Prompted by news on Monday (21.11.11) of a drive for raising exports, presented at the CBI conference, I felt compelled to respond with my thoughts on the bigger “balance of trade” picture. As ever, it’s a bit raw, but I hope it prompts some debate.
I agree that the UK should be (and should have been) redressing the years of net-importing behaviour (see Fig 2), to at least a point at which we export as much as we import – a true Balance of Trade.
From a systems perspective there are some basic premises:
– Let’s move out to the world economic system. Economically speaking the world does not have any imports or exports i.e. we do not trade with Venusians, though it could be argued that we export space craft & junk.
– From a natural system perspective, the world “imports” the sun’s energy (which ultimately fuels most activity on the planet, other than geothermal enrgy), the occasional rock and miniscule amounts of energy /radiation from stars etc. (mostly photons), on which we ponder. We “export” forms of radiation back into space, mostly through reflection. None of these interactions require us, humans, to make a decision – they just happen. Our direct influence on these input-ouput relationships is relatively small.
– Now, within the world-system there are economic sub-systems, which are mostly represented by countries (or one might argue economic blocs of countries, like the EU or Eurozone, but let’s assume they don’t have all the attributes and processes of countries, yet).
Figure 1 – An Input-Ouput View
– Each economic sub-system interacts economically with many of the other sub-systems in the form of trade. This trade is mostly measured when it crosses the border, inwards (imports) or outwards (exports), on which each country bases it’s balance of trade figures (see ONS). There are other forms of interaction that can, and do, influence the economic interactions directly or indirectly, but we won’t discuss them at this point. They will remain in a black-box.
– Generally, economic interactions are not measured within a country to the degree and frequency that they are between countries, and usually only for the purposes of highlighting issues and allocating resources, from central and regional government (the decision and policy-makers)
– The sum of imports and exports throughout the world identifies total trade activity, which will be a component of overall economic activity.
– Total Imports SHOULD EQUAL Total Exports so the worlds Trade Balance should be ZERO.
– If we divided all the imports and exports equally amoungst the countries, then every country’s trade balance would also be zero (or at least on average).
– This is however not the case. Some countries are generally net exporters and some net importers. If you are a net exporter you can rely on a general in-flow of cash, a surplus, which you can use to invest or pay debts. If you were a company, you might call this a profit.
– As a net importer, there will be a general out-flow of cash, usually -ve surplus, which is money you no longer have to invest or pay debts. If you were company, you might call this a loss, and over time, you would go out of business (perhaps after mounting considerable debts)
Figure 2 – UK: Net Importer ? Net -loss ?
How does a country become a net export ?
1) Isolation in extremis. You could ban imports. You might only be able to do this if you were truely self-sufficient, having all the resources and know-how needed to sustain the economy and peoples expectations. This sounds interesting, however, you would need to stop anyone going outside the country. How would you do the deals to sell your exports, and learn how to make new stuff ? If you don’t buy anything, why should anyone want to trade with you ? Your currency could not be traded, and lose it’s value etc. etc.
2) Reduce or control imports selectively. Better, but you still might face some of the issues above. Most likel, you don’t have all the natural resources to hand. If you are good at what you do, and have the
propaganda marketing to go with it, your domestic market will gladly buy from it’s own. But, you have to be the best, or at least be perceived as the best. You could also support and protect domestic firms in favour of foreign.
3) Increase Exports. You could devalue your currency, if you have the power to do so. Providing the companies don’t simply put prices up, to profit from this, you can make your exports cheeper overnight. It won’t necessarily make them look more attractive though, and anyway, your import costs have also gone up over night. A short-term option then. In reality, you also have to be the best, or one of the best, in most of what you do. Perhaps if have natural resources that other countries want, and most others don’t have, you’ve got a head start – and they won’t last forever. Best still import raw stuff of lower value and transform them into desirable stuff that everyone wants, for higher economic value.
Now a complex reality is starting to emerge that cannot be resolved as simply as just saying – “we are going to be net exporters [in the next few years]”. There are lots of checks and balances, cultures, behaviours and cultures that need to change before you can have all the pieces of the jigsaw to attempt at becoming a net, and importantly, sustainable exporter. Of course, all your trading partners will not be standing still, especially those who are already or emerging net-exporters.
A statement of intent is a start. But this is a long-term thing, with lots of unpredictability.
Complex system ? A systems solution – view the whole, understand it and ideally the people within it, allocate resource to the obvious gaps, whilst tackling the deeper systemic components, dynamics, behavioural and cultural items, so that the changes you make stick (and don’t just return to the mean behaviour of the system you started with).
Figure 3 – A causal view of some the UK economic interactions (import/export on left)
By definition, not all countries can be next exporters as in the world the sum of total exports SHOULD EQUAL the sum of total imports. So there will be “losers”, if, that a net-importer is. Should the UK even try ? Perhaps Trade Equity is a more perfect state ?
Extracts from BBC report:
“The CBI wants Britain to match the EU average of one in four small-to-medium-sized enterprises exporting by 2020.
The report – written with the help of Ernst & Young – comes ahead of the CBI’s annual conference, in which exports will be a major theme. [E&Y finish off by selling their own strategic approach – surprise, surprise – which actually aludes to some of the systemic changes needed.]
The government should aim to increase net exports from -2.4% in 2010 to 2.5% by 2016, the report said.
The CBI wants exports to rise from 29% of the UK’s GDP last year to 36% by 2016.
Small and medium-sized enterprises (SMEs) have some of the most growth potential, it said – so therefore It urged the UK to aim to match the EU average of one in four small to medium-sized enterprises exporting by 2020, compared with the current one in five.
Sectors with high export growth potential are construction services, communication services, electrical goods, optical and high-tech goods, creative industries, and financial services.”