Partner Article

UK risks becoming economic has-been without exports

William Chase, the founder of Chase Vodka and Tyrrells Crisps, shares his thoughts on why the UK must increase its exports.

The UK needs to rediscover its historic role as a worldwide exporter.

After ships carrying Asian imports arrive in Suffolk and unload, they return to their countries of origin only 40 percent full of British exports to sell overseas. This is quite a change for a country that used to supply 40 percent of the world’s trade.

It’s also a bit embarrassing. We used to supply the world, now we depend upon it for everyday items.

As recently as 1990, the UK was the world’s fifth largest goods exporter worldwide which was equivalent to its economy relative to the world. In the more than 20 years since, Asian economies, such as those in China and India, have eclipsed many of those in the European Union. Now the UK’s economy has slipped to the world’s 11th largest, trailing those of Italy, Russia and Belgium.

Adding insult to injury is the fact the UK was just the 19th largest exporter to India, its former colony. In 2012, UK imports accounted for only 1.5 percent of those flowing into one of the world’s fastest-growing economies. Other former colonial powers have been able to benefit far more from their historic overseas ties.

Former colonies should be the first step in building up exports. Given the UK’s historic ties with India, selling our products there should not be as difficult as we seem to be making it.

It’s not all bad news. Since 1966, the UK has maintained a trade surplus in services. The United States is the only country that exports more services worldwide. The UK also has a large income surplus as well, due to its overseas investments getting larger returns than foreigners’ investments here. However, the trade deficit in goods is so large (£80 billion or $128 billion) it has eclipsed both the income and services surpluses.

When the UK was one of the world’s largest manufacturers, the balance of trade took on more urgency but it still remains important.

Closing the gap between imports and exports requires borrowing from overseas. Companies that export pay better and hire more people than those that simply sell domestically. They also are more aggressive in research and development investments and more profitable.

Continuing to rely upon exporting services and importing goods to grow the economy is dangerously naïve. Selling goods overseas provides an excellent opportunity to increase sales of services.

One necessarily can follow the other as buying autos or appliances eventually requires buying repair and maintenance services for them. An increase in goods exports would allow the UK to emulate France, which has a more equal balance of goods and services exports.

Yet more troubling is the currency exchange’s impact. The British pound lost 25 percent against other world currencies during 2008-2009. That made imports more expensive and exports cheaper, which should have helped close the trade deficit. Indeed, after the UK left the European Exchange Rate Mechanism in September 1992, the pound wilted and the trade deficit virtually disappeared.

However, nearly 20 years later a similar decrease in the pound’s value failed to increase exports and the trade deficit actually got worse but this is very fixable with more focus on mid-sized and small businesses.

The UK welcomes foreign investment to a greater degree than many other countries. BMW’s factory in Oxfordshire and Tata of India’s Land Rover plant are two of the country’s export bright spots. However, they stand out so well because the rest of the country is not as prolific. Why is this and how can it be fixed?

Take a look at the case of David Mellor Design in Derbyshire versus that of URENCO in Chester.

The former employs 40 workers who make silverware and cutlery. The latter has 1,600 people who produce enriched uranium for fuel rods used in nuclear power production.

Mellor’s suppliers primarily are local companies in places such as Barnsley and Sheffield. So the company deals with the British pound, both buying and selling, and doesn’t account for changes in exchange rates.

Therefore, the weaker pound allows the company to sell more of its products in the United States.

Meanwhile, URENCO has factories in the Netherlands, the United States and Germany and delivers its products to domestic customers in those countries. The result is income for the company but not exports for the UK. Spreading its costs and income across three foreign currencies also means URENCO doesn’t have to worry about changes in currency exchange rates.

This illustrates perfectly the root of the UK’s export problem. The country’s jobs are concentrated in large international companies such as URENCO versus mid-sized companies such as David Mellor Design.

Ten million of the UK’s 24 million private sector employees work for companies with more than 250 employees. These kinds of large companies invest in foreign markets rather than selling to them.

So currency exchange rates don’t matter to these companies which make up such a large part of the country’s economy. That’s exactly why we need more small- and mid-sized businesses to export their products.

However, the Government’s UK Trade and Investment agency notes the country’s small and medium-sized businesses are not big exporters. Only 40,000 of the country’s approximately 200,000 small businesses are exporters.

Increasing that figure to 50,000 small businesses (equal to the European Union’s average of 25 percent), would increase the country’s overall exports and the trade deficit would decrease.

Increasing it to 70,000 would create a visibly noticeable increase in exports.

The UKTI works with the country’s banks and its field offices in 96 countries to spot potential export markets and connecting them with small businesses at home. Once an opportunity is identified, the agency also can help small businesses combine resources to reduce expenses such as shipping. Export insurance also provides protection for companies that must wait an extended period for payment.

UKTI does as well at its job as similar agencies in Germany and France. However, it has a greater deficit to overcome. The UK has an abundance of companies that won’t export regardless of the amount of Government assistance.

This requires only a simple change in attitude to one that embraces exports instead of being scared of the process.

Driven by construction and public sector spending, the UK’s economy roared between 1997 and 2007. New employees included Government workers as well as consultants bidding on public contracts. The construction boom drew in large amounts of labour and capital.

However, this emphasis on construction and Government, instead of manufacturing, meant most of that growth occurred at home and not in exports.

Economic resources must be transferred to exports to provide a more balanced and sustainable economy if the UK is to remain a player on the world economic stage.

Reasons for optimism include that the UK’s manufacturing sector, both domestic- and foreign-owned, is highly regarded. Consumers buying goods manufactured by the country’s multinational companies prefer those goods to be made in the UK. Small businesses could pursue exports more aggressively. The Government also is increasing the UKTI’s budget even while cutting spending elsewhere.

The stagnant economy may provide just the necessary incentive to awaken the country to the potential of exporting goods, and not just services, to the world’s growing middle class. However, unless that happens, the UK will continue to lose its standing in the world economy, eclipsed those countries more aware of the value of exports.

This was posted in Bdaily's Members' News section by William Chase .