Britain’s place in the global economy at the start of the 21st century

Introduction – Britain’s place in the global economy at the start of the 21st century

Britain has looked outwards to the wider world for many centuries, but its role has constantly evolved. The British economy, and its place in the wider global economy, has shifted dramatically from the early days of British sea exploration in the 16th century, through the Industrial Revolution of the 18th and 19th centuries, to the global world of today.

An open economy, combined with robust domestic industries, has long been a crucial part of the British success story. In the 19th century, the rapidly industrialising UK was one of the world’s most open economies, with trade climbing to half of its overall national income – compared to 35–40% in France and Germany and around 10% in the United States. In this context, ‘openness’ for the UK was straightforward, with inter-industry trade predominating. Britain exported mainly manufactured goods – specialising in textiles, shipping and iron[1] – while importing raw materials from the Empire and other resource-rich countries, today’s emerging economies. It also was the source of almost half of the world’s foreign direct investment (FDI) at the outbreak of the First World War, while receiving less than 2% itself, and had one of the world’s highest rates of net emigration.[2] In leading the drive towards free trade[3] and international investment that culminated in the world’s first wave of globalisation prior to the First World War, the UK’s global stance helped usher in an era of unprecedented levels of global trade, migration and investment flows fuelled by new technologies such as iron-hulled ships and the telegraph.

Whereas in the 19th century Britain forced openness through industrial dominance and naval power, through the 20th century openness became increasingly secured and influenced through multilateralism, regionalism and the setting of international rules. Once trade with the Empire and Commonwealth began to fade in importance after the Second World War, membership of the European Union and its predecessors became the centrepiece of Britain’s global trade policy to achieve this.[4]

After plummeting during the Great Depression, Britain’s ratio of trade as a percentage of GDP  did not recover its level at the eve of the First World War until the 1970s,  helped by entry into the EEC and the new wave of globalisation then emerging. [5] ‘Openness’ for the UK by the end of the 20th century supported a web of complex supply chains and two-way flows of export, imports, investment and population movement. Britain’s trade make-up had shifted again, predominantly exporting and importing manufactured goods with its near-neighbours and other developed countries, part of a rising trend of ‘intra-industry’ trade, cross-border supply chains and economies of scale seen throughout the developed world.[6] Britain’s approach to labour and capital flows had also shifted dramatically: later in the 20th century and into the next, Britain became a major recipient of FDI, while still remaining an important source, and experienced net immigration rather than the emigration seen during the 19th century.

The changing world has allowed the UK to play even more to a number of its strengths: for example, while the UK has been one of the world’s foremost exporters of financial services for centuries, new communications technologies have enabled these and other services to play an increasingly important role in British exports.

An open economy and a global trading role continue to underpin British prosperity today. However, the nature of economic openness – as well as the means of securing it and the technologies enabling it – has changed significantly. Today, openness is best promoted by securing market access to trade in both exports and imports at every stage of the value chain, having a regulatory climate that is both competitive and enabling to trade, increasing access to labour and investment through migration and capital flows, and improving the business climate for foreign direct investment. It is underpinned by a competitive economy, with investment in infrastructure, education and successful industries.

Today, the UK economy is diverse and its strengths spread right across the UK

Britain has one of the largest and most prosperous economies on the planet – 6th largest in the world in 2012, with a GDP per capita that puts it 3rd among the world’s ten largest economies.[7]

The British economy also has a rich and diverse sectoral mix. The bulk of the economy is service-based: from the large and world-beating financial & insurance industry (8% of Gross Value Added (GVA)), through professional, technical and support services (a further 12%) to the smaller but internationally renowned cultural sector[8] (taking a 2% share). And, contrary to popular belief, the UK still makes, shapes and builds things too: its manufacturing sector is the 9th largest in the world; construction is the other large non-services sector, with a 6% share; while the oil & gas sector remains crucial in strategic terms, although its share of GVA has declined to 2%.[9]

The UK’s industrial strengths also touch all corners of the country. For example, the food & drink industry provides nearly a third (29%) of Scotland’s manufacturing output; chemicals contribute a quarter (24%) and a third (33%) respectively to the North East and North West’s manufacturing output; the West Midlands and Wales both source around a fifth of this from the metals industries (21% and 20%); while engineering and transport equipment strength is found in the West Midlands (40%) and South West (44%).[10] Although many regions have a sizeable financial sector – from 4% of GVA in the East Midlands and Northern Ireland to double that in Scotland – the financial services industry predominantly has its focus in London, where it has a 21% share of output and is world-renowned as a global financial hub.[11]

The UK still has a prominent global trading role

Britain remains a trading nation. Over 65% of its GDP is linked to trade – higher than that in many other large advanced economies including France (57%), Italy (59%) and Japan (31%) – with £527bn of imports and £493bn of goods and services being exported around the world in 2012.[12]

The UK has particular export strengths: for example, it is the second-largest exporter of services in the world after the United States,[13] while OECD data on goods exports indicates that the UK’s comparative advantage lies in chemicals, transport equipment and food & drink.[14] However, its export profile is marked by its diversity: Britain exports goods in 98% of the 4,913 World Trade Organization (WTO) product codes.[15]

Britain’s imports are also diverse and are important across the economy, which means that many non-exporters are as reliant on trade as exporters themselves. In 2008, UK businesses used 57% of imports as intermediate inputs, with most of the remainder used by final household consumption or investment demand. A broader range of sectors is involved in the imported intermediates side of trade than in exports: 48% of Britain’s imported intermediates by value go into services industries, with some sectors such as health & social care and retailing & wholesaling that are mostly domestically focused on the output side being among the more prolific importers. Manufacturers account for a further 36% of imported intermediates and construction for another 6%.[16]

Britain is also a key player in world investment markets. In the ten years to 2011, the UK was the 3rd largest recipient of FDI inflows in the world after the United States and China, and the largest in the EU.[17] Over the same period, the UK was also a prolific source of FDI abroad, having the 3rd largest net outward flows in the OECD.[18] International FDI flows are important even to sectors that participate relatively little in direct trade of goods and services. As well as being open to global capital flows, the UK has also been open to international labour: 14% of workers in 2012 were born outside the UK, and this proportion has been growing.[19]

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Closing off from the world is not how the UK will create and keep the jobs it needs to provide a decent standard of living for all its citizens, or maintain its status as a global leader.

Britain now needs to adapt its global trading role for the coming century

For an island nation covering 0.16% of the world’s land area[20] and with 0.9% of its population,[21] British influence around the world remains extensive. It has a permanent seat on the United Nations Security Council helping to shape global affairs; it is a major force in the world’s most powerful military alliance, NATO; its economy is the 6th largest in the world, underpinning its leadership roles in both the G8 and G20;[22] it is a leading member of the European Union, the wealthiest trading bloc in the world; the economy is diverse with export successes in manufacturing and services; and it is both a major recipient and significant source of global investment.

But the world is changing and so too is Britain’s place in it. The UK must again reinvent its global role for the 21st Century as the global economy changes at a staggering rate.

Growth in China and India is shifting the economic centre of gravity to the East – a process accelerated by the worst financial crisis in the developed world since the Great Depression. Over the coming decades, although Britain will undoubtedly remain a prosperous nation, it will see its weight in the world economy fall back as today’s emerging powers – the BRICs and other countries such as Mexico and Indonesia – take their places among the world’s largest economies.

The rise of emerging nations is also changing the nature of global trade, with the emerging world exploiting a comparative advantage in lower labour costs to drive specialisation in labour-intensive sectors. Britain’s share of trade with Europe and developed nations has been in decline in the early years of the 21st century. It remains to be seen what global economy will emerge from this blend of the intra-industry, regional model of 20th-century globalisation with the renewed inter-industry model of 19th century globalisation.

Closing off from this world is not how the UK will create and keep the jobs it needs to pay for public investment and provide a decent standard of living for all its citizens, or maintain its status as a global leader. We must decide if the best way to be outward-facing and globally competitive lies in continuing to use and influence the EU as a base to maximise integration and interdependence with economies all over the world or, instead, in attempting to reverse this process and return to a system of bilateral ad hoc arrangements.

This report will explore that key decision regarding the UK’s global future in the context of the changing global economy and the ongoing debate about the future of the European Union and Britain’s membership of it. The choices the UK makes will fundamentally affect its future. One thing is clear: the process of globalisation will continue, and even accelerate, whatever we decide.

The CBI believes that UK economic prospects would be damaged if it abandoned the open, trading approach that has served it well for centuries, with all the consequences that entails for prosperity and jobs. There is no reason to suppose that the UK cannot continue to thrive and prosper if it embraces and harnesses the forces reshaping the global economy, using its influence and skills to further develop the interdependent relationships that help to guide global practices and bring down barriers to trade in the modern economy.

 


References

[1] The first country to industrialise, Britain continued to specialise in the products of the early Industrial Revolution after the likes of Germany had moved towards more modern industries like steel and chemicals.

[2] Baldwin, R. & Martin, P., ‘Two waves of globalization: Superficial similarities, fundamental differences’, 1999

[3] Free trade in Europe peaked around the 1870s – from then until 1914, protectionism was reintroduced on the Continent, although the world remained more open than it had been. Britain remained a supporter of free trade until after the First World War, however.

[4] The share of Britain’s share of trade that takes place with the Commonwealth began declining in the early 1950s – well before British entry into the Common Market. Library of the House of Commons, Note SNEP 6497, ‘UK – Commonwealth Trade Statistics’, 2012.

[5] The ratio of the sum of UK exports and imports to GDP first breached 50% in 1974 – it was 65% in 2012 (in nominal terms). Haver Analytics UK Database/ONS.

[6] Paul Krugman, Nobel Prize Lecture, ‘The Increasing Returns Revolution in Trade and Geography’, 2008

[7] Britain’s economy is sixth-largest in the world in nominal terms and its GDP per capita in purchasing power parity terms is third among the world’s top ten (behind the US and Germany). IMF, World Economic Outlook, April 2013

[8] ‘Arts, entertainment & recreation’ in the ONS definition.

[9] Haver Analytics UK Database/ONS and EEF, ‘UK Manufacturing 2012, the Facts’, 2012

[10] CBI Regional Trends Survey (data available on request)/ONS Annual Business Inquiry

[11] Haver Analytics UK Database/ONS.

[12] In nominal terms. Haver Analytics G10 database/INSEE/INS/Cabinet Office of Japan/ONS.

[13] UN Service Trade database

[14] Based on revealed comparative advantage statistics. OECD stat.

[15] BIS Trade Policy Unit

[16] World Input–Output Database and CBI calculations.

[17] World Bank

[18] OECD Stat

[19] ONS Labour Force Survey.

[20] United Nations Statistics Division Demographic Yearbook, 2011

[21] UN Population Division. The UK’s share of the world population fell from 2.0% in 1950 to 0.9% in 2010.

[22] In nominal terms. IMF World Economic Outlook, April 2013.