Loughborough University

Is a £1 trillion export target achievable for UK businesses?

George Osborne’s 2012 budget report

Oliver Wright

1/19/2015

This report will be focusing on the likelihood of the United Kingdom in doubling its exports, when George Osborne made his report, with emphasis on the key areas that will make this goal attainable.

Executive Summary

This project will study the UK exports in achieving the £1 trillion goal set out by George Osborne in the 2012 budget report. Looking at key areas, is this an attainable target, using historical data and forecasting future outcomes.

This topic is important because it is known that for a country to have a sustainable growth model; exports (having a trade surplus) must be the centre of this. If the UK wants to be one of the most powerful economies, like China (the largest exporter at over £1.2 trillion), it needs to focus its government spending on schemes to enhance exports.

The literature is mainly based around business investment and how that impacts international trade levels. A lot has been written about the government’s efforts to reach the goal with internal goals within organisations with will aid the target. The key companies that are being targeted are small and medium enterprises (SMEs). It is important to increase the number of companies exporting and the smaller firms need greater support financially and with advice. Many documents give details of the amount of funding and percentage of businesses that export. Another factor that comes up is the opportunities in emerging markets; since 2010 there has been a 91% increase in exports to China and a 118% increase in exports to Russia, showing just how large to potential is in those kinds of markets (Tovey, 2013).

There are limited studies looking into what effect it would have on the UK economy if the target was reached. Most of the literature is pessimistic about the target and there is no mention of the benefits it would bring to the citizens welfare. There are questions raised whether the UK infrastructure could support the increase demand from exports, especially on airports and ports; many believe much expansion is needed.

This project report has investigated what is needed to in happen in order for the UK to reach the export goal. Is it an achievable goal given the government’s role in the success and whether domestic businesses can break into new markets and succeed in them? There will be specific focus on government intervention and diversifying into emerging markets, looking at the views of experts in the field.

There was a lot of information illustrating the amount of support such government organisations, like UK Trade and Investment (UKTI), offer and some people felt that they were doing enough to help businesses grow their export markets. Offers looked at the apparent under investment given to exporters compared with other nations and wanted to be see more spending to help smaller companies. Others have highlighted to need to pursue fast-growing markets in order to achieve the target.

Most people believe that the target will be missed, only by a few years, but is an encouraging sign for UK businesses to set up capital investment and start exporting. I feel that the target won’t be reached, but it does give a good precedent for UK businesses.

Contents

1. Introduction..............................................................................................................................1

1.1 Aims..................................................................................................................................1

1.2 Main areas of focus...........................................................................................................1

2. Literature Review.....................................................................................................................2

2.1 The current situation of the UK economy.............................................................................2

2.2 The governments role............................................................................................................4

2.3 Breaking into developing markets.........................................................................................5

3. Methodology............................................................................................................................6

4. Results......................................................................................................................................7

5. Discussion of the results..........................................................................................................8

6. Conclusion.............................................................................................................................10

Bibliography..................................................................................................................................11

1. Introduction

1.1 Aims

The purpose of this report is to investigate whether or not it is achievable for the United

Kingdom to effectively double its exports by 2020. George Osborne made it clear in the 2012

budget report that he wanted to challenge UK businesses to reach £1 trillion in exports within an

8 year period. We are now only 5 years away from this so it should give us a better

understanding of whether this goal will be achieved and what needs to be done in order to

achieve it.

1.2 Main areas of focus

I will be exploring a few key areas which I have focused my research on. There have been

certain topics that have had a lot of information about due to the importance of them in

achieving the goal. The main subject I have looked into is the role of the government in aiding

UK businesses; there have been numerous government publications about all the support it plans

to give and different proposals it means to put in place. There are many articles that see

government intervention as the only way to achieve the goal.

Other areas include diversifying into the emerging markets; Brazil, Russia, India and China

(BRICs) by breaking down the barriers to trade. With emerging markets growing at a fast pace,

exporting to such nations will give Britain a great advantage in reaching the target.

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2. Literature Review

2.1 The current situation of the UK economy

With the UK recovering from the financial crisis, it seems that business investment isn’t

following suit. The UK’s growth is unbalanced, from 2010 to 2013, capital investment has fallen

(figure 1), and total industrial production as declined. To add to the poor performance of capital

investment, in the first half of 2013, business investment was at its lowest on record since the

ONS database started in 1997. (Smith, 2013).

Figure 1. UK Capital Investment (Smith, 2013)

This is not a sustainable recovery; the lack of investment will significantly hinder the UK’s

ability to reach the export target because businesses are not investing in new capital, this means

they’re pessimistic about the future and are not willing or able to increase production and export

to new markets.

David Cameron spoke about diversifying into new markets; in 2010, the UK exported more to

Ireland than it did to the BRICs combined. David Cameron is well aware that the barriers to

trade between these countries need to be tackled. (Gordon, 2013).

In 2012, UK’s investment suffered one of the biggest falls in the G8, this is concerning for UK

businesses as it leads to lower competitiveness on the global market because of the lack of new

equipment and technologies. Britain invests a lower percentage of its GDP (Gross Domestic

Product) than all other leading industrial nations. (Inman, 2013).

The UK’s main export partners are the United States (14%), Germany (10%), France (7%), the

Netherlands (6%) and Ireland (4.5%) (ONS, 2015).

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For the UK to achieve the goal, exports would need to increase at a rate of around 10% year on

year. Clive Memmott, Chief Executive of the Chamber, believes the plan to boost exports is a

positive one, but is sceptical over the time framed placed on such a large change (Greater

Manchester Chamber of Commerce, 2014, p. 12).

In 2012, export figures for the UK for goods and services amassed over £490 billion, meaning

the target level of £1trillion is roughly double. In the last five years there as been a 30% rise in

exports. 1 in 6 UK-based companies export. In the World Trade Organisation league table; the

UK is 11th for goods exported and 2nd for its services (EEF, 2014, p. 1).

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Figure 2. UK top 20 Export Nations (HM Revenue and Customs)

2.2 The governments role

An article from the Telegraph has shed some light on the small amount of government spending

it invests in exports; less than £333 million, whereas twenty-five times as much is given in

overseas aid. John Longworth, director-general of the British Chambers of Commerce, believes

that British exporters are “grossly underfunded by comparison with competitor nations” (Tovey,

2013). This tells me that in order for the UK to turn into a top 5 exporting nation; the

government needs to increase its spending on international trade.

The UK Trade and Investment (UKTI) is a government organisation that deals with international

trade and inward investment promotion. It provides support to new and existing exporters of

goods and services. Many of the articles and reports I read believe that UKTI do offer an

extensive range of guidance and funding, however, the general consensus being that most

businesses don’t know about UKTI or its services it provides. Katja Hall, CBI Chief Policy

director, speaking to the Telegraph “A study found 69% of SME (Small and Medium Enterprise)

exporters were unaware of UKTI and 2/3s didn’t know about UK Export Finance” (Tovey,

2013). It is clear that not only is there a lack of resources being use to increase exports and

business investment, but another key issue is the information being provided to educate

businesses about the amount of support available to them if they are planning on exporting for

the first time or to break into an emerging market.

An article from Trade Finance reviews what UKTI has done in the period of 2012-2013. It has

aided 29,320 businesses and £235.6 million worth of trade. As well as spending £81.2 million on

foreign direct investment (FDI). UKTI set itself a target to reach in 2020, increasing the amount

of UK businesses that export. It wants to reach 25% of companies exporting by 2020; increased

by a quarter. This would represent around 100,000 firms (Gordon, 2013). This is a far more

modest target than the one George Osborne set.

In more recent government news, a press release from gov.uk stated that there has been a 50%

increase in export support to businesses. UK Trade and Investment (UKTI) supported 47,960

businesses, from 2013 to 2014, to export for the first time or to find a new market to export into.

(Livingston, 2014).

The government are obviously extremely determined in reaching its goal; they are putting a lot

of resources into doing so, but some academics still feel that there is more that is needed to be

done by the government in supporting UK businesses to achieve the target.

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2.3 Breaking into developing markets

Many articles put the emphasis on the support that small and medium firms need in order to

break into the fast-growing emerging markets.

Figure 3. Source CITY A.M

Figure 3 shows the contrast between the nations the UK predominately exports to, and the

emerging nations it is forecasted to export to over a 5 year period.

RBS economists have devised an index illustrating the benefits of trading with foreign markets

to the UK; on a scale of 0 (no match) to 1 (perfect match); with Brazil ranking high with 0.62,

just behind the US with 0.65. Given the vast difference in trade from the UK to those two

countries, it seems like the UK can see as much benefit in exporting a similar amount to Brazil.

Around 40% of what Brazil’s imports are goods or services that the UK exports large quantities

of. This shows just how big of an impact it would make to the export goal in securing a trading

platform with Brazil. The research conducted by RBS also portrayed Mexico, Taiwan and

Turkey as other suitors to the UK’s export market. (Ward-Proud, 2013).

Knowledge about domestic regulation is important; organisations such as UKTI help companies

looking to export to unfamiliar foreign markets, information such as this is important to

determine whether a firm has the confidence to export into a new market. Therefore, greater

awareness is needed about the support government organisations offer; this comes through

advertising.

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An article from the Guardian, backed by influential MPs, believes that the UK will miss the

export target unless more government help is given to secure trade in the fast-emerging markets.

The cross-party public accounts committee (PAC) argues that the government aren’t giving

adequate aid to SMEs. This source may be overly biased due to the head of PAC being a labour

MP, Margaret Hodge. (Monaghan, (2014).

An annual report from UKTI believes its efforts to expand market diversity have been very

successful. It boosts, since 2010, a large increase in exports to the BRIC nations; a 37% increase

to Brazil, 39% to Russia, 24% to India and 52% to China. It would be easy to focus solely on the

emerging countries but, during that period, exports to the EU and the US saw continued growth

(UKTI, 2014).

The majority of sources believe that government support is paramount for UK businesses trying

to break into new markets, but little give any recommendations how to go about this. From what

I have learnt, UKTI and other government organisations specialising in trade, are working very

hard to see the objective is made. It seems the support and finance is there, but maybe not

enough is known about these institutions by the people that need their help.

3. Methodology

This project report was constructed using secondary data reviewed initially through the

university catalogue plus to obtain academic journals relating to my research topic. It was from

these papers that I generated my question and gave me knowledge of the key issues that I need to

focus the majority of new research from. The predominant database for research journals was

EBSCOhost. Reading academic abstracts gave me a better understanding of where gaps were in

the academic papers, so other means of research was necessary. This was partly due to the nature

of my question; its outcome will be determined in the future. I examined a lot of government

documents such as budget reports and statements relating to new project proposals and funding

to businesses.

To keep up to date with current views and beliefs about the outcome of my report, I trawled

through a number of economic and political websites, paying close attention to any bias or

prejudice, with a few respected newspapers having useful articles; giving different views on

success or failure also adding to the areas of focus that had been apparent in the academic

journals I had been reading. Using the references from some of these websites gave me access to

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different styles of reports, one being UKTI annual report and others from key business sectors

such as ‘The Manufacturers’ Organisation’.

I found a very useful article put together by EEF and The Telegraph which keeps track of the

export progress, called Export Dashboard.

4. Results

My question that I researched was whether or not the UK will reach the export target set by

George Osborne. Because this information will only become available in 2020, the year the

target is set for, my results can only give me a forecast of what is likely to happen.

There is no clear consensus about if the target will be reached or not. The majority of my

references believe it isn’t going to happen, with the National Audit Office saying it is not likely

(Gordon, 2013). The article also draws light to economic forecasts carried out by the

International Monetary Fund and the Office of Budget Responsibility, both illustrating that the

target will not be met by 2020.

Other reports are less pessimistic about the outcome, Lord Ian Livingston of Parkhead feels that

the target is ambitious but shows the government’s true desire to improve the UK’s export

performance. In his eyes, UKTI are doing enough to support businesses in achieving the goal

and sees the developing markets as the area of focus in assuring success (UKTI, 2014).

Deputy Director-General of CBI, Katja Hall agrees with Lord Livingston stating that the target is

achievable- but ambitious. However, she is cautious about being overly focused on these fast

growing markets, exporters should not forget about the UK’s main export partners of the USA

and the EU. Katja places the fate more towards the knowledge of markets, insisting that 69% of

SMEs are unaware of the support provided by government organisations (Tovey, 2013).

Clive Memmott, Chief Executive of the Chamber of Commerce, doesn’t believe that the 2020

target is a reasonable time frame. This claim comes off the back of research committed to

forecasting the export growth, which puts the UK 5 years behind schedule. The economic

models and forecasts have predicted a figure of around £750 billion in exports by 2020, and only

reaching the target by 2025. The forecast assumes a 6% increase in exports per year, some way

off the 10% needed to achieve the goal (Greater Manchester Chamber of Commerce, 2014, p.

13).

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Looking at the recent figures of exports from the export dashboard from the telegraph, it shows

exports at £503.1 billion in March 2014. This figure doesn’t put the target as a realistic chance if

that level of growth continues. The publication goes on to comment on the mix performance of

exports, which will surely hinder the progress unless exports increase each month. The quarter

(Q1 2014) ended up being negative (Pettigrew, 2014).

An all together different view from a CBI report believes the UK has a large comparative

advantage in some sectors. Services have had a growing trade surplus meaning that it has a

lower only opportunity cost in producing services. This is due to the level of skilled labour;

Services are skilled labour intensive and the UK are skilled labour abundant, so the Heckscher-

Ohlin-Samuelson Model would assume the UK to have a comparative advantage in services and

therefore should specialise in that industry to gain the greatest welfare (CBI, 2013).

5. Discussion of the results

My results tell me that it is unlikely that the UK will reach the desired outcome in 2020. This is

may be due to the government not doing enough to aid businesses; at the start of section 2.2, I

mentioned that the UK doesn’t invest as much money into exports compared with competitor

nations. Continuing this point, the support provided by last organisations such as UKTI, from the

literature I have spoken about, shows just how much information and guidance is available to

uneducated businesses seeking that edge to give them a foothold into a new market or even

export for the first time. However, Katja Hall spoke about the amount of small and medium

business (the ones needing the support the most) not knowing about what UKTI offer, or worse

still, not knowing what UKTI is! It is said that the smaller businesses are 11% more likely to

survive if they are exporting.

One of the reasons why the target may not be reached is due to low business confidence. Having

all the support and funding is useless if producers don’t feel safe about the economic situation.

Looking at the investment side of businesses has a large impact on exports; if businesses are

renewing and expanding their current capital stock, they believe that it is not profitable to do so

with the current demand. And if businesses are reducing supply; exports will be severely

impacted. In recent years, businesses have been substituting labour for capital due to the shift

from long term goals to short term survival. This is partly down to the Eurozone crisis (the UK’s

largest exporter) which damaged the confidence of exporters.8

Out of all the forecasts I have seen calculated in this area, none have put the UK reaching the

goal. It is for this reason I believe that the target will not be achieved in the time frame set by

George Osborne. The figures from the Chamber of Commerce illustrate that it is likely to be hit

five years later due to the revised export increase of 6% and not the 10% that was needed

(Greater Manchester Chamber of Commerce, 2014).

Looking at Current figures of export growth from the ONS (Office of National Statistics) before

the middle of 2013, exports looked to be on track, but poor performance in the back of 2013 and

throughout 2014 has been detrimental to success.

The target was too ambitious given the current recovery and the volatility of foreign market

demand.

Looking at figure 3 in section 2.3 does give me confidence that businesses are getting the

knowledge about these markets, and with the help of UKTI, the forecasts should be reached.

Although that won’t be enough to secure the £1 trillion export target.

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6. Conclusion

The success of this ambitious target will depend on the effectiveness of UK businesses in setting

up strong trade networks in the fast-growing markets. My research has lead me to believe that

getting into new markets and dealing with foreign regulations will not be the issue because the

government organisations have a wealth of knowledge and experience in dealing with new

markets. I will be keeping up to date with the progress of British exports through Export

Dashboard, set up by The Telegraph and EEF.

On reflection, given all the academic and political professionals voicing their opinions, it seems

that the export target has created a lot of attention for the need to improve the trade deficit. For

the UK to achieve such a feat would have meant record breaking growth rates at a time of low

confidence and uncertainty. It is my belief that hitting George Osborne’s target is important but

not the defining factor in the success of the goal. It sent out a message to businesses that the

government is serious about re-balancing the economy towards exports and capital investment. It

has created a better understanding of the support available to companies wanting to export, but

haven’t got the expertise.

If it has done anything, it has given producers confidence about future demand outside of the UK

and will increase the capital investment needed to grow firms and gain higher productivity

through better technologies; this will give firms the comparative advantage over foreign firms on

the world market.

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