This is an interview with Dr John Llewellyn, Partner at Llewellyn Consulting. John will be speaking at the World Trade Summit in London on November 1st. You can sign up to it here.
What will you be talking about at the World Trade Summit this year?
Given the event is being run by The Institute of Export & International Trade, you could say the secret is in the name! Yet I don’t see the strong arguments for exporting being very widely understood, let alone strongly made, whether by businesses or beyond.
One hears the argument that exports are good – or “great” to borrow government terminology – but there are a number of strong reasons why exports are so important for firms and necessary for the economy. I thought it would be a good idea to talk about these, in straightforward language that businesses attending can readily appreciate.
What are the main economic arguments in favour of exporting?
For one, exports are a source of demand that augments the demand in the home market.
Second, exports are also a key source of foreign-currency revenue that allows us to import things that we cannot or do not make at home.
That’s only part of it though. Another hugely important dimension is that exporting provides businesses with access to a bigger market – and this applies to everyone, even those with the largest domestic markets ‒ the Americans, Europeans, and Chinese. Given that exporting is important even for them, think how important it is for countries, like the UK, that have much smaller home markets.
By enabling producers to sell into a market that is way bigger than their domestic one, they gain economies of scale in production. That has constructive consequences for labour productivity, and thereby for real wages. If you think about the large-scale, high productivity, high-wage auto industry, for example, the virtuous link between large (foreign) markets and high (UK) wages is self-evident. Not surprisingly, the international evidence is that exports and business investment are closely correlated.
Another element is that when international firms establish themselves in the UK, they not only bring in investment, including importantly new technologies, they also provide increased market access abroad.
And there are further reasons too why exporting is so important. While firms individually do not always like competition, there can be little doubt that consumers (as well as all firms that buy inputs) benefit enormously from vigorous competition in markets; and the international trading system, with its current openness to exports and thereby imports, plays a large part in ensuring that competition endures.
UK companies, previously, would have been termed as ‘Europeans’, in the sense you alluded to. We still don’t know what Brexit will look like, but how much of a shock will it be not being part of the European market?
The first shock is the reduction in export volume, relative to what would have happened otherwise. That results in a reduction of the demand for goods and services, and thereby in GDP and then tax receipts. Governments always say that they are cash-constrained, but future UK governments most certainly will be. The UK has now been through ten years of austerity, and public expenditure now accounts for its lowest proportion of GDP for many decades. There is bound to be pressure for public spending to rise; indeed that is already evident. With key institutions, including the NHS, the armed forces, and the police now particularly constrained, any further period of slow tax receipts is likely to prove particularly serious.
The UK is an island and an export-import economy. To what extent will Brexit change the overall economic structures of the UK?
Any Brexit is inevitably going to change structures to some extent; and in some cases not necessarily for the worse. The UK will likely have a proportionately smaller financial sector than it has at the moment, which may or may not be a good thing. There are serious economists who think the financial services sector in the UK is too big in relation to its GDP. For example, as measured by bank assets, the size of the banking sector is about five times GDP, which is the biggest ratio anywhere bar Hong Kong and Singapore. This makes the UK vulnerable to periodic banking crises, and thereby poses a risk to the public finances.
Agricultural policy will inevitably be different from how it has been these past forty-odd years, though is impossible to know how it will change until the government spells out its agricultural policy in full detail. This could be a difficult area. The notion that the UK is going to sign trade deals with New Zealand and Australia is a difficult one to fully fathom because what they want is more access to the UK market, which is not necessarily what the UK farmers want.
Brexit will probably not be too disruptive for anyone exporting knowledge-intensive products, such as researchers designing microchips for instance. But firms that manufacture things will suffer – some already are ‒ because Europeans are already starting to source from alternative suppliers who are on the Continent. Much will depend on the precise Brexit deals that are ultimately struck.
In terms of manufacturing, I doubt that the UK will end up in a situation where automobiles, for instance, will not be produced in this country at all, because the government is determined to preserve that industry. However, the industry may well not get the new investment that would have come in had the UK remained a part of the EU ‒ for the fundamental reason that it is the EU market, not the UK market, that is the big prize market for the auto companies.
Supply chains, which are a central feature of the modern world, and which do not seem to be fully understood in the policy world, may well be a particular challenge, particularly in mass-production activities. Introducing any friction is bound to imply costs. In other words, Aston Martin and Morgan will probably be hurt less than Jaguar Land Rover, Toyota, and Nissan.
What can the UK do to make itself an attractive proposition to markets around the world after Brexit?
Most fundamentally, firms need good information on what the world demands, and then must produce these goods and services at high quality and a competitive price.
In part this is a cultural matter. In Germany for example, exports are widely considered to be a, quite possibly the, superior form of demand. It is not obvious that that is the case in the UK.
There are many things that could be done to boost UK exports. From the perspective of a business, it is necessary to: go on trade missions to tell people what you do; receive good support from the UK government, including from a website that lays out all that is on offer – something the UK is not great at compared with, say, the Australians. However, much of what businesses need to do however is just hard graft.
On the political level, discussions need to be had about where there are opportunities, but this is not always easy. Each country has its agenda. India, for example, wants its people let into the UK, but the UK is not keen on this. Australia and New Zealand want to export more agriculture, but the UK’s farmers do not fancy this. Meanwhile, the EU, and thereby the UK through the EU, already has a fairly comprehensive agreement with Canada, and it will not be easy for the UK to better that, at least for some time, once it is on its own. And much the same applies to trade with other countries, including Japan, where the EU has just signed a rather far-reaching trade deal.
Where do you see opportunities in Brexit?
I don’t really see why any large sector will profit from Brexit much more than it would have done before, at least for an extended period. Certainly I don’t buy the argument that the UK has been seriously held back by the customs union: one only has to look at Germany, which way outperforms the UK in many product areas, and not least in fast-growing markets, including China.
Some sectors may do relatively well, of course. Provided they are not hamstrung by disruptions to supply chains or access to skilled foreign labour, the computing and software companies will probably flourish, because the UK has a niche there. In the space area too – particularly in small satellites and small space vehicles, where the UK has an unsung but impressive industry – the UK ought to do well, though not obviously better than it would have done anyway. There will be other areas too, of course, though it is not always easy to predict. The UK will probably always be good at services including education and tourism.
It is probably manufacturing about which the UK should be most worried, not least because manufacturers need to be near their market, and the UK is in the process of creating a degree of separation between itself and its largest large market. And everyone knows the importance of the adage “Buy in your language, but sell in theirs”. British strengths however do not tend to lie in foreign language skills.
The theme for the summits has been planning a ‘Roadmap to Export Success’. How important will it be for UK exporters – particularly manufacturers – to plan for the challenges ahead?
In truth, a lot of small firms really do not think about this ‒ mainly because it represents such a major task. Exporting is not as obvious a process for UK companies as it is for those on the continent; and a cultural element comes into play here too.
The government and The Institute of Export & International Trade certainly have a job on their hands to beat the drum about exporting. And this message should not just be about exporting being good for the country: it needs to be presented as an important (in some cases a potentially life-saving) source of demand for companies that will initially see lower demand after Brexit.
There are plenty of markets out there, and companies can in principle sell into them. But it is not easy, and it requires some investment – firms have to send people abroad and pay for hotels, travel and all that. All that amounts to a significant up-front outlay. But, to repeat, there is a lot of demand out there in the world, and there will be rewards for those firms that go out there to find it.
In terms of spreading information about exporting, how important are events like the World Trade Summits?
They are extremely important. I get told that time and time again. It is necessary to get as many people rubbing shoulders as possible. They have to hear from one another’s experiences about what works and what doesn’t work. They have to hear about experience in different markets. It has to be the case that swapping stories, experiences, and wisdom gained is a good idea.
