Our industries must pass the Taiwan test

PHEW] The only rational reaction to the signing of the Gatt agreement should be relief. For once the political rhetoric is justified: not only is it an important agreement which will help the world grow richer; had it not been signed there would have been a real danger that growth in world trade - the great motor of post-war prosperity - would grind to a halt.

But while everyone has waxed enthusiastic about the supposed gains from the agreement it is difficult to attach much credibility to official forecasts of their scale. For example, it is all very well for the Prime Minister to claim that the agreement will lead to an extra 400,000 jobs, but since the Government failed to forecast the recession or the waves of job losses that would follow, it is hard to take this forecast too seriously.

Take another example: in September the World Bank published a booklet which calculated that by 2002 the world would gain about dollars 213bn a year in income as a result of the Gatt round. It was a very interesting exercise, trying to put real numbers on the gains from freer trade, but it was an exercise, nothing more. It is perfectly possible that these gains could be dwarfed by some other great global economic shift, good or bad.

There is, however, something which can sensibly be said about the effects of the Gatt agreement: the changes already taking place in the economic structure of a country like Britain will proceed more quickly than they otherwise would. Freeing world trade leads to greater economic specialisation: countries will find themselves concentrating on the activities in which they have a comparative advantage - and being forced out of those in which they are at a disadvantage.

Every industrial country should apply this test. Ask: what can we do that the Taiwanese can't? If Taiwan is able to do something, you can be pretty sure that mainland China will not be far behind. This has some very practical implications for this country, for it is important not to kid ourselves that we are good at things when we are not.

There are at least half a dozen big sectors of activity where Britain is very strong and should get even stronger. One is financial services: the City is the largest export centre in the world. Another is pharmaceuticals, for Britain has two-and-a-half of the top 10 world drug companies: Glaxo, Wellcome and the Beecham side of SmithKline Beecham. A third is oil, with one-and-a-half of the top five oil companies: BP and half of Shell. Still another is spirits, with three of the top four: Grand Metropolitan and Guinness are one and two, Seagram of Canada is third and our Allied-Lyons fourth.

We are also strong in branded household goods through our part of the Anglo-Dutch Unilever; in retailing; and in pop music, though there is some evidence of loss of market share there. Finally, we are second only to the US as an arms exporter. Some people may not feel particularly comfortable about this, and military 'kit' is not specifically intended to be one of the beneficiaries of the Gatt round. But in purely business terms this is a fine corner of the forest: high-margin, cash up-front, and sadly reliable demand.

That is not at all a bad list, though it may come as a surprise to learn that the area that British companies dominate most of all is not some hi-tech area of manufacturing but the low-tech supply of one of those basic human needs: booze. (We are not bad in tobacco, either.) It may seem a little shocking, but any industrial strategy designed to back winners ought certainly to include the City, the drinks and tobacco trades, and the arms exporters. Britain has a rather well-positioned economy for the Nineties, but politically correct it is not.

Naturally there are losers. Mass manufacturing is the most obvious, for that will continue to go to low-wage countries, particularly in East Asia. Where there is a high craft element - as in racing cars, top-end motor bikes, some luxury consumer goods, military products - manufacturing will remain reasonably protected. (Some of these are quite unglamorous - earlier this year in two US hotels on different sides of the continent I found the soap came from England.) But manufacturing as a whole will shrink, and it will shrink slightly faster as a result of the Gatt round.

Textiles, basic chemicals, engineering, steel, agriculture, anything to do with electronics - these areas, already being squeezed from abroad, will find themselves squeezed further.

The list of 'losers' may seem discouragingly long when set against the list of 'gainers', but that is because we cannot fully identify all the potential gainers. My worry is that there are important areas where Britain could make more of its natural advantages but has not organised itself to do so.

For example, the British universities have - quite rightly - an immense appeal to the knowledge- hungry market of East Asia. You do not find young Malaysians flocking to German or French universities: they go to the US or they come here. Some universities, and in particular their business schools, have made a point of trying to attract foreign fee income. But we have not identified this as an export business in which we have a comparative advantage. Go to a dinner at an Oxford college - one of the half-dozen best brand names in education in the world - and they do not talk about their market share in attracting the best foreign students. They bleat about how badly they are paid, and how horrid it is of the Government not to value their services.

Or look at our film industry. We have the best acting talent in the world, yet it has to work in Hollywood. Our film-makers, with a handful of exceptions, do not seek to make aggressively commercial films for the export market, but direct their aggression at the Government for not handing taxpayers' money to them. Or look at our newspaper and television industries, where again we do have a body of talent, but where regulation seems designed to help non-British companies rather than British ones. It is all very odd.

This is not a cry of despair, though. It is much more a statement of hope. We have this strange national myth, rooted in a brief period of little more than a century of our history, that we are good at making things, whereas actually we were never particularly good at it - we just started early. The new Gatt round, by opening up trade in services, fits our real needs far more closely than previous agreements. It is particularly good for us if it makes us think about our real advantages in a tough world.