Published on 31/03/2021

The Aston Angle

Dr. Oleksandr Shepotylo

Will a Global Britain deliver local jobs?

By Dr. Oleksandr Shepotylo
Aston Business School
March 2021

 

The economic impact of the Covid-19 pandemic has hit the UK particularly hard in comparison to its international counterparts. In 2020, UK GDP declined by 10% and its export dropped by 15%. The UK has been hit harder than most of its peers because its economy is concentrated in financial and business services, advanced manufacturing, and hospitality and travel. It has also been hit harder because of the policy decision to erect new trade barriers with its closest and most important trading partners in the EU. According to new trade statistics emerging from the Office for National Statistics (ONS), UK exports to the EU have fallen disproportionally by 41%.

The UK risks decoupling from the EU supply chains, leading to lower productivity, lower living standards, and less advanced manufacturing and services production. Despite the real Brexit happening in 2021, its impacts have been long felt. Since 2016, exporters struggled, FDI dwindled, and businesses relocated to Ireland, the Netherlands and Luxemburg. These impacts may have negative implications on long-term employment prospects for UK workers and the new trade barriers with the EU, impose constraints disproportionally on small businesses. In our report “UK Trade and Prosperity 2020 - Looking beyond BREXIT and COVID” we examined export led growth and long-term trends of UK trade and productivity and made a number of recommendations for consideration by policymakers.

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The UK risks decoupling from the EU supply chains leading to lower  productivity, lower living standards, and less advanced manufacturing  and services production.

 

Global value chains after Brexit and COVID-19
One of the important features of the global economy is the predominance of global value chains (GVC) in the operation of large multinational enterprises. Since the pandemic hit the global economy, there is ongoing discussion about the benefits and future of GVCs, with some advocating for more local and regional supply chains, while others argue that the global economy helped to soften the impact of COVID-19. We contribute to the global debates, by looking at the future of GVCs beyond COVID-19

The UK is the second largest service market in the world, and it remains the second largest cross-border service provider globally, behind only the US. The UK financial services, business services and professional services sectors provide one-third of value-added in manufacturing exports. These sectors contribute hugely to overall UK competitiveness, which will face unprecedented challenges post Brexit while disengaging from the EU. The value position of the UK is clearly set to be reassessed.

Covid-19 brings significant medium term challenges to businesses and governments. However, one also has to think beyond the Covid-19 crisis, and to focus on the long-term challenges posed by Brexit.

Way forward
As one of the largest economies in the world, the UK has solid economic foundations. It exports goods of high complexity and delivers high quality services that reflect the strengths of a knowledge-intensive economy and adds value to its partners in 255 countries and territories. At the time of writing, the UK stands at a critical juncture. It faces major challenges from multiple sources: decades of slowing productivity, short-term acute COVID disruptions and long-term disquiet during the Brexit transition. There are serious concerns for the future, UK merchandise traders will face increased costs due to non-tariff barriers, which are bound to be erected in its closest and largest market. Services traders may be disadvantaged or incapacitated in doing business with the EU, being restricted in business travel, business provisions and recognition of professional qualifications.

But there are new opportunities that allow for optimism: the Brexit-impelled search for new markets has led traders to previously under-explored trade destinations. COVID accelerated digitalisation among businesses which will speed up innovation in products and processes. Unpredictable technological changes can cause new sectors and new markets to emerge very quickly. There are new ways of engaging in trade, with more advanced e-commerce and blockchains. The UK could refocus building on its strengths in technology and innovation, and advance an agenda of sustainability and levelling-up.

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The new wave of industry 4.0 technologies offers new opportunities for local manufacturing SMEs to explore more distant markets.

 

In the longer term, the continuing competitiveness of UK businesses depends on their capacity to be innovative and productive. The new wave of industry 4.0 technologies offers new opportunities for local manufacturing SMEs to explore more distant markets in which skills, innovation, exporting, and productivity are often interchangeable keywords for success. Productivity is the key to trade participation and performance that is what underlies the competitive advantage of producing goods and services in this country and elsewhere. Hence, the requirement to improve UK productivity coincides with the priorities of promoting UK trade and the country’s position in the GVCs. Firms need to have the confidence and capacity to invest and innovate. Skills gaps need to be better understood and tackled accordingly. In addition, it is important to remember that it is not just the exporters that matter to UK trade; the non-exporters that serve the value chains are equally as valuable.