Exports are growing, but too slowly to rescue the economy

As Britain's economy stumbles toward a likely recession, hopes are pinned on exports, particularly to faster-growing parts of the world. There are some encouraging signs. Britain's trade deficit shrank from 4% of GDP in 2007 to around 1% of GDP by early 2011. But the economy might have been expected to do better. The obstacles have been many. Falling global demand blunted the impact of a cheap pound in 2008 and 2009. Once global trade recovered, so did Britain's appetite for imports—despite a rise in relative import prices of roughly 20% since 2007. The financial-services industry, which accounted for a third of British exports in 2008, has been slow to recover.

A deeper concern is that Britain has become too dependent on rich-world markets. The share of exports going to Europe has fallen in the past decade, but the continent still accounts for half of British exports. That market is shrinking. America absorbs more British exports than any other single country and its economy still looks relatively robust. British exports to that country fell 4% in the year to September, but showed signs of recovery, along with America's economy, in October and November.

The emerging economies of Asia and Latin America seem a better long-term bet than Britain's established markets. But the combined share of British exports going to the three emerging-market giants —China, India and Brazil—is less than 5%. Firms have been slow to build trade links with these fast-growing economies. When the domestic economy was strong, there was little incentive for its firms to go to the trouble of finding customers in unfamiliar markets.

The recent success of Britain's car industry suggests all is not lost. Domestic car sales fell by 4.2% in the year to November, but exports to China rose 23%, and sales to India were up by 67%. Foreign carmakers who built export-oriented operations in Britain in previous decades have taken advantage of the fall in sterling to expand market share, particularly in emerging markets. Others must find a way to learn from and duplicate the success now on display in Liverpool. Let it be.

The Financial Times, January 2012.