In the “war of words” which has been unleashed by Prime Minister Cameron’s speech in the City of London on Wednesday 22nd January, trade statistics are and will continue to be prominent bullets fired by all sides – the so-called Europhiles, Eurosceptics, the BOOs (Better Off Outers).  It is therefore worth setting out the latest (2011) figures on the United Kingdom’s trade with other countries both within the EU and those in the rest of the world (ROW).

Some of the more extravagant views currently include the Europhile claims that three million UK jobs depend on our being in the EU (Nick Clegg MP on 13^th January 2012; assorted corporate businessmen in the Daily Telegraph, 20^th December 2011).  Written repudiation of this and other fantastical claims has been made by this writer at intervals stretching back to the Maastricht Treaty negotiations in 1992 (see the post “Corporate Business and the EU, January 4^th 2013 for references).

On trade balances the most recent claims from the so-called Eurosceptic camp are in the report by Cash & Jenkin – both Conservative MPs[1].  They seem to have a problem with definitions of the various credit-debit income streams, but these are set out very clearly in the National Statistical Office publication “United Kingdom Balance of Payments” – “The Pink Book” for short, which is directly accessible from Google under that name – as follows:

(1)        Trade:  Trade in Goods and Services

(2)        Income:  Principally Dividends and Interest into the UK, minus the flow out of the UK.

(3)        Transfers:  Principally to and from EU institutions, but including military operations and bases, and remittances sent home by foreign workers, chiefly to Poland and Pakistan.

These three could be either positive or negative amounts and the sum of (1) + (2) + (3) makes up the “Balance of Payments on the Current Account”.  Any deficit on the Current Account has to be paid for by interest payments to foreign suppliers and investors.  This is quite separate from and additional to interest payments which are being made on the National Debt (currently increasing at an average rate of about £13 billion per month) chiefly in the form of Gilt-edged Stock which is sold by the government each month.

1          The UK Position on the Current Account

Of the three components (1), (2) and (3) only Trade (1) has a direct bearing on jobs.  The trade balances between the UK and other countries and blocs like the EU are usually quoted by politicians and journalists, but the data cited is sometimes a combination of (1) and (2).

In particular, current account earnings by the City of London cause many commentators in the broadsheet press particular problems, sometimes attributing all financial credits to the City, or even more extreme, attributing all services income to that vaguely defined entity.  This article is designed to define and quantify the major items of Britain’s trading income and debit streams, and where abouts in the world they come from.  A second article will set out the makeup of the credits and debits in the UK’s Investment Income stream (2) and similarly for Transfers (3).

Table 1: Current Account Data[*] for recent years[**] in £ billions

	2011			2006
	Credits	Debits	Net	Credits	Debit	Net
(1) Trade	493	517	-24	388	423	-35
(2) Income	189	172	+17	238	230	+8
(3) Transfers	17	39	-22	23	35	-12
Total in Current A/c	699	728	-29	649	688	-39

[*] Taken from the National Statistical Office (NSO) Pink Book for 2012. The 2013 edition will be published on July 17th. Numbers are rounded to the nearest whole number of £ billion.
[**] Data for each of (1), (2) and (3) for the years 1995 and 2005 may be found in “Produce and Prosper”, a paper by Stephen Bush which can be found on this website, or by Googling “Balance of Payments”.

2          Trading Account

Trading is usually split into (i) tangible, storable “goods” which are replicated, and (ii) “services”, which are supposed to be unique, not storable and consumed at the point of delivery to the customer.  Travel and restaurants are thus archetypal “services” but the United Kingdom is heavily engaged also in the provision of services often not seen by the general public or political commentators.

Archetypal services of this latter kind are collected together by the NSO under the heading “Other Business Services” and include engineering design and maintenance, architectural design, information technology, research & development (R&D), and legal services.  Much of these services depend on the export of tangible goods, e.g. Rolls Royce’s overseas engine maintenance centres, and it is a moot point whether an engineering design for an aircraft or a factory embodied in reports, drawings and discs being obviously tangible and storable is a “good” or not.  At the moment it would be classified under “Other Business Services”.

UK exports to “Other Business Services” has grown steadily year by year since records in this form began in 1991 right through the recession, with £52 billion credits in 2010 (£66 billion in 2011).  Financial services were worth £44 billion in 2010 and £57 billion in 2011.

2.1       Trade in Goods

As currently defined, “goods” covers the major categories: food and drink, basic materials, crude oil and oil-based fuels, coal, gas and electricity (via the interconnector to France), intermediate manufactures like chemicals and precious stones, components like engines and pipes and finished manufactures including consumer goods, equipment and cars.  The outstanding features of the ten year period to 2011 are:

(i)         Change in the oil account from a positive balance of £5 billion in 2001 to minus £3 billion in 2006 and minus £11 billion in 2011 as North Sea oil production has predictably reduced – virtually halved over 10 years – corresponding to a reduction in national output of around £25 billion at current oil prices[2].  The insane policy being adopted by the United Kingdom of forcing the oil companies to include 5% biofuels in gasoline from April 1^st 2013 and 10% before 2020 in pursuit of the chimera of stopping climate change, itself problematical, will only make the fuel balance worse since virtually all biofuel feedstocks are imported.

(ii)        A near doubling of the consumer goods deficit to £28 billion in 2011.  This owes a lot to British retailer chains like Marks & Spencer, John Lewis, Tesco, Curry’s, etc. scouring the world for goods to tempt their customers and not doing enough to encourage production in the UK.  The export-import ratio for these goods was at 0.44, by far the worst of any major category.

(iii)       A steady reduction in the cars deficit from around £7 billion in 2006 to a positive balance of £1.5 billion in 2012 (minus £1 billion in 2011).

Goods production is of prime importance to the UK because it engages every level and type of skill and labour including every major services category.  Much if not most of British industry is world class, but there is simply not enough of it.  See e.g. endnote [3].

Table 2: Exports (credits) and imports (debits) of Goods (2006, 2011)

	2006 £ billion			2011 £ billion
Type	Credits	Debits	Balance	Credits	Debits	Balance
Food & raw materials	16	33	-17	27	48	-21
Chemicals, polymers & pharmaceuticals	42	38	+4	62	58	+4
Consumer goods	19	41	-22	22	50	-28
Cars & aircraft	20	28	-8	31	29	+2
Machinery	57	63	-6	39	51	-12
Components	42	53	-11	45	58	-13
Oil	23	26	-3	38	49	-11
Others	25	40	-15	45	56	-11
Totals	244	320	-76	299	399	-100

Clearly most of the deterioration in the goods balance since 2006 (just before the financial crisis) is due to oil, machinery and consumer goods as noted above, offset by improvement in cars and aircraft.

Machinery is vital to improve as this is what the expanding markets in China, India, Latin America need above all – things to make other things.  Germany in 2011 was the second largest goods exporter in the world (at £830 billion, over three times the UK) and the largest supplier of machinery around 25% of the world total).  This is the principal reason why Germany has 12 times the UK’s exports to one key market – China.

2.2       UK Goods Trade by territory or trade bloc

The trade in goods is likely to be a major issue for the forthcoming UK referendum on EU membership.  Various claims have been made that the £100 billion goods deficit is chiefly accounted for by trade with the EU, or that this applies to all trade.  Table 3 sets out the goods data for the two reference years for particular countries and groups of countries.  The Anglophone countries, all former members of the British Empire (AICANZ) have been grouped together because the UK’s trading record with them is quite distinct for historical and cultural as well as language reasons from that with the EU (less Ireland), the BRICs, and Latin America (less Brazil).

Table 3: UK Trade in Goods by areas of the world in £ billion

	2006			2011
Area	Credits	Debits	Balance	Credits	Debits	Balance
Whole world	244	320	-76	299	399	-100
EU 26	153	184	-31	159	202	-43
EU-RoI[*]	136	173	-37	141	189	-48
AICANZ[**]	56	44	+12	68	51	+17
EFTA[***]	7	19	-12	9	33	-24
BRIC[i]	9	26	-17	22	47	-25
GHSS[ii]	12	17	-5	19	24	-5
ROW[iii]	24	41	-21	40	55	-15

[*] Republic of Ireland.
[**] USA, Republic of Ireland, Canada, Australia, New Zealand.
[***] European Free Trade Association – the remainder of the organisation founded by Britain in 1961 now consists of Norway, Switzerland, Iceland, Lichtenstein.
[i] Brazil, Russia, India, China – fast developing large countries (population 2.7 billion).
[ii] Other countries where the law and language of business is mainly English – Gulf States, Hong Kong, Singapore, Republic of South Africa.
[iii] Rest of the World.

2.3       Comments on Table 3

(i)         In terms of the possible outcomes of the UK EU referendum, it is very unlikely that UK/ Republic of Ireland trade would be significantly disturbed because of common geography, language and Law.  For that reason Ireland is grouped with the other Anglophone countries as AICANZ.

(ii)        The huge growth in the deficit recorded with EFTA is entirely due to the massive increase in imports of Norwegian oil and gas[4].

(iii)       In terms of balances, three areas show an improving trend through the financial crisis in 2007 to the present, while BRIC, while the EU and EFTA have deteriorated.

(iv)       The proportion of UK goods going to the 25 countries of the EU minus Republic of Ireland reached 47% in 2011; 23% to AICANZ and 7.4% to the BRIC countries which have a combined population of 2.7 billion which is almost nine times the USA’s and six times the EU’s.

(v)        Nothing much will change until (a) the UK seriously addresses the language issue, specifically training salesmen and executives to speak Portuguese, Spanish (for Latin America – Brazil), German, Russian and Chinese, and (b) concentrates more effort on machinery exports and (c) gets the retail chains to work directly with British designers and factories to improve the consumer goods export/import ratio.

(vi)       There are 42 countries in the 5 identified areas in Table 3, representing 87% of UK goods exports and imports, the other 152 countries representing the remaining 13%.  Any seriously run business would be bound to concentrate on the 42 when resources are limited.

(vii)      AICANZ is the only area showing a rising positive balance and also a significant increase in goods exports (21%) over the 5 year period.  The EU 26 showed a 4% increase in exports, the remaining areas reading down Table 3 were 21%, 28%, 144% (from a small base), 58% and 67%.  These trends are more pronounced with the trade in Services shown in Tables 4 and 5.

3          UK Trade in Services

Table 4 summarises UK services exports (credits), imports (debits) and balances for the whole world under the main headings described, for the reference years 2006 and 2011.  Table 5 gives the same area breakdown used in Table 3 for goods.

3.1

Table 4: UK Services Exports and Imports in £ billion

	2006			2011
	Credits	Debits	Balance	Credits	Debits	Balance
Transportation	17	19	-2	23	20	+3
Travel	19	34	-15	22	32	-10
Insurance	13	4	+9	10	2	+8
Financial Services (including fees, commissions & fund management	34	10	+24	51	12	+39
Business Services including engineering, legal & IT	45	22	+23	66	34	+32
Royalties & licence fees	8	5	+3	9	7	+2
Other Services	8	9	-1	13	11	+2
Totals	144	103	+41	194	118	+76

 

Notes on Table 4

(i)         The Business Services category is composed of Engineering, Architecture, Construction, Information Technology, Contract R&D, and trade related services such as merchanting.  Physically, with the possible exception of merchanting, these services are preformed all over the United Kingdom and not at all connected with the City of London.

(ii)        Business services show an extraordinarily steady increase right through the recession (2008 to the present) in fact since records of these activities began in 1991.  Its export value overtook Financial Services plus Insurance in 2010 and in 2011 accounted for 34% of all services exports and 42% of the net services trading balance.  As can be seen in Table 5 these services are even more strongly linked to the Anglophone world than are goods exports.

(iii)       In 2011 Financial Services accounted for 26% of Services Exports.  The growing importance of non-Financial Services (74%) runs counter to the view endlessly propagated by the broadsheet newspapers.  This is because they conflate financial services income which is mainly to do with the City of London with investment income which is largely to do with investment by large international companies such as Shell[5].

3.2

Table 5: UK Services Exports by areas of the world in £ billion

	2006			2011
Area	Credits	Debits	Balance	Credits	Debits	Balance
World	144	103	+41	194	118	+76
EU 26	58	54	+4	75	59	+16
EU 25[*]	51	51	0	65	54	+11
AICANZ	44	25	+19	59	28	+31
EFTA	8	4	+4	12[**]	4	+8
BRIC	6	4	+2	9	5	+4
GHSS	9	4	+5	12	6	+6
ROW	26	15	+11	37	21	+16

[*] EU without the Republic of Ireland
[**] Predominantly Switzerland (£9.4 billion)

Notes on Table 5

(i)         As with goods trading, the Anglophone area denoted AICANZ has easily the highest positive services balance and almost as large services exports as the EU 25 (i.e. without Republic of Ireland).

(ii)        Services trade with the BRIC countries is pathetically small given their huge population (about 2.7 billion).  This almost certainly reflects the poor British commercial language skills and low levels of cultural knowledge outside the Anglophone world.

(iii)       Physical nearness does count.  Services exports to the Republic of Ireland and to Switzerland at £2,400 and £1,300 per head of population are way above the USA’s (£130 per head) and comparable with Singapore (£1,300) with which Britain has strong present-day business and cultural links deriving from its entrepôt role in the Far East Empire.

(iv)       In terms of balances and exports, all areas showed an increasing trend from 2006 to 2011.

4          Overview of Britain’s Overseas Trade

4.1       The massive increase in Britain’s goods deficit from a just manageable £12 billion in 1997 to an unmanageable £100 billion (7% of GDP) reflects a twelve times increase in deficit with the EU 25 (from £4 billion to £48 billion) and a 16 times increase in deficit with China (from £1.4 billion to £22 billion).  These vast deficits are, as noted above, chiefly due to the profligate importation of consumer goods, electronics and IT above all, as evidenced by this being the category with the lowest export/import ratio (0.42).  The huge expansion of unfunded  state benefits and public sector pay under the Labour governments of Blair and Brown in the years 2000 to 2011 translate directly into the huge rises in imports in the period, along with of course the corresponding huge rises in government deficits.

4.2       The major retail chains bear a large responsibility for the rise in consumer goods deficit.  With a buoyant home market John Lewis and Curry’s in particular seem to have made no moves to encourage new UK suppliers preferring instead to go for immediately available Far East goods (see Table 3).

4.3       A second major factor in the good deficit has been the decline, indeed virtually halving, of North Sea oil production which has pushed up the replacement oil and gas import bill from Norway by eleven times (from £2 billion in 1997 to £22 billion) and 17 times from Russia (from about £400 million in 1997 to £7 billion in 2011).

4.4       While there is not much that the UK government can do about the North Sea oil decline, it can surely take much more active steps beyond trade delegations to improve Britain’s miserable export performance in the BRIC countries.  Devaluation of the pound sterling, so beloved of economists like those at the National Institute of Economic and Social Research, is no remedy.  All it does is increase the cost of imports, when all the evidence is that it is the range of goods which is the problem, not the price.  One senior Chinese businessman commented that compared with Germany, France and Italy, Britain didn’t have much to sell.

4.5       This means providing the means to:

(a)        enlarge the range of British products by new factories and products established for the purpose;

(b)        create new schools of commercial Chinese, Russian, Spanish, Portuguese and German.  As one German businessman famously said: “I buy in German and sell in English”.

4.6       The extraordinary success of British exported technical services (linked in many cases to physical exports) in starting from near zero in 1991 to the position 20 years later where at £68 billion in 2011 it has overtaken Financial Services (£56 billion in 2011) as the largest category of services exports should be broadcast as a corrective to political concentration on the wishes of the City of London.  The City financiers have notably failed to finance the nuclear power stations’ new-build so urgently needed and the new factories for machinery needed for exports – as noted above[6].

Endnotes

[1]  Bill Cash and Patrick Jenkin, “The EU Single Market – is it worth it?” 17^th January 2013.

[2]  The current government has taken a number of measures to encourage production from marginal oil fields, but most are heading for exhaustion.

[3]  Stephen Bush, 2005, “Britain’s Industrial Army has too few troops”, Parliamentary Monitor (no. 6).

[4]  Ironically these imports have their main source in a part of the UK Continental Shelf which the Conservative government gave to Norway in the UK Continental Shelf Act of 1964.  The grounds for  this incredible generosity were apparently that the western edge of the deep trench leading to the Atlantic from the Skagarak (which International Law holds to be the edge of the UK’s North Sea continental shelf) was so close to Norway that in the eyes of the Conservative government of the time, it would be “fairer” to adopt the median line between the two countries.  One wonders what twisted logic awards roughly half all the North Sea reserves to a country of 4 million people (then) when as a country of 52 million (then) you don’t have to.  Nearly all of Norway’s oil and gas has had to be landed on the UK’s North Sea coast because of the difficulties of taking pipes across the extremely deep Skagarak trench.

[5]  Investment income will be analysed in the forthcoming article: “UK Investment Income and Transfers”.  Transfers cover payments by the UK government to foreign institutions such as the EU and Aid agencies.

[6]  JCB is showing the way in Brazil with its expanded production for Brazil reported on 12^th May 2013.