The end of the beginning, or the beginning of the end for UK trade?
2020 was a terrible year for UK trade. Overall, UK exports in goods contracted by almost 15%, down by £54.5 bln[i] in the twelve-month period, this is even worse than the contraction seen in the UK economy as a whole, which was just under 10% in GDP terms. [ii] Furthermore, the early 2021 bilateral trade statistics between Germany and the UK suggest the downward trend in UK exports worsened beyond 2020.
We should see these statistics in a broader context than the current effects of Brexit and the pandemic. The next few years will be pivotal for the economy. Our recent research on COVID-19 and UK trade points out some bad news:
- During the COVID-19 crisis, exports from all nations declined, but the UK is experiencing more of a decline and a slower recovery, compared with Germany, Italy, Spain and the US.
- This deteriorating trend has been visible in trade statistics since the Brexit referendum in 2016.
- The UK has become an exporter of sophisticated products and services, and these are the areas in which it has retained global competitiveness. Examples include knowledge-intensive products such as automotive, machinery and mechanical appliances, pharmaceutical products, and skills intensive services such as financial, professional business and ICT services. Regrettably, the UK’s comparative advantage in these areas has been slipping for years.
The fundamental cause of the UK’s dismal trade performance goes beyond trade. And there is much more at stake than just trade. This is because of the intimate linkage between exporting, innovation and overall productivity.
Productivity growth enables firms to export because it makes them more competitive. Exporting creates the opportunity to scale businesses, foreign competition sharpens their productive edge, and new sources of inputs enhance efficiency and effectiveness. The much-talked about long-term stagnation in productivity growth in the UK is the key reason for the subdued competitiveness of the UK economy. Notwithstanding the country’s world-leading scientific institutions, this has resulted in a lack of competitiveness in producing new goods and services, and, by extension, an inability to be more resilient to change and to exploit opportunities in a crisis like the COVID-19 pandemic.
Unfortunately, the evolution of global supply chains in light of the COVID-19 crisis and other disruptions has been towards diversification of supply chains which have become more concentrated within regions (for example within Europe, Asia and North America). Proximity is again counting much more. However, Brexit has crippled the UK’s ability to service the economic activity of one of the world’s largest trading blocs, conveniently located only 25 miles away. So, now much rides on the ability of the UK to be a leading innovator. Innovation has been crucial for the UK’s trade success in the past. It will be even more crucial now, to regain ground in the uncertain post-COVID world economy. The UK will need to punch above its weight in new industrial and technological fields, as well as in new markets – some of which may have become more important either because of paradigm shifts precipitated by COVID, or from the UK having definitively left the EU’s structures and regulatory frameworks.
There are some promising beginnings. COVID has greatly accelerated digitalisation of most of the economy. Change that would have otherwise taken years here has been achieved in months. The Government’s UK Research and Development Roadmap promises to double support for R&D by 2025. If experience elsewhere is a guide, this is likely to draw in further private R&D development.
But there is another side. UK investment in R&D has consistently been lower than in competitor countries for many years. The world-leading research strength of UK universities has translated into few world-leading businesses. Successful businesses have had trouble reaching global scale, and are often sold to more ambitious and better-funded international competitors. The UK’s financial services sector was accelerated into global prominence by the arrival of US firms in the 1980s and 1990s, not by homegrown talent. These facts point to a deeper problem that we have to admit to and redress. There is an underlying weakness in management skills and entrepreneurial initiative in the UK economy. For that reason, new government initiatives like the recently announced Help to Grow: Management scheme are welcome.
Overall, to recover from the COVID-19 crisis (and the new trade barriers resulting from Brexit), productivity must be placed at the centre of policymaking. Industrial policy, innovation policy, skills policy and trade (and investment) policy should be made coherently to facilitate this goal. Trends in international trade can act as an ‘anemometer’ for detecting global technological, socioeconomic and geopolitical changes, and they should be utilised purposefully and responded to promptly.
Jun Du and George Feiger
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the
Enterprise Research Centre, its Funders or Advisory Group.
