October 24, 2016, by Charlotte Anscombe
Export or Die: UK Exporters in a Post-Brexit World
Increasing exports is crucial to the health of the UK economy, With a British exit from the European Union expected within the next few years, the future holds new challenges and opportunities for our exporters.
‘ Export or Die’- is a panel discussion chaired by Iain Wright MP, and featuring Rt.Hon Sir Vince Cable, Vicky Pryce and former Rolls Royce CEO, John Rishton, as part of Nottingham in Parliament Day.
Professor Richard Kneller from the School of Economics at The University of Nottingham gives us a taster of what can be expected from the discussion:
The UK is a successful exporter globally. But this is highly dependent on a relatively small number of firms and products. Understanding these patterns highlights its vulnerability to possible Brexit alternatives.
Last year the UK exported £510bn of goods and services internationally. This makes it the 3rd largest exporters of services globally and the 10th largest exporter of goods. UK exports are split approximately 60% of goods and 40% of services.
This total is the sum of the export transactions made by firms, of products, to various country destinations. It turns out that exports are fairly well spread across lots of destinations, but in terms of products and firms they are very highly concentrated.
The UK sells about 50% of goods and 40% of service exports to the various EU countries (about 10% to Germany and about 6% to France), with a further 13% of goods and 19% of services sold to the US, and 6% to China.
Government statistics show that just a little over 1 in 10 of firms in the UK are exporters (about 220,000 firms). For exports of goods, just 1% of these export firms account for 70% of goods exports; with the top 5% accounting for 90%. For services the top 1% of exporters account for 74% of export value; the top 5% for 87%. Similarly, just 10 products (out of the 4,800 manufacturing products the UK sells) account for 25% of total manufacturing exports (there are very few service categories so it doesn’t make sense to perform this calculation for services).
UK exporters are therefore comparatively rare, and the total is very dependent on a few products sold by just a couple of thousand of these firms. Why? Because the UK has only a smallish number of ‘world-class’ firms and products.
As a general characterisation they are usually large, very productive multinational firms, that employ lots of skilled workers, pay high wages, are involved in R&D and participate in supply chains across Europe and the world. They also include foreign owned firms. They are to be found in pharmaceuticals, chemicals, the automotive sector, or producing engines, business services and telecoms services.
It follows from this that most firms only export a little to a small number of markets. Out of the 1 in 10 UK firms that are good enough to export at all, the number shrinks quickly with the distance from the UK, even for relatively large countries. Using estimates for partner-GDP and distance from standard gravity model of international trade, and comparing countries to France, as a country with a large economy and close to the UK, then we would expect that a little under half of the number of firms that export France would export to the US. This occurs despite the US economy being 6.5 times bigger than France (but it is 10 times further away from the UK).
For China, the expected number of exporters would be just 1/10th of those exporting to France, while for Australia the number of exporters is just 1/20th. So even for countries that are the second and 12th largest economies globally distances severely affect the number of exporters. For economies that are distant and small even fewer firms export to those markets.
So why does this matter in a post-Brexit world?
Two main conclusions might be drawn from this analysis. The dependency of UK exports on a relatively small number of high-quality firms should demonstrate to the government that getting its policy actions wrong, in particular with respect to trade policy, risks damaging exports, but also the UK economy in general, if these firms choose to expand elsewhere or leave the UK altogether.
It is also reveals that trade deals with small and distant countries will benefit just a few firms, and stimulate relatively little exports. Retaining current trade policy arrangement with countries that are large and close by would bring no new exports, but they would prevent the decline of the already rare species of UK exporter and total trade. Leaving the EU-trade bloc will harm exports even if this is compensated by new trade deals with others. In such an outcome, the budget of UKTI, the UK’s trade promotion agency, would have to be increased enormously to try to get new exporters to fill this gap.