Export-led growth and the failure of economic rebalancing
The trade deficit is growing – and the Transatlantic trade deal is unlikely to rectify this
The Conservative Party’s general election manifesto could not have been clearer: ‘A sustainable recovery must be driven by growth in exports’. A preceding speech by George Osborne specified ‘net exports’, explaining that rising exports had to be matched by falling imports, as Britain once again became a nation of ‘makers’ rather than consumers.
Yet the data on Britain’s trading position since the coalition government took office is equally clear: the trade deficit is getting worse rather than better. The proposed Transatlantic Trade and Investment Partnership (TTIP) is being sold as part of the solution to this – but I believe the notion that TTIP will lead to a rebalancing towards export-led growth is somewhat fanciful.
In the immediate post-war era, the UK’s current account has alternated between small deficits and small surpluses. Since 1984, however, the UK has run a current account deficit every single year, and deficits have grown in magnitude. In 2012 it stood at more than £59 billion, almost 4% of GDP, making this the largest deficit since 1989. From 1997 to 2009, the situation had improved, as the continuing decline of manufacturing had to some extent been compensated by the increasing ‘tradeability’ of financial services. The average annual deficit in those years was around 1.8% of GDP.
But, from 2010 to 2012, the average deficit increased again and reached 2.7%. The trade balance – the chief component of the current account deficit – stood at almost £34 billion in 2012, or more than 2% of GDP.
GDP data shows that the trade balance has improved slightly in 2013, as exports increased. However, the increase was largely in line with the overall increase in GDP, with exports accounting for no greater a portion of GDP than in 2010, 2011 or 2012. This limited improvement has been assisted by sterling depreciation, so our exports are cheaper – but this trend is actually quite worrying, insofar as it is driven by lower inflows of capital into the British economy from abroad.
Clearly, the recovery is not being led by exports. This helps to explain the government’s enthusiasm for TTIP (which has received virtually no mainstream media attention), a hugely ambitious free trade deal between the United States and the European Union. The US is Britain’s most import export destination, and indeed our second biggest source of imports (just behind Germany, and just ahead of China and the Netherlands).
The deal will virtually eliminate tariff barriers between the US and the EU. But most of the benefits lie in eliminating ‘non-tariff barriers’ (NTBs), that is, the rules and regulations by which those wishing to sell to or invest in other countries must abide. Depending on the extent of the final agreement, the deal could lead to an increase in between 0.3% and 0.7% of GDP for the UK.
However, I believe most of this benefit will not be realised. Even if it were realised, it would not represent re-balancing towards export-led growth.
TTIP has attracted a little controversy recently due to the implications of seeking to eliminate non-tariff barriers – in other words, harmonising regulatory practices between jurisdictions. TTIP would not only require national governments to alter legislation to conform to the agreement; they would also have to compensate any company which successfully argued its ability to operate freely in other countries was being impeded by excessive regulation.
Compensation would be agreed by investor-state dispute settlement mechanisms: shadowy, quasi-judicial bodies which meet in secret and are not led by an independent member of the judiciary. Such mechanisms are already a feature of many trade deals between developed and developing countries. George Monbiot of the Guardian has understandably labelled this aspect of the deal ‘a full-frontal assault on democracy’.
But the faulty economics of the agreement are just as interesting. Firstly, Britain already has a very liberal regime in terms of openness to American firms. This is why our European partners stand to benefit much more than we will. It is acknowledged in research for the Department of Business, Innovation and Skills (BIS) that harmonisation between the US and continental Europe will actually divert trade away from Britain.
Secondly, in reaching the estimated benefit of 0.3%-0.7% of GDP, the BIS research appears to take no account of the negative economic impact of additional imports from the US. Exporting to the US will be easier for Britain – and exporting to Britain will be easier for the US. Clearly, there will be a short-term economic benefit arising from cheaper American imports; but there may also be a longer-term impact on skills and investment in Britain if our producers suffer as a result.
Thirdly, and I believe most importantly, the estimation of the cost of NTBs is actually quite unscientific, and is based largely on asking firms about the extent of these expenses. Invariably firms will exaggerate the cost of regulatory compliance.
Finally, cabinet minister Ken Clarke’s response to Monbiot suggests that TTIP is actually quite progressive, as it helps small firms more than large firms – because smaller firms have fewer resources for cross-border regulatory compliance. This argument seems quite implausible, since TTIP is more concerned with enabling overseas firms to establish a physical presence in other countries than with encouraging arms-length trade. NTB or no NTB, few small firms have the capacity to undertake such activities and, as such, TTIP will almost certainly benefit the largest corporations more than smaller firms.
Increased investment in new technology and the UK manufacturing base is the surest path to export-led growth. Deregulation will, at best, provide a temporary boost before exacerbating long-term structural defects in the British economy.
Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.