Whatever happened to that export-led growth?
April 15, 2013
In a fast-changing world the truth is the global race has been underway for some time.
The past half-decade ought to have been the best of times for UK exporters. After all, in the immediate aftermath of the financial crisis sterling dropped in value by over twenty percent against the currencies of both our biggest export markets. The pound’s fall against the US dollar (nearer 30%) and the Euro in an era before enforced austerity within the Eurozone, happened when consumption remained relatively high.
Since the financial crash our floating currency has remained remarkably stable against these competitor currencies, the slight gains in 2009-12 only being cancelled out by downward movement in recent months. Worryingly, however, despite the devaluation UK companies appear to have missed this opportunity to boost export sales and the UK’s healthy surplus in services exports continues to be undermined by a stubbornly high goods deficit.
The government’s avowed strategy of rebalancing the economy towards trade and manufacturing, where the UK is currently the eleventh largest goods exporter worldwide (in 1990 the UK stood proudly in fifth place), and away from financial and professional services where we rank at number two, is part of the issue. We might rightly have expected a manufacturing renaissance to compensate for weaker services exports in the aftermath of the financial crisis. Yet as the pound was falling after 2008, so were British manufacturing exports – by some 8%. In expanding, non-EU markets, the export of goods has fallen by over 4% year-on-year, with the much vaunted car industry witnessing a slump of 23% from its January 2012 peak.
Our performance in the emerging markets remains weak – indeed the weakest of any G8 nation for the period 2000-2011, an era when emerging markets were regarded as the key route to expansion. The Germans exported nearly twice as much in goods to India in 2011 as their UK counterparts, while the Belgians similarly continue to dwarf our own exports to that vast nation. Indeed when it comes to the Indian market, Britain is taking a mere 1.5% slice of the cake, and ranks nineteenth in the 2012 league table of exporters. Given the historical UK-India ties of Empire and Commonwealth yet alone the benefits of common language and culture, this is little short of a national disgrace.
Similarly Spain and Portugal, whilst under the weight of stiff ECB-sponsored austerity programmes, have cleansed much of their non-performing business and in recovery mode have put in better export performances than the UK, where our 0.3% decline indicates a fall in global market share. This applies even in our traditionally strong market sectors, where the coalition is supposed to have focused the UK’s rebalancing efforts. In high tech/high value added manufacturing, our export record has been disappointing, declining to less than 11% of GDP, two-thirds of the EU average which we matched less than twenty years ago.
To be fair, both David Cameron and Boris Johnson have led high profile trade missions to the Indian sub-continent, in particular, in order to kick-start a fresh wave of trade deals. The appointment in recent months of eight trade envoys to specific overseas territories is designed to pay dividends in the future and the new same-day visa for Indian businessmen, alongside the lifting of restrictions on Indian students, sends precisely the right message about Britain being open for business.
These envoys, working closely with UKTI and overseas embassies/High Commissions should regard their roles not as propagandists for UK companies, but as providing long-term intelligence about the ‘go-to people’ on the ground in territories for prospective exporters, especially in the SME sector.
In truth, however, the developing world still has an overwhelming appetite for mid-market manufactured goods, rather than the services that make up the UK’s competitive advantage. Even in China and India, the most mature of the emerging markets, demand for services is at a relatively immature stage in the growth curve. However, we forget at our peril that the cultural propensity of the fast growing Asian middle class to save means that before long they will assuredly be prime targets for our financial, consulting and professional services exports.
In most other countries coping with financial crises, the export boost from devaluation has been the great sweetener leading those economies back to growth. Take South Korea, for example, a country whose currency dropped in the aftermath of the 1997 Asian financial crisis to a similar degree as ours post-2008. In its wake came a 15% increase in manufacturing exports. The mysterious failure of the UK similarly to capitalise on the back of a weakened pound suggests our problems run deeper – we have a productivity issue.
Demographically the UK faces a double whammy. On the one hand the proportion of the overall population in work continues to decline (not, it should be said, as precipitately as many of our European neighbours). On the other we face a huge challenge in respect of the quality of our labour market. Complacently the UK has prided itself on having a highly skilled, inventive and productive workforce. Yet the functional illiteracy, innumeracy and chaotic lifestyles of a worryingly high proportion of UK adults have rendered them unfit for the modern day service industry workplace. Witness the huge numbers of foreigners employed in hospitality at a time of high indigenous unemployment. Whilst in a by-gone era many of the unskilled might find employment in traditional industry, such jobs have disappeared.
The abandonment of the UK’s science and technology edge has resulted in a near terminal decline in our manufacturing capacity. Nowhere is this more apparent than in London. In the half century between 1960 and 2010 the Capital’s industrial base contracted precipitously; at the start of this period manufacturing accounted for virtually one-third of London’s wealth; it is now reduced to just 7% and with it three quarters of industrial jobs have been lost. Truly there is no way back.
For sure Chinese companies are able to manufacture mass-market goods more cheaply but the lack of UK commitments in enhancing graduate and apprentice level skills in IT, science and engineering has served ill our chances of expanding exports in this most perilous of decades. In 2008 China had 3.7 million engineering students and produced fourteen times as many engineers as the UK. If a half-century ago top UK engineering companies still attracted many of the best graduates, the decline in the appeal of this discipline (even for those with an academic and practical training) has been marked. The services industries – banking, the media, law, management consulting – attracted many more of those entering the workplace in the 1980s and 1990s with the even more specialist financial service outlets of private equity and hedge funds appealing until the crash of 2008.
Sadly the UK probably now lacks the critical mass in technical graduate engineering skills or a home manufacturing base to recover even if banking and professional services were to remain (relatively) in the doldrums for years to come. Furthermore, Britain’s small and medium sized businesses (SMEs) appear stubbornly reluctant to export with only 20% of the UK’s 200 000 SMEs doing so.
UK Trade and Industry is determinedly trying to address that by helping such firms spot export opportunities. Other than appointing envoys, SME assistance and the liberalising of immigration rules, what else can government do to rebuild the UK’s trade performance? The Export Guarantee initiatives are welcome but invariably take time to bear fruit. They are the lifeblood for mid-sized enterprises breaking into new emerging markets. The UK needs to exploit supply chain finance within the Eurozone and recognise the strengths of its position as a distribution hub. To be frank, we are well behind the French and German governments, which are often accused by British prospective exporters of unfairly promoting their own national exporters in new markets in Asia, Africa and South America.
Now is not the time for orthodoxy and timidity in the export guarantee field: we need to integrate policies in this area and aggressively market that diminishing but still highly respected UK expertise at the top end of the value chain in the manufacturing sector. Inevitably some export guarantees will go sour, but that is the price any government must pay if we are to exploit the new export markets that will invigorate the UK’s traditional role as a global trading nation in the century that lies ahead.
Beyond that, however, the UK requires serious long-term thinking that identifies future growth industries and links them to new infrastructure projects, targets them for R&D subsidies and equips the workforce with the skills to operate in the growth areas of tomorrow.
It is unrealistic to expect a speedy turnaround of our trading fortunes in emerging markets, but the marketing of UK manufactured goods and services abroad needs to be reinvigorated before the UK economy can claim an export renaissance. We still have a great deal to offer, not least as the goods we do manufacture have a reputation for quality. But our exports needs to be far wider and deeper than professional services and high end goods if we are to close the gaping British trade deficit.