Analysis

HSBC: Importing for export success

Imports are key to the UK’s export success story, says HSBC report. In order to remain competitive in a global marketplace and integrate further into the global supply chain, UK business needs to continue to outsource production of component parts, invest in education and skills and provide fiscal incentives to support continued R&D. These particularly apply to the most successful organic chemicals, machinery and pharmaceutical sectors.

Imports are essential to the UK economy. Not only due to the goods and services that are unavailable or insufficient to source domestically but because of lower input costs of basic component parts, produced more cheaply and efficiently abroad. This improves productivity and helps maintain the UK’s competitive advantage in creating value-added products higher up the production chain.

Many UK businesses source component parts from abroad, thus improving their efficiency and profitability. By displacing domestic production and employment, it is a common misconception that imports are damaging to the economy. Openness to imports and economic growth is positive.

Production processes have evolved to take advantage of shifting patterns of global trade and production. By outsourcing intermediate goods, focus is on higher value-added investment and consumer goods sectors. Strong capital investment and a highly skilled workforce mean the UK has a strong competitive advantage in the organic chemicals, machinery and pharmaceutical sectors. Innovation and R&D expenditure and imports in these sub-sectors supports efficient production and specialisation higher up the supply chain. It’s not just the volume but the type of inputs, with raw materials having a smaller impact than semi-manufactured inputs. With imported inputs and productivity being even stronger in light manufacturing industries.

Sectors where import growth over the next decade is forecast to be strong will see even stronger export growth, particularly those driven by high-technology manufactured goods to Asia, the Middle East and North Africa, as well as China.

Maintaining the lead in R&D intensive manufacturing sub-sectors depends on the UK’s adaptability within a changing competitive landscape. It has one of the most highly educated workforces in the world but attempts to encourage more people into STEM subjects is lagging.

Future challenges within specific sub-sectors include competition from China and India in the supply of organic chemicals to other emerging economies, while declining domestic supplies of oil and gas will increase pressure from the Middle East. Slow recovery in the Eurozone will hold back machinery exports on the continent, while China’s growing capacity in this sector is also expected to erode it further. The revival of UK car manufacturing exports, however, is expected to continue to grow.

The UK will continue to benefit from trade and outsourcing production but an increasingly competitive environment underscores the need to maintain a comparative advantage by investing in R&D.