Trade flows

How to tackle the UK’s trade deficit

The answer to the UK’s export conundrum? Don’t target all emerging markets – target the right ones

The UK trails its European peers when it comes to exporting goods to emerging markets. But by focusing on exporting to emerging market countries with relatively higher GDP per capita, the country can catch up to with its European peers.

Analysis of trade and GDP data suggests that two main factors explain which countries trade with the UK: geographical distance and GDP per capita.

The UK exports relatively more to Gulf countries, such as the UAE, Qatar and Kuwait, which have high per capita incomes and are closer to the UK than Southeast and Northeast Asian countries.

Overall, only 20 per cent of the UK’s exports go to emerging markets, compared to 27 per cent for its big European neighbours. But then emerging markets tend to have lower incomes, and are therefore more likely to import goods rather than services – whereas services are the UK’s strong suit.

The UK is a top exporter of financial, insurance, transportation and travel services (mainly tourism) globally. In fact, the country has a services trade surplus of about USD130 billion, which partly offsets the USD180 billion goods trade deficit.

The big deficit on goods is partly explained by the fact that UK manufacturing went through a low-growth period in the last quarter of the 20th century, while other countries such as Germany were booming.

The competitive advantage

The UK does have a competitive advantage on some manufactured goods, namely pharmaceutical products and some high-value-added, knowledge-intensive engineering products such as aircraft engines. It has also increased its competitiveness on car manufacturing dramatically in recent years, with a focus on above-average-quality cars.

Before an emerging market country reaches middle-income status, it typically has high demand for goods such as household appliances, cheap cars and construction equipment.

The good news for the UK is that – with incomes rising across many emerging markets, particularly in Asia – what people demand is changing, and it is moving in a direction that suits UK exports.

By pushing more exports to Asian emerging markets with relatively high GDP per capita, the UK has a huge opportunity to turn around its lacklustre export performance

Asian countries are beginning to demand more high-value-added goods such as higher-quality cars and pharmaceuticals, rather than raw materials such as commodities.

And, as incomes rise, demand for services is likely to grow in relation to goods consumption. Financial services, insurance and entertainment, such as broadcasting rights for television programmes, are likely to be most in demand.

The UK has steadily raised its exports to Greater China, the Middle East and North Africa, successfully targeting the rising middle class in these regions. However, its share of exports in East and Southeast Asian countries – where the middle-class population is expected to grow rapidly in the coming decade – is lagging behind.

By pushing more exports to Asian emerging markets with relatively high GDP per capita, such as Korea and Malaysia, the UK has a huge opportunity to turn around its lacklustre export performance.

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