Effective trade policy is built on one thing above all: a sound grasp of competitive advantage in overseas markets. Understand this, and a country can feel its way towards export-driven prosperity. Ignore it, and trade policy is flying blind – and so is industrial policy.
The UK has been free to craft its own trade policy since we exited the Customs Union, and yet there’s no real evidence of self-awareness when it comes to national competitive advantage. This is baffling. It is also dangerous since in today’s highly interventionist world, we are likely to invest money and energy into the wrong industries.
Here’s a simple test: the next time an economist digresses on UK trade, ask them: ‘What UK goods or services have proved most successful in overseas markets over the past 15 or 20 years?‘ If that draws a blank, ask a more general follow up: ‘What are the UK’s top five goods exports?’
My new research at Civitas looks deep into the past 25 years of UK trade data to uncover national competitive advantage. And it makes a surprising discovery. Despite all the disruption of the Covid pandemic, Brexit and a stalling economy, three British industries have quietly triumphed: premium cars, civil aerospace and specialist machinery.
The combined threats of US tariffs, domestic taxes and cyber attacks may further disrupt these industries. But according to the trade data, these are the UK industries that have demonstrated competitive advantage in overseas markets, and they should be the focus of government policy.
First, cars. Exports of premium vehicles to global (non-EU) markets grew by a staggering 8% per year from 2000 to 2019. This growth rate is exceptional in UK trade data, and it is thanks to the popularity of Jaguar Land Rover (JLR), Bentley, Rolls-Royce and other luxury and sports marques in global markets. Their success is why UK exports to non-EU markets are now worth around twice our exports to EU markets, or £24 billion last year.
So, what’s the take away? The Government should prioritise the interests of the UK premium auto industry in all trade negotiations. This means negotiating up a 100,000 vehicle quota in the current UK-US trade agreement. And it means the UK trying to ensure that trade partners accommodate premium UK vehicles in domestic regulatory settings.
The pre-eminent importance of JLR to UK exports also means doing everything to get the company and its suppliers back on their feet from the recent cyber attack, and ensuring nothing like it ever happens to a major UK exporter again. Given the scale and sophistication of our cyber security industry, that it ever happened at all is a scandal.
On the domestic side, any public support deemed necessary should focus on helping SMEs in those parts of the UK auto supply chain that entrench UK competitive advantage. This means a focus on customisation, craftsmanship and design. These are the factors that differentiate UK vehicles in global markets.
Next, aerospace. The UK’s £40bn-per year aerospace export industry is a staggering 21st-century success. Sadly, the pandemic sent aerospace exports into a nose-dive from 2020 onwards and promptly delivered the single biggest ‘hit’ to UK goods exports in the post-Brexit era.
Now, however, the industry’s prospects look rosier than at any time since the 1950s. For example, UK companies supply around 40% of the value of the Airbus A350 widebody airliner. UK factories supply most of the engines, the wings, the landing gear, avionics, the fuel system and hundreds of other components.
The A350 matters to Britain because it has an order backlog of 766 aircraft. Production rates are set to double in the next three years, to 12 per month. The Airbus A330neo is almost as valuable to UK industry, because Rolls-Royce is also the sole engine supplier. This once-unfashionable plane is suddenly popular. Output is being doubled.
So, the big challenge for UK aerospace is not trade barriers, or demand but the ability to ramp up domestic production.
Meanwhile, the opportunity to expand into aircraft refurbishment is a gaping opportunity because of vast delivery backlogs. As it happens, Northern Ireland and Wales are home to some of the world’s finest aircraft seat designers and manufacturers.
What should UK policy do? First, the industrial strategy should prioritise support for any company involved in commercial aerospace. They are proven winners. We should back them. This means helping them expand quickly without going bust.
Second, government should take a long hard look at Rolls-Royce’s plans for its next generation engine, the UltraFan. It is not enough that this engine should succeed. UK policy should be directed specifically to ensure that the supply chain is as UK-centric as possible. If Rolls can break back into the narrow-body market – and take UK suppliers with them – then UK aeroengine exports could potentially triple. That’s big, big money.
Last, there’s specialist machinery. A close look at the data shows pockets of brilliance. Consider, for example, construction machinery. The UK has easily the biggest construction machinery-manufacturing industry in Europe, employing around 40,000 people. But this isn’t just JCB. Caterpillar also has 10 factories in the UK.
One curious standout is naval equipment. Until this year, UK shipyards had not won a single order for a major warship from a foreign country since the 1970s. Now, the Clyde will start building frigates for Norway. Rosyth’s Babcock is selling designs (which include UK machinery) to Poland and Indonesia. It looks likely it will start building frigates for Denmark and other markets. A genuine renaissance in UK naval construction and equipment manufacturing is at hand. So, defence and security diplomacy should focus on naval ties.
If there’s a common theme in the machinery sector, it’s that the UK is extremely good at building power machinery. That’s why the Australians ultimately chose a Derby-built power plant for its future nuclear submarines. The combination of confidence and capability in UK nuclear engineering is a potential game-changer for UK machinery because of the prospects for small modular reactors (SMRs). Looked at coolly, SMRs are a once-in-a-lifetime opportunity for Britain to build a gigantic new export industry.
Of course, the Government could continue to plough money and diplomatic effort into industries in which it thinks the UK ought to be a world leader – like AI. But the trade data hides some salutary lessons. Pharma is fashionable, and for years, pharmaceuticals gobbled up the biggest share of spending on research and development in the UK. And yet our exports keep falling.
Successful exporting countries know what they are good at. For South Korea, it’s ships, cars and semiconductors. For Australia, it’s minerals, energy and agriculture. For the UK, it’s premium cars, aerospace and specific types of machinery. If we focus trade and industrial support on these industries and their UK-based suppliers, our aggregate exports will have the best prospects for rapid growth.
But if we neglect the industries that have demonstrated competitive advantage, then nothing we do with our trade policy will, in the end, make much difference.
‘The Quiet Triumph of British Engineering’ is authored by Phil Radford and published by Civitas.
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