By Rachel Hesketh
Debates about trade have an inevitable Brexit hue at the moment. Our relationship with Europe is undoubtedly important for the UK trade balance – in 2016 just under half of UK goods exports and over a third of services exports were purchased by EU consumers. Put another way, more than half of goods exports and almost two-thirds of service exports go outside the EU. We do not yet know what our eventual trade relationship with the EU will be, nor the type or number of any new free-trade deals that the UK might conclude with other countries.
However, as recent work by the Policy Institute, in partnership with Barclays, shows, understanding and strengthening UK export performance requires looking beyond the likely outcomes of the current Brexit negotiations. Given that it is firms that sell overseas, not governments or countries, understanding what drives firms to export, the barriers they face and how they can be overcome is paramount.
Our report sets out seven broad recommendations for policymakers on developing an effective export strategy that supports UK businesses over different lengths of time. In the short term, there are good reasons for focusing on large firms that already export, given they account for the bulk of exports and pull smaller firms into exporting indirectly via their supply chains. In the medium term, the aim should be to identify firms with the potential to export successfully, and encourage them to initiate overseas sales. Over the longer term, policymakers should seize the opportunity to address economic fundamentals, helping more firms to develop the characteristics that will enable them to compete in foreign markets.
Short term: Asking large exporters to do more
If we’re concerned about the value of exports in the near term, it makes sense to focus on the performance of existing exporters, and large firms at that. Why? Exporting is relatively uncommon in the UK (under 10% of firms in Great Britain exported in 2016, according to the Annual Business Survey) and the number of non-exporting businesses that might be suitable candidates for exporting is highly uncertain. Additionally, large firms (those with 250 or more employees) are responsible for the bulk of exports – approaching 60% of goods exports in 2016.
But rather than just encouraging current exporters to sell more of their existing products in their existing export markets, an emphasis on diversification seems to be important to manage the risks of export intensification. The UK needs more ‘superstar exporters’ – firms selling 10 or more products in 10 or more markets. These firms are likely to prove more efficient and sustainable contributors to the UK trade balance. Crucially, they can also provide routes to market for smaller businesses through deep supply chains.
Medium term: Growing the number of UK exporters
Over time, there is a huge opportunity to draw more firms into exporting, especially those that share many of the characteristics of successful exporters (for example, in terms of size, productivity and the sector they operate in), but do not yet sell overseas. Picking these businesses out of the large population of non-exporters is a challenge, though, so bodies that are closer to businesses, such as local enterprise partnerships, regional chambers of commerce and sector organisations may be better-placed to do this than central government.
These organisations can help to encourage exporting by connecting potential exporters with firms that already export, sharing exporting best practice and providing accessible, targeted exporting advice and market information. It is vital that the voice of businesses is heard in terms of the type of assistance from central government or business support organisations that would be most useful to them, and how it could most effectively be delivered.
Long term: Helping more UK firms to develop export potential
Over the long term, a successful exporting strategy is likely to have much in common with an industrial strategy. There is strong evidence that better firms – that is, firms that are larger, more productive, conduct more R&D and use more human and physical capital – are more likely to export and export more. This implies a clear role for policies that help to develop these fundamentals in the UK economy, specifically helping firms to grow and become more productive. Manufacturing firms also have a particularly high propensity to export. Supporting the growth of manufacturing industries, especially high-tech manufacturing − where there is some evidence of a comparative advantage for the UK − would therefore also be valuable.
Policy that significantly and sustainably boosts the value of UK exports isn’t only made in trade negotiations. Aligning exporting policy with economic and business development policy, and the national industrial strategy, offers a route to higher exports irrespective of the outcome of Downing Street’s negotiations with Brussels.
Rachel Hesketh is a Research Associate at the Policy Institute.