Global trade - what needs to happen now?

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Global trade has been our hot topic for the week.  On Monday we published a new reportGlobal Trade: run aground or structurally sound. It takes a look at some of the reasons behind the lacklustre performance of world trade growth (well, until the past couple of quarters at least) and how this has been playing out with UK manufacturers.

Hela gave you our top ten ‘must know’ facts from the report on Monday and Maddie provided more detail on what’s been behind the slowdown on Thursday. I want to wrap the week up with the recent exporting experience of UK manufacturers and what this means for their strategies and that of UK policy makers.

In case you missed it:

  • Global trade growth hasn’t recovered to its pre-recession trend

  • UK exports have been pretty flat since the turn of the decade

  • Experts believe this to be a combination of weak demand and structural factors, which include more protectionism, less trade finance and changes to global value chains.

Evidence of structural barriers?

Our report shows that UK manufacturers have indeed been at the sharp end of some of these global developments.  Overall a balance of around 20% of companies we surveyed had seen an increase in export sales to the markets we focused on (the exception being Brazil). But for those that have seen sales to emerging markets fall, a majority had also experienced one of the structural barriers to export growth listed above – this is illustrated in the chart below. 

More encouragingly weakness in sales over the period to developed economies seems to be more about cyclical demand factors – which now appear to be turning a corner. 

Lee-1

 

Which ones and where? 

It’s not a one size holds back all story – as the chart below illustrates.  More companies selling into China have been hampered in their efforts as Chinese authorities have intervened to provide additional support to domestic companies, thus tilting the playing field against UK exporters. This was also true to a slightly less degree for exporters seeking access to opportunities in India.

Also problematic in India, together with Brazil and the UAE was a reduction in the availability of trade finance. This is another financial crisis legacy. The regulatory environment has gone through significant change, including actions to improve the resilience of the financial system with additional liquidity and capital requirements for trade finance. These developments affected the supply of bank-intermediated trade finance, along with a hefty pickup in their cost.

Exporters to the US and Brazil also note a rise in protectionist policies, which include barriers such as a preference for locally produced content or changes in regulations which favour domestic producers.

strcutral-factors

This matters

… for lots of reasons. We’ve previously illustrated the importance of exporting to UK manufacturers. And the need to raise our export game has been a significant component of the rebalancing debate.

It also matters because we are in the process of leaving the European Union. Our report shows that the EU is an outlier in terms of the advantages for exporters.  Proximity, no tariffs and minimal export procedures are among the top reasons why companies do business with the rest of the EU.  These reasons are not widely cited for any other market.

EU-an-outlier-on-market-advantages-chart

So, the obvious conclusion here is that we want to retain as much of this advantage as possible at the end of the negotiation process.

The other reason is that the appetite across many other markets to dismantle trade barriers and embark on further liberalisation is pretty fuzzy.  On the one hand we see the EU marching on with an economic partnership agreement with Japan and there were talks of a ‘quick’ trade deal between the US and the UK at the G20 gathering. On the other hand, the US President took an early decision to pull out of the Transpacific Partnership agreement and there were no concrete actions on trade policy emerging from the G20 summit.

What do we do now?

UK exporters could potentially be caught between a deal which adds a bit more friction to trade relations with the EU and the remaining three-fifths of our market demonstrating little enthusiasm to be an early mover in further trade liberalisation. This points to the need for action on three fronts:

  • Manufacturers need the right strategy for the right markets.
  • Government needs to back this with the appropriate support and promotion of UK capabilities.
  • And the UK needs to engage with the rest of the world to reduce the structural barriers to trade.

 

 

 

Author

Chief Economist

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