Re-balancing and the re-industrialisation of Britain

A black cab being produced

The UK wants to re-balance its economy towards making things and selling more of its wares overseas.

As I travel around Beijing to cover the end (or at least the thawing) of the 14-month deep freeze marked by the visit of British Chancellor George Osborne, the Mayor of London Boris Johnson, and a number of high-level figures, I started to think about how both countries want to re-balance their economies but in different ways. It's certainly the term du jour.

For the UK, the government wants to re-balance the economy towards manufacturing and exporting more overseas, while relying less on, say, financial services given the banking bust of a few years ago. Manufacturing only accounts for around 11% of total valued added of what's produced in Britain, while the service sector accounts for over three-quarters of the economy.

For China, it's the opposite. It wants to re-balance its economy away from too much investment and towards developing a more diversified service sector to provide for its burgeoning middle class. China is worried about its high levels of capital spending, which has produced so-called ghost cities, and wants its companies to invest overseas instead — some of which will be going to Britain as announcements about Manchester Airport and other deals are expected this week.

In theory, these countries are largely complementary in what they want.

Trade deficit

Britain, which until recently exported more to Ireland than to the BRICs combined (Brazil, Russia, India, China), wants to re-orient more towards emerging economies and help its companies access the fastest growing markets in the world.

It begs the question: is the UK peddling the right stuff abroad?

Britain has run a trade deficit that widened precipitously last year when it hit a record high of £59.2 billion.

The hope was that with sterling having lost about a quarter of its value since the crash 5 years ago, it would have boosted exports in the same way that it did during the 1990s when the pound left the ERM (exchange rate mechanism) that had tied it to the Deutsche Mark. The last time that Britain had a trade surplus was towards the end of that decade in 1997 on the back of a depreciated pound.

Before then, Britain ran a current account deficit every year since 1984.

Notably, the deficit in goods trade grew since the late 1990s with further de-industrialisation of the economy. Manufacturing declined from contributing a quarter of GDP in 1980, to 20% during the 1990s and then fell sharply to 12% during the 2000s. Manufacturing still makes up about 20% of the German economy on the same value-added basis.

Exporting services

But, offsetting the overall trade gap is the export of services, which has been in surplus since 1966. And, it's a large surplus, typically around 5% of GDP.

Britain is particularly good at these activities and ranks only behind the US in terms of total exports globally. And it's not just financial services - but a range of business services including legal, accountancy, architecture, design, management consultancy, software, and advertising.

Furthermore, the trade in services tends to be relatively high valued-added. As global competitiveness is derived from quality rather than cost-competitiveness, margins tend to be higher. Because UK exports are increasingly represented by higher-end manufacturers and services, it might explain why the recent depreciation of sterling has failed to boost trade by as much as was hoped for. Price still matters, but perhaps not as much as it used to.

So, if the UK can get China to open up more of its services including in financial, professional and creative areas, then British companies are well positioned to serve the under-developed services sector in China.

Chinese students lining up to receive degree certificates British universities are expanding in China

One of Britain's problems is that the global trade in services, which it is particularly good at, has not opened up in the same way the trade in manufacturers has. Since World War II, the global trade in manufacturing goods has boomed as multilateral organisations such as GATT (General Agreement on Tariffs and Trade) and then the WTO (World Trade Organisation) have brought down tariffs and removed restrictive practices. The global trade in services though has not been liberalised to the same extent and this hurts Britain.

Playing your cards right

Where the trade in services has opened up, Britain tends to do well. Higher education is a good example of a UK service industry that is already successfully serving the Chinese market.

This is not just seen in growing numbers of Chinese students studying at British universities, but also through UK universities expanding into China and elsewhere through overseas campuses and partnerships with foreign universities.

It's why re-balancing the economy and re-industrialisation are easier said than done.

It's of course a long-term task and depends on a number of factors, and not just trade. There are some recent positive signs, such as an influential survey of purchasing managers, known as the PMI, finding that manufacturing output recently rose at the fastest pace in nearly two decades, since 1994.

But, in this respect, trade with China may not help.

Just this year, China overtook the US as the world's largest trading nation and the biggest manufacturer.

Trading more with China will mean that Britain must continue to upgrade and produce goods at the higher end of the technology spectrum as its companies won't be able to, nor would they necessarily want to, compete on cost.

More competitive pressure does help to fuel innovation, and there are world-beating British companies producing at the innovative end of the manufacturing spectrum already. Still, it means that Britain will continue to import substantial amounts of manufactured goods, especially lower cost ones from China.

Tellingly, UK goods exports to China may have doubled since 2009, but the trade gaps with China (along with Germany and the Netherlands) are the biggest contributors to the British trade deficit.

Britain could, and should, benefit from the further opening of China if it plays its cards right. But, trading with the world's largest manufacturing power is unlikely to reverse the de-industrialisation of Britain.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 253.

    So Osborne & Boris have admitted that we are now on the same level as a developing African state in that we need Chinese investment to develop our infrastructure

  • rate this

    Comment number 252.

    .."we've got to make better cars than the Germans
    oh errr ok forget it ..."


    The Germans were not born as the best car builders in the world. So how do you think the Germans got to make the best cars?

    Some of the best German cars are made in Györ in Hungrary, Poznan in Poland, Setubal in Portugal, Pamplona in Spain & Brussels & Argentina & Finland

  • rate this

    Comment number 251.

    "29 SEPTEMBER 2012

    Prime Minister David Cameron has returned to Britain at the end of a two-day visit to Brazil to promote British trade.

    --He added: " I argue for Britain's membership (in the EU) because I want to be able to say to countries like Brazil 'Come to Britain and you can sell to the 320 million consumers across Europe'."

    -- and he is still complaining with 320 million consumers ?

  • Comment number 250.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 249.

    " But, trading with the world's largest manufacturing power is unlikely to reverse the de-industrialisation of Britain."

    --when the Colonies left -- that was the end of the closed markets, cheap raw materials and the necessity for a massive military presence all over the world.

    It was the arrogance of waiting for customers ´banging at the door´ was the reason for the downfall.

  • rate this

    Comment number 248.

    244.Auf Widersehen Pet Returns
    "we've got to make better cars than the Germans
    oh errr ok forget it ..."

    And there we have it in a nut shell. Pure 'City Think'.

    The Germans were not born as the best car builders in the world. So how do you think the Germans got to make the best cars? It certainly wasn't by 'forgetting it'.

    Who's economy is healthier?

  • rate this

    Comment number 247.

    The problems are many fold but in short:
    1. Huge pay packets in the City has drawn some of the talent that might have gone into industry.
    2. The bonus culture has encouraged short termism and insufficient investment in R & D
    3. The City boys have exported most of the jobs
    4. Social culture values footballers and big brother contestants more than engineers.
    5. Tax structure is wrong

  • Comment number 246.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 245.

    You simply can't dismantle generations of skill & industry and then expect to pick up where you left off because we need to get back in the game.

    Paying people to sit on their backsides and do nothing has contributed to the demise of British industry for decades.

    Then you have an army of people willing to work but can't because industry & services have been outsourced to foreign countries !

  • rate this

    Comment number 244.

    if we want to successfully rebalance the UK economy we've got to make

    better cars than the Germans

    oh errr ok forget it ...

  • rate this

    Comment number 243.

    Fish are caught in the North Sea.
    They are frozen, put into containers and sent all the way to China.

    The fish are processed (say into kippers) and packaged.

    They are re-transported to the harbour, loaded into container ships and transported all the way back to UK. Distributed, say to Morpeth [near to where they were originally caught]. Cheaper and locals unemployed.

    Is that sensible or lunacy

  • rate this

    Comment number 242.

    Gideon is repairing the UK, this coming from a man that folded towels for 4 weeks. One thing is for sure he's robbed the poor blind & given their money to the super rich via their tax cuts (that's if they pay any)! Furthermore, he's borrowed more money in 1 month than any other Chancellor in History, the Bullingdon boys have got you by the throat from Atos to ludicrous rail & utility hikes etc.

  • rate this

    Comment number 241.

    The chance of EU or UK trying to compete is an utter folly.

    China is now importing UK Universities so that they will be better able to administer Research and Development.

    Automation has also left the Chinese stumped. It takes robots to make the new stuff and people (even Chinese) are REDUNDANT.

    The machine has won because it is more clever, faster and more accurate than a human.
    China has won.

  • rate this

    Comment number 240.

    If a balanced economy is what we truly need for financial and social well being, then lets get on with it.

    There may be reasons it is 'impossible' to achieve but the only reason to walk away is if we don't truly need it.

    You roll your sleeves up and get on with it and keep at it till you get what you need.

  • rate this

    Comment number 239.

    multi billionaires don't need to heavily invest in the U.K.. they want maximum profit, so the U.K. IS NOT THE BEST PLACE TO INVEST.
    can`t figure out though why they consider they need so much, we all end up dead at some point, and you can`t take it with you.

  • rate this

    Comment number 238.

    Osborn spouting hot air again .

  • rate this

    Comment number 237.

    Re-balancing and the re-industrialisation of Britain
    SOUNDS a real good idea George. Lets take a look...

    The Chinese make almost everything.
    We would have to pay extra for labour energy and CO2 Emissions.
    China has improved cheap imitation copies, to be even better than the originals to stage on the world markets.
    China makes High Tech EVERYTHING because they were GIVEN the technology.

  • rate this

    Comment number 236.

    Why are multi-Billionaires sitting on vast amounts of hoarded hidden assets when they could be re-investing in UK's industrial infrastructure, reviving the economy and providing us with real jobs? Isn't there a law against it? Perhaps there ought to be. Dish-out some money to kickstart growth in industry. Start making Velocettes again and flog them to India !

  • rate this

    Comment number 235.

    We could pursue various alternative approaches to rescuing the British economy. One such approach would be to shift to an Hemp-based agricultural policy, providing sustainable jobs in a sustainable industry, that would provide other industries with cheaply, sustainably sourced materials for pulp, cloth, oil, food additives, etc.

  • rate this

    Comment number 234.

    Simply add value and reward those who do. Import any necessary resources (not always required), add value to it using labour (sometimes brains rather than brute force), and export the product (could be internal rather external).
    Or just manipulate markets and make a quick buck by exploiting a workforce beneath their true ability, and getting the gov to make the wages up (benefits)!


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