an example of a niche technology that we developed together, and Airbus as an example of economies of scale where partners, smaller partners came together to do a new technology where they couldn't do it on their own, but together they could provide an alternative. Neither of those definitively means we can do it on AI, but they are historical examples of countries that are smaller coming together to do something to create an alternative that the larger powers either don't want to share or want to use as leverage. So it gives you diversification. The other piece that I think we're starting to see is whether there's a sort of more of a defensive arrangement around collaboration.

12:09And that could be collective anti-coercion cooperation. And there are, I say in my paper that I think the UK should develop any instrument we have to be interoperable with the EU explicitly done in a way that we could use them together if we needed to. And although the CPTPP thing sounds quite funny and the long term, effectively what it is, is it's a group of countries who are saying, we want to preserve open trade. And in a contested world, a reasonable number of countries coming together and doing that could be a sizable chunk of the world economy. We cannot dictate the behaviour of the big powers, but if enough of the other guys get together, it could still be materially significant for those partners.

12:55So I think you can preserve openness, you can do a bit of diversification, but you're absolutely right, you cannot change the decision-making of the large powers very easily. Yeah, I guess just on the preserving openness, I mean, right now you mentioned the challenge of China and its sort of different economic model, how that's playing out is obviously a huge increase and its goods exports, and there's increasing chatter about whether there need to be higher trade barriers, right? And so you can imagine some kind of group of countries could get together and say, okay, well, let's erect common defences, preserve open trade between us, but kind of raise these external defences.

13:37I haven't seen any indication that the membership of the CBTPP is on the road to that. so I suppose if we're thinking about some kind of joint defence is that really the place to think about that? I think it's unlikely to start in that corner of the conversation but I think if you look at something like so one thing I would say is we're starting from an extremely open space at the moment particularly on tariffs as you know the level of tariffs is historically low and one of the things I say in my paper is we may find that in some places we're putting up barriers to preserve the broader stability of the system.

14:20The example I think of with the question about whether there's an increase in barriers is probably more something like the critical minerals club that the US has been, the idea that came from the US around having effectively a sort of buyers club on critical minerals. And that's an idea that is strategically about the power of people wanting countries wanting more diverse supply and whether they can use their purchasing power to generate that away from a single supplier model. We have a world where we have effectively a single supplier for some of those. There's lots of devil in the details in those kinds of designs, but it is an example of thinking strategically in that space.

15:00Right. The issue is that China's critical minerals are too cheap. This buyers club would essentially make them more expensive to make alternative suppliers viable. My understanding was that actually the UK was one of the obstacles because, you know, more expensive critical minerals for our few manufacturers left is not something that we really want. And it's certainly that's where I think I'm trying to be a little bit provocative in our debate, because a traditional British response to that would be to be critical because it's slightly going against the grain of a pure market model. but it's maybe more expensive today in a resilience world where those prices could rise a lot in future is it on balance in the long run a better price and I think that's the a more stable and diverse supply but maybe a slightly higher price in the short run might still be a good deal and that's that's the key question I think.

15:55Okay I want to move to talking about the private sector so So, you know, one of the weaknesses of a middle power is that often its relationship with multinational companies isn't quite as strong as some of the bigger powers. And so one thing that you talk about is that there needs to be this deeper strategic alignment between the private sector and the UK's national objectives. Specifically, practically speaking, what does that mean? One is that in the same way that companies that are incorporated in the UK have a set of requirements on them in terms of the transparency that you could think about having a national resilience objective for larger businesses.

16:40This is not a completely new idea, but I'm revisiting it because I think that boardroom decision making, there's an argument for it thinking more about the resilience of the markets and the countries that they're located in. So that would put a requirement on the leaders of businesses to think about national resilience and their contribution to it. So hang on, just to be clear, so Microsoft, which has operations in the UK, it would be a requirement for the board of Microsoft located in the US to think about the UK's national resilience? Yes. And they have to think about it? Do they have to report on anything?

17:15It sounds like it could end up… Yes, so we were suggesting something where you have to think about it. We would define in the paper what we think national resilience is and then report as part of annual reporting what they're doing to contribute. And that's really just to try to get to the sort of strategic thinking bit of business and how business decision making is done. That's one thing that we talk about in the work. I mean, it sounds a little bit like that could go the way of ESG, you know, environmental, social and governance requirements, which sort of were just a box digging exercise in some cases and wouldn't actually make much of a difference?

17:52I think, I mean, I haven't looked exactly at all the evidence on this, but I think those measures made some difference to some decision making by some business. And this would be the similar argument. Because at the moment, we're not requiring anything in that space at all. There is some businesses might think about this, but those that are involved in critical national infrastructure I sometimes have to think about these kinds of questions, but we're not really as a country asking anything of those businesses at the moment. Another example that I talk about is that it would be really helpful to have even a shared understanding of the scenarios and the strategic direction for the country.

18:32So we did an exercise where we presented my four scenarios to a roundtable of business and government folk. and several of them said to me it was the first time they'd had that kind of conversation with business and government people in the same room. So we don't even have a shared assessment between the private sector and government of what kind of environment we're operating in, let alone what the right response to that is. Yeah, I mean, I guess it still sounds a little bit fluffy. I mean, are there any harder levers the government could contemplate? So we do talk about in the history paper, the fact that the UK has this thing called a golden share, it was essentially where the government retained one special share in businesses when they were nationally owned and then privatised.

19:18The government retained that particular share. It doesn't really give them financing return, but it gives the government some influence over the decision-making, voting within the governance of the company. It's probably not exactly the right model because it applied when we were moving from a nationalised industry to a privatised industry. But you can think about things in that kind of space. The other example that I talk about, which I do think is quite important, is when we're investing public money in British businesses, which we do quite a lot through things like the British Business Bank and various other investments.

19:58I talk about the example of something called the National Security Strategic Investment Fund, which is a very long title, but it's essentially a fund that invests in innovative startup businesses that are developing technologies. It's quite narrowly focused on technologies relevant to the defence sector because it was set up in a sort of national security space. But what's interesting about it is the conditionality that comes with that money. Normally, the conditions the government would apply would be about the kind of financial return that we get. This fund also puts conditions on around the location of intellectual property, whether or not the business can be sold to a foreign investor.

20:48And so I describe that as a little bit of sort of almost national security kind of conditionality. And I think for those investments where the British taxpayer is funding a strategic investment, we should be thinking more about those kinds of conditions when it's relevant to businesses or technologies that generate strategic advantage. And we don't, we only do it in that very narrow corner. And I think you could think about how to expand that where relevant to some other investments. And that would not affect all businesses, but it would be one slightly tougher lever. So for the business people listening to this and, you know, pulling their hair out saying, OK, great, you've just, you know, destroyed incentives to invest in the UK because we're worried about these golden shares.

21:37Or, you know, if I'm a startup founder, then why on earth am I going to try and put my business in the UK? Because, again, there are these conditions. Why don't I just go somewhere else for the deeper capital markets and a bigger market? How do you handle all of those concerns, particularly for a multinational, deciding where to put an investment? The risk is that you just lose the investment altogether and then we're not resilient and we're poor. This is the challenge that there's not one answer where you can move completely to a national view without worrying about attracting foreign investment, nor can you be completely relaxed that we just sit and hope that the investment comes and stays in the UK.

22:19I think for the using public money piece, the government is putting funding into these businesses. So it's more about the kind of deal of return and conditionality for the public balance sheet. And the point of the state in those investments is to be a long term patient investor, which is an attractive proposition. I think the other thing I would say is I just come back to the state of the world and the other countries are doing all sorts of things like this, too, with either deeper pockets or more directional control. And so investors are having to choose between a range of markets where a range of these policies are being implemented.

22:59And there are very few places now where there isn't that kind of strategic state intervention. So I think it's a comparison between the UK and the rest of the world rather than a perfect model. Okay, let's cut to a break now. And when we get back, I'm going to ask you some more about how the UK needs to get its act together.

23:465 million more mortgage-eligible people. Banks win and francs win. Lenders win and so do lenders. When you build credit scores the right way, everybody wins. Get started at VantageScore.com.

24:03We are back from the break. We've mentioned China already being a challenge, and so far the UK has been pretty open. So I'm thinking about cars, for example. the US and increasingly the EU are closing their markets and that leaves the UK as one of the biggest open markets left and we can see that in the data. China's market share is increasing pretty rapidly. Is this an area where the UK is probably going to change its policy over the next few years? In terms of being open to sort of Chinese car imports, well I don't have a crystal ball but actually this is one of those areas where the structure of the economy does make a difference.

24:41We do have car manufacturing in the UK, but it's not at the same scale or as central to our economic model as Germany or even the US. And so it hasn't been interestingly a feature when I looked at the scenarios and what I was worrying about and kind of the UK economy. So I don't know, but my guess would be that's not likely to be the sort of primary focus for the UK in terms of managing the risks and the resilience questions. just because our economy is different to other countries that you're talking about. But earlier you were saying that actually the Chinese competition can affect the UK indirectly, right?

25:18And so the EU is very much being affected by Chinese car competition and they're not thrilled at losing the UK market to Chinese competition. So could it be an area, I suppose, where the EU asks us? Maybe. I mean, that would be an interesting question, wouldn't it? If that was something that they felt strongly enough about to want to ask the UK to do something, I think it's more likely to come through that route than the UK doing something directly. Trade and investment. In the US, I really get this impression that there has been a change in the conversation, right? So 10 years ago, if you were to say, oh, there's something special about manufacturing, you might have been labeled as a bit of a protectionist crank.

25:58Whereas now I feel like there's really been a shift in the consensus and actually there's more widespread acceptance that no, there is something special about manufacturing. Maybe in some kind of hot war, you need to have manufacturing capacity. There are all sorts of non-economic reasons, but also some economic reasons in terms of innovation potentially. The UK is a services-based economy. Do you think that there has been any of that shift in the UK? Yeah, I mean, I think there has been some and I think the industrial strategy is moving in that direction. I suppose what I'm saying in my work is that the bit of the economy where the global competition and the contestation is most apparent, it's not in all of the economy.

26:40It's in the bits that are really interlinked, where there's a lot of rivalry and where those parts of the economy really matter. And more of those parts of the economy are in things like technology, manufacturing, energy, the more physical bits of the economy. So I suppose what I'm saying is that those parts need more attention in this world. I think we're seeing a bit of that in the UK, but I think my argument is we need to be moving a bit more in that direction. Okay, so Andy Burnham has said, you know, manufacturing is great, make Britain great again. He hasn't said that exactly, but you get the gist.

27:17And so, you know, music to your ears. It's not inconsistent with that. Okay, one of the big trade-offs that middle power faces is that the status quo involves getting a lot of stuff for very, very cheap. And if you want to change the status quo, if you want to diversify your sources, that will often mean essentially increasing the cost of imports, of consumption. And, you know, in the UK, there's obviously huge concern over the cost of living. How do you navigate those concerns? So one of the things we did this year was we did an exercise to engage the British public on what they thought about some of these questions, did a deliberation exercise, which means they get in a room and they discuss and debate the issues and are presented some information.

28:05And one of the questions we got people to talk about was this question of whether there's more interest in a more secure and resilient kind of economy that might cost a bit more or whether it was more important to focus on price and keeping the cost of living down. And they debated this question and the outcome at the end when we asked them to vote was 25 to 1 in favour of more secure and more resilient, not in favour of keeping the price down. Now that was really interesting to me because that seems counter to what you hear a lot from the opinion polling about cost of living. But some of it was when you were listening to the discussion was about, actually, I would describe it as people being concerned about jobs and the economy and the country, not just the price of things today, and worrying about, you know, the sustainability of our economic model, what jobs their kids were going to have.

29:02So I describe this as them sort of being both workers and consumers. And we sometimes think of voters as only being consumers and only concerned about the price. And actually that conversation and at least that bit of work we did said it's a bit more complicated than that. Yeah, I'm just very sceptical of these deliberative exercises. You know, you've got all sorts of group effects. You know, you might have a kind of performative aspect of it. No one wants to be the selfish person who's like, no, I want to sell out the country and keep costs down. But then actually does that translate into voting behaviour?

29:35I don't know. So it's one exercise. it's only one data point it's not everything but what struck me was interesting was how different it was from the normal evidence and discussion that you hear about this okay well maybe we'll get some more evidence and see if the focus groups were right you mentioned leverage earlier the need to work out where the UK had leverage is it really that bad do we really just have no idea what to do if we kind of came under economic attack? I do think it hasn't been the focus of how we've been thinking about policy. The attention is more about how we can use it to achieve foreign policy goals rather than what would we do if we came under threat or direct coercion.

30:23It's worth saying we haven't experienced that. So it's unlike Australia or other partners that have experienced it. But I think it speaks very much to the work you've done in your book too, that my view is the UK needs to spend some time seriously looking at this and working out where we have the leverage with that frame in mind. Well, in that process of finding out where the UK has leverage, presumably there are going to be lots of business owners listening to that and thinking, OK, note number one, do not tell the UK government that I am a potential source of leverage because they won't want to be caught up in anything.

30:59but as you were saying earlier there's going to be this new close relationship between governments and business so maybe it will all be okay. Jenny, this has been really interesting. Thank you so much for joining me. Thank you very much for having me.

31:20That is all for this week. You have been listening to The Economics Show with Samaya Keynes. If you enjoyed the show then please do rate and review us wherever you listen. This episode was produced by Misha Frankel-Duval and Claire Williamson, with original music from Breen Turner and sound design by Breen Turner and Sam Jovinko. The broadcast engineer was Andrew Giorgiades. Our executive producer is Manuela Saragossa. I'm Samaya Keynes. Thanks for listening.

32:14www.thex5podcast.com rather than bolting it on at the end. Listen to The Next Five wherever you get your podcasts. Enjoy. For years, credit scores were generated with just a snapshot. A snapshot that left millions of people out of the picture. So VantageScore is modernizing the credit score. VantageScore uses 400 % more credit report and alternative data than legacy models, bringing more people into the credit economy, like 5 million more mortgage-eligible people. Banks win and francs win. Lenders win and so do lenders. When you build credit scores the right way, everybody wins. Get started at VantageScore.com.