Time to start wooing the new giants of trade
There's a rather nice page to be found in the monthly Press release on UK trade which, perhaps unwittingly, offers a value judgment on our balance of payments position with the rest of the world.
It tells you how good or bad the latest month's — or latest three months’ — numbers are in historical context. As the balance of payments is merely an accounting identity, this is a slightly odd state of affairs. Apparently, deficits are bad and surpluses are good. At the global level, this is rather unfortunate because, for every nation which runs a current account surplus, others must, by definition, be running deficits.
By now, I'm sure you're waiting on tenterhooks to know how the UK's trade position stacks up at present. For goods and services in total, the July deficit, at $4.9bn (£3.2bn), was the worst since August 2005, when the trade data were distorted by the global effects of Hurricane Katrina. Taking the total over the last three months (and hence reducing the Katrina effect), the deficit stood at £13.2bn, the worst ever.
To be fair, as we become richer and our incomes rise, so we should be able to cope with a larger deficit. But the UK's trade deficit has been steadily deteriorating.
This is surprising for one notable reason. Britain's exchange rate collapsed in 2008 and that collapse, in turn, was supposed to mark the beginnings of a major “rebalancing” of the UK economy. A year ago, Mervyn King, the Governor of the Bank of England, reinforced this view by observing that the “rebalancing of the UK economy that I have been talking about for about 10 years is very necessary. I think the fall in the exchange rate that we have seen will be helpful to that process but there's no doubt that what we need to see now is a shift of resources into net exports, whether directly or in producing things that compete with imports that help to reduce the trade deficit.”
With a newly widening deficit, it increasingly appears that the fall in the exchange rate has not achieved quite as much as Mr King was hoping for. No one is suggesting that the cure for the UK's trade deficit is entry into perma-recession even as nations elsewhere in the world continue to enjoy economic growth. That would be too costly. Rebalancing is not a story about persistent slump. Rather, the idea is to do more of one thing (exports) and less of something else (consumption) so that we can pay our way instead of being dependent, year-in, year-out, on borrowing from the rest of the world.
This is where the exchange rate comes in. A fall in sterling adjusts relative trade prices. In sterling terms, imports become more expensive while, in foreign currency terms, British exports end up cheaper. We end up consuming less of what's made abroad and foreigners end up consuming more of what's made in Britain. That, at least, is the theory. Yet it appears not to have worked.
Part of the reason relates to British business's lack of ability to determine global prices. Economically, what then matters is how the higher profits are used. Are they invested in expansion plans or used to pay down debt? Are they frittered away in higher wages or do managers take it easy and choose to use Friday afternoons for golf rather than work?
Part of Britain's problem is its habit of exporting the wrong kinds of things to the wrong parts of the world. Our economy won't rebalance until we recognise that the world has changed.
It's as if British industry has been asleep for the past quarter of a century, seemingly unaware of the emergence of economic superpowers which already are promising to become the biggest markets for Western products. It's about time we woke up.