Marwan Mikdadi looks at the UK’s exporting record, past, present and potential future.

Exports pre Covid-19

Britain’s history has been intertwined with the sea and its status as an island trading nation. For years, before we thought about trade with Europe, the UK traded with Asia, Africa and the Americas, initially through colonial links and subsequently as independent nations. It is this history that makes trade and the UK’s exports such an important aspect of the UK’s economy.

In February 2020 the ONS reported that UK exports had grown to their highest level on record at £689B1, which was an increase of 5% on the previous year; up to this point the UK had experienced 45 consecutive months of export growth. Of course, Covid-19 has somewhat impacted on the UK’s and for that matter global demand for goods and services, resulting in a fall in the value of UK exports (see figure one), since that high point, but all indications suggest that the UK should quickly rebound, once the world economy starts to grow again.

Figure 1

Looking around most homes the range of goods that we see rarely reflects the fact that the UK is one of the most successful manufacturing nations in the world and with it a significant exporter of goods and services. Before we had even heard of Covid-19 and the impact it was to have on global economies, the UK played a leading role in the manufacture of cars, planes and pharmaceuticals as well as being one of the globe’s financial hubs. Whilst the businesses may be foreign owned, the goods that they manufacture in the UK represent a significant proportion of the UK’s exports.

When driving around the UK, we see many cars that are manufactured here, such as those produced by Nissan, Toyota, BMW (Mini & Rolls Royce cars), Tata (Jaguar Land Rover) and Volkswagen (Bentley). Many of these will also go on to be exported, whilst many other cars manufactured outside the UK, will contain UK components exported to their respective overseas factories.

When we fly around the world on holiday, if we fly on an Airbus plane then the wings will have been made in Wales before being assembled in Bristol and then exported to France. The plane is most likely to be powered by Rolls Royce engines made in England. Whilst over the next few months many of us will be injected with the Astra Zeneca/Oxford University C-19 vaccine which was developed in the UK and will be exported around the world, helping to return the world to some semblance of normality.

It is clear that exports are a significant aspect of the UK economy, but how many people does it employ, what are the areas of growth and what are the prospects now that the UK is no longer a member of the EU, albeit still with tariff free access to Europe through the deal struck on Christmas Eve 2020. Other barriers to trade, such as non-tariff barriers like regulations and bureaucracy will remain, which will have an impact on the ease with which trade can take place between the UK and EU, but how much of an impact will this have and what are the prospects for UK exports in this new trading relationship?

Some of the areas that were the fastest growing2 during 2019 were cereals, which were up 16.6%, fish and shellfish up 13.1% and meat up 12.4%. Whilst these agricultural sectors are the fastest growing sectors of the UK export market, they do only represent 1% of the total UK exports at £6.7Bn. The vast majority of UK exports remain in manufacturing and the service sector.

45%3 of UK exports go to five countries, namely the USA, Germany, France, The Netherlands and China. The largest export sector within the goods market was mechanical appliances, which accounted for £57.4B worth of export revenues, with cars, pharmaceuticals and airplanes representing a further £75.1B.

Stephen Phipson, chief executive of the manufacturer’s lobby group, Make UK, estimated that 2.7m jobs4 are supported by manufacturing that is heavily dependent on trade with the EU, with many more supporting exports to the rest of the world.

Services remain the largest UK export, accounting for £317Bn5. Services include not only financial services, such as banking and insurance, but also legal services, education (schools, universities and exam boards) and of course tourism and retail. The numbers employed in this sector are a significant proportion of the UK workforce, at approximately 84%6 or almost 27m people. Whilst a significant number of these workers will not be part of the export market, it is largely accepted that the service sector tends to be labour intensive and therefore a large number of workers will be involved in export markets, even if their jobs are not entirely reliant on exports.

Impact of C-19

Initially severe restrictions were imposed in China and parts of Asia in January of 2020 when Covid-19 first started to be discussed. This had a direct impact on the exports from China, especially as their manufacturing sector ground to a halt. As many UK firms hold very limited stocks and rely on Just-In-Time deliveries, this had a relatively swift impact on UK firms who needed to source components from China, which would feed into their manufactures and eventual exports. Indeed, Jaguar Land Rover were so concerned about the lack of key components needed for the key fobs for their cars, that they took to having these flown in on commercial flights in suitcases.

However, once Europe and the UK went into lockdown from the middle of March, we witnessed a significant drop off in UK exports, as shown in Figure 1. The manufacturing sector ceased operations for several months and this resulted in a significant fall in output. Furthermore, the service element of the economy, during this first lockdown witnessed, in particular in the hospitality and entertainment sector, output fall to almost zero. Tourism, which is a major driver of the UK hospitality sector and employs 2 million people, generating £106b7 a year virtually dried up. These lockdowns contributed to the decline in exports which was seen in 2020.

Before the global Covid-19 pandemic labour productivity in the UK was performing poorly; it had slowed significantly in the immediate aftermath of the global financial crisis and continued to lag behind all the G7 members, save for Italy8. The pandemic has hit productivity further, with output per worker falling by 8.8% year on year up to October 2020, as workers remain employed whilst furlough but do not contribute any output. This will undoubtedly have some short to medium term impacts on the UK’s ability to compete and increase exports in the period post Covid-19.

However, it is hoped that once a vaccine is rolled out and the UK and Europe can return to something resembling 2019, it will not take long for UK exports to return to their upward trajectory.

Possibilities for Growth

As economies have gradually eased lockdown restrictions, the adverse impact of Covid-19 on trade has declined more quickly than expected with smaller than expected falls in export and import volumes in the second quarter of 2020. The National Institute for Economic and Social Research9 has estimated that export and import volumes would both fall by around 11 per cent in 2020. Exports are expected to then recover only by around 5 per cent due to the exit from the EU Single Market at the end of the 2020.

During the lockdown there was significant saving undertaken by those in employment and retired10, in other words those who did not see a significant decline in their income, either as a result of continued employment, the Covid Job Retention Scheme (Furlough) or steady income from their pensions. Once the lockdown in the UK was relaxed in July, there was also evidence of an increase in the level of retail sales. Indeed, by October 2020, before the second national lockdown, retail sales increased by 5.8%11 compared to a year earlier and represented the sixth monthly increase in retail sales. These two factors suggest that there may well be a significant increase in spending throughout the UK and in similar economies in Europe and North America once restrictions are permanently eased. It is hoped that this spending will yield a significant uplift in demand for UK exports and perhaps with it fuel an export led recovery of the UK economy.

In addition, the UK is well placed, as host of the COP 26 conference in Glasgow later in 2021 to drive forward a green revolution. The UK government has said that it will be moving forward on a legally binding pledge to be carbon neutral by 2050. While this seems like a long way off, it will necessitate significant investment and development of green technology. The UK is well placed to be able to lead a global revolution and exploit the first mover advantage of wanting to reduce environmental emissions as quickly as possible. The expansion of green technology may well help to further expand the opportunities for UK exports to increase in future years.

Furthermore, the UK maintains its position as a well-established trading nation, with significant expertise in fashion, engineering, gaming design and financial and legal services, which will allow for an eventual return to month on month increases in exports.

While the UK undoubtedly faces significant new obstacles to trade in the short-term, as a result of the departure from the EU single market, the implementation of the tariff free deal on goods, will help to maintain and potentially allow UK exports to flourish. Whilst the service sector will not have the same access to the EU that it had prior to the UK’s withdrawal; it is not felt that its preeminent position as a titan of the global financial sector is likely to be threatened. So, in the long-term the prospects for UK exports look positive. The UK has already negotiated a number of free trade agreements with nations outside of the EU and is in a position to negotiate others, which may mean that the UK is able to export even more and become a more attractive destination for foreign direct investment, which in turn will contribute to UK exports.

Marwan Mikdadi is a Teacher of Economics at Westminster School

The views expressed here are my own and not those of my employer

References

  1. ONS 2019 was record breaking year for UK exports, 2019 was record-breaking year for UK exports – GOV.UK (www.gov.uk) 11 February 2020
  2. ONS 2019 was record breaking year for UK exports, 2019 was record-breaking year for UK exports – GOV.UK (www.gov.uk) 11 February 2020
  3. UK Overseas Trade in Goods Statistics Summary of 2019 Trade in Goods (publishing.service.gov.uk) Page 3
  4. Our jobs and future depend on a deal, business warns Boris Johnson, The Observer, 13 December 2020
  5. UK trade in services by partner country – Office for National Statistics (ons.gov.uk) 22 January 2020
  6. Broad Industry Group (SIC) – Business Register and Employment Survey (BRES): Table 1 – Office for National Statistics (ons.gov.uk) 6 November 2020
  7. The value of tourism in England | VisitBritain
  8. Productivity measures – Office for National Statistics (ons.gov.uk)
  9. Prospects for the UK Economy | National Institute of Economic and Social Research (niesr.ac.uk) Page 13
  10. How has Covid affected household savings? | Bank of England

Retail sales, Great Britain – Office for National Statistics (ons.gov.uk)