Memorandum submitted by CBI
The Confederation of British Industry (CBI)
is the national body representing the UK business community. It
is an independent, non-party political organisation funded entirely
by its members in industry and commerce and speaks for some 240,000 businesses
that together employ around a third of the UK private sector workforce.
The CBI's membership includes the majority of the FTSE 100, some
200,000 small and medium-sized enterprises (SMEs), more than
20,000 manufacturers and over 150 sectoral associations.
INTRODUCTION
1. UK companies' visible exports contribute
25% of UK GDP and UK services companies remain large contributors
to the UK balance of payments. They are the world's second largest
source of foreign direct investment (FDI) and the UK is the second
largest recipient of global FDI. Yet falling global demand will
lead to the first decline in world trade since 1982—the
World Trade Organisation now puts this at minus 9%. This will
be compounded by significant falls in international investment
and capital flows.
2. Business is right to be concerned at
the looming spectre of protectionism. A major reduction in market
access for goods, services and investment, together with significant
distortion of competition, can only lead to reduced business opportunities
and declining global prosperity. The importance of an open trade
and investment climate to the UK demonstrates why it is vital
the protectionist trends are resisted and that trade and investment
must be seen as a key driver towards recovery.
3. The CBI believes it is important Government
fully recognises this position and focuses on building the UK's
capacity to further benefit from, as well as respond to, the opportunities
and threats of globalisation. This dynamic is made more critical
by the current challenging global economic circumstances. The
success of the UK's economy in the future will be dependent on
adopting the right approach now.
4. To create the rights conditions to help
business prosper the CBI highlights the following key points:
— Robust export growth will be essential
if the UK economy is to sustain a satisfactory rate of expansion
in the near future.
— The business climate and its underlying
competitiveness should be supported amongst other things by minimising
the adverse impact of regulatory and tax policies on business
costs, improving skills levels, identifying the value of intellectual
property in export markets, and exploring some of the new ideas
on industrial activism.
— UKTI activities must effectively support
UK business interests both in export and investment promotion,
and must convert its knowledge of different markets and its wide-ranging
influence into concrete export opportunities for business.
— The Export Credit Guarantee Department
should ensure more effective support for companies.
CREATING A
COMPETITIVE CLIMATE
FOR EXPORTS
5. As the drivers of economic growth change,
via declining household expenditure and constrained Government
spending over the years ahead, the UK will have to look to a combination
of business investment, import-substitution and exports to drive
economic growth for several years to come.
6. Business investment cannot be expected
to grow at a robust rate for very long without final demand from
one source or another—households, Government or net trade—also
growing at a reasonable pace. While the potential role of import-substitution
should not be overlooked, this is unlikely to suffice on its own
given the limitations imposed by natural resource constraints
and relative cost considerations. So robust export growth will
be essential if the UK economy is to sustain a satisfactory rate
of expansion in the near future.
7. That will require a better export performance
than over the past decade—as shown in table 1.[18]
Table 1
THE UK'S EXPORT GROWTH VALUE
| | |
| |
| By volume
| By value |
| 1998-2008 | 1973-1998
| 1998-2008 | 1973-1998
|
| | |
| |
| Exports (goods & services) | 3.7%
| 4.3% | 5.9% | 11.0%
|
| Imports (goods & services) | 4.9%
| 4.5% | 6.7% | 10.7%
|
| GDP | 2.6% | 2.1%
| 5.1% | 10.4% |
| | |
| |
| Source: National Statistics |
| | | |
| | |
| |
8. One factor that should help exports in the near-term
is the significant decline in sterling, of some 25% in trade-weighted
terms between July 2007 and March 2009. If as seems likely
sterling did not return to the levels characterising the 1997-2007 decade
for many years to come, then that would provide welcome support
for the goal of a more balanced economy.
9. However, a policy that relied on sterling weakness
alone to support export competitiveness and economic growth would
not be optimal:
— Exchange rates are driven by a complex array of forces
and cannot be relied upon to settle at a "desirable"
level in anything other than the very long term. Though unlikely,
there is no guarantee that sterling will not return to a significantly
more challenging level.
— A key downside of sterling weakness would be comparatively
high import prices, reducing UK residents' living standards and
boosting some key industrial input costs.
10. It would therefore be far better to seek to support
underlying competitiveness, amongst other things by minimising
the adverse impact of regulatory and tax policies on business
costs. That would allow UK-based producers and service providers
to compete internationally without any need for an overly-weak
currency. The Government should therefore strive to contain:
— direct additions to business costs, due for example
to taxes, other public sector charges, or a need to employ extra
staff to comply with regulations; and
— pressure on unit costs due to below-potential productivity,
caused in turn by eg by regulatory-driven inflexibility, or tax-induced
inefficiency in the use of resources.
International tax competitiveness
11. The competitiveness of British business is increasingly
compromised by the UK corporate tax system. As tax competitiveness
deteriorates this undermines the attractiveness of the UK as a
place from which to conduct internationally focussed business
and specifically from which to export. While corporation tax can
clearly have a marked effect on our ability to compete, the burden
of other taxes should not be overlooked.
12. The 2008 Pre-Budget Report implies that the
Treasury target for total business taxation for 2008-09 was
almost £140 billion, or a quarter of all Government
revenues. This includes corporation tax of £45 billion,
employer NICs approaching £50 billion, property rates
of £23 billion and £15 billion in business
payments of transport and green taxes. OECD revenue statistics
show that the burden of UK property and transport taxes—which
are typically shared fairly evenly between firms and households—is
amongst the highest in the industrial world.
13. Fiscal policy therefore needs to be shaped to support
international competitiveness. It follows that the tax burden
in general, and the business tax burden in particular, should
be prevented from rising further not just through the recession
but during the recovery and beyond.
14. Whilst enabling public spending to be reined back
through a radical reform in the approach to public service delivery,
specific tax and spending policies will also need to support competitiveness,
employment and investment, including a reversal of key recent
business tax decisions
The role of intellectual property (IP) in export markets
15. Deteriorating business conditions have led companies
across many industries to try to exploit the full potential of
their IP. The IP embedded in UK exports is a key component of
their value and will be an increasingly important differentiator
of UK products going forward. The UK is currently a world leader
in knowledge intensive businesses being, for example, the world's
second largest pharmaceuticals exporter with export sales of £12.2 billion
in 2004, and a world leader in creative industries accounting
for more than 15% of the global video games market with £1.3 billion
per year of music industry exports.
16. Strong IP rights and properly functioning regimes
are required to protect stocks of intellectual property, and to
provide the necessary incentives for innovation. Decisions taken
in this field will in good measure promote or impair economic
growth.
17. The current system in the UK for IP protection and
promotion is in general very good. This environment underpins
solid global trademarks in manufacturing, pharmaceuticals, retailing
and services. The CBI does not believe that it is necessary to
consider a shift in the fundamental IP framework in the UK, but
the Government could do more to develop a greater understanding
of the economic importance of IP and give it according weight
in policy making.
18. Whilst the UK's domestic record on IP protection
is generally good, in order to successfully compete in export
markets, international IP issues are increasingly important for
UK companies. As a matter of principle it is essential that the
UK Government supports continued improvement in the quality of
patents granted in Europe and worldwide; the efficiency of obtaining
and enforcing patents; and remedies for copyright and trademark
infringement.
19. In countries where copyright and trademark counterfeiting
and piracy are rife, the principal problems are inadequate legislation,
inadequate enforcement procedures and remedies, and inadequate
Government commitment to dealing with the problem. We appreciate
the efforts of the UK Government and the European Commission in
encouraging countries with emerging markets to address such problems.
Skill levels must be improved
20. The UK needs to improve its skills profile in order
to remain competitive and adapt to global economic change. The
growth of emerging economies is bringing tougher economic competition
and globalisation means that business activities are being located
according to comparative advantage—the UK cannot compete
on labour costs and must build an advantage on higher skills.
Action is needed to increase the number of young people studying
science and mathematics at school, through automatic enrolment
into triple science for the most able students, and that these
subjects are taken at university through better careers advice
and financial support.
EXPORT FINANCE
AND THE
EXPORT CREDIT
GUARANTEE DEPARTMENT
21. The worrying decline in global trade is both a function
of falling demand and a reduction in the availability of trade
finance. Consequently, trade finance products have also become
more expensive. Given that 90% of the world's visible export trade
depends on credit, insurance and guarantees, this dynamic has
had a significant practical effect on businesses' ability to trade
internationally.
22. As stated earlier, the depreciation in sterling will
not by itself drive an export-led recovery over the longer-term;
effective financing will be critical to meeting all our aspirations.
This places the spotlight on the Export Credits Guarantee Department
(ECGD), which must demonstrate a shift in attitude to one where
there is a "can do" approach to supporting exporters.
This will require a step change in everything from response times,
re-balancing its interpretation and operation of the business
principles, and ensuring that it matches the commitment of its
peer group of export credit agencies. If ever there was a time
for ECGD to fulfil its core function of providing support in case
of market failure, this must be it.
23. As reported in the Financial Times[19]
the CBI agrees that the Government went too far in making changes
at the ECGD. We strongly support Lord Mandelson's pledge to boost
its capabilities and to expand its role. The CBI also welcomes
Government announcements of a variety of wider support schemes,
as well as the introduction of legislation that will allow the
ECGD to support transactions when goods have already been exported.
24. On specific support, the CBI is pressing the Government
to provide help for exporters with a direct funding scheme to
ensure that a lack of liquidity does not compromise export orders,
a stand-alone bond support scheme (a scheme that is not tied to
an ECGD-supported facility) and the reactivation of the ECGD's
dormant reinsurance facility to surmount the problems that are
arising for companies that are seeking credit insurance for contracts
on cash or near-cash terms.
25. With the current market conditions, banks have reduced
their trade finance offerings for balance sheet and credit risk
reasons. We believe that this is leading to market capacity issues.
In addition, the banks have signalled a significant rise in letters
of credit confirmations, including for developed markets. We think
that the Government must move back into the short term trade business—something
which other export credit agencies are also doing.
26. Business investment and trade will be critical to
forging a sustainable growth path for our economy, and high-value
manufacturing will drive a bigger share of that growth. Resurgent
interest by the Government in exporting and high technology manufacturing
is welcome and must continue.
THE EFFECTIVENESS
OF UK TRADE
AND INVESTMENT
(UKTI)
27. In the current economic climate it is even more important
to ensure that Government support for businesses that trade or
invest in and from the UK is delivered effectively.
28. The CBI believes UKTI should focus on more proactive
work chasing more leads and market information. The CBI recognises
that the focus on priority markets and activity as part of UKTI's
five-year strategy has been encouraging, as has the reaching out
to mid cap companies. While priorities are important, care must
be taken to recognise that the UK's global footprint is best served
by providing expertise across a wide range of markets and sectors.
29. The recent NAO report[20]
raises some valid points that could also help UKTI improve its
service provision further.
30. There is significant value for the UK from outward
investment activity, this can also be about effective market access.
Sometimes foreign direct investment (FDI) is a preferred option
to access markets, or it may be the most competitive way to establish
supply chain dynamics, rather than through straight export activity.
It is also clear that the attraction and retention of high quality
FDI to the UK provides significant benefits.
31. UKTI must therefore have good links into the FCO's
global network of posts overseas. UKTI needs also to continue
to ensure that it works closely with BERR on trade and investment
policy.
32. We also believe that the focus on meeting targets
for chargeable services, whilst understandable, has led to a disincentive
for UKTI staff to pursue more proactive work. The CBI recommends
that UKTI should be chasing greater numbers of leads and market
information to feed back to business. UKTI should also start producing
positive, good news stories about the UK for use throughout the
Government, but specifically overseas and should be seen as part
of the key collateral for selling and promoting the UK.
33. UKTI has made some advances in trying to address
the issue of overlapping and duplication related to the RDAs and
the devolved administrations, which link to our concerns about
the coordination and reinforcement of the UK brand. Continued
efforts here, together with monitoring on the ground, would be
useful.
34. In terms of staffing, the CBI believes that as much
resource as possible should be devoted to front-line service provision.
A common culture is evolving but, as is often the case, needs
continual efforts. The organisation must strive to attract the
highest quality of people from both parent departments who see
an UKTI posting as a career-enhancing move.
35. The CBI argued for a modest uplift in UKTI's budget
as part of our 2008 pre-budget submission. We believe that
the additional resources can help to bring better and time-sensitive
information and insights on key markets to business. This is especially
important as UKTI operates in cases of market failure—where
the private sector cannot or will not provide services, or where
those services would be at prohibitive cost. UKTI must convert
its knowledge of different markets and its wide-ranging influence
into concrete export opportunities and investment possibilities
for business. In addition, there is a good case for more targeted
expenditure on marketing in order to reach those companies that
currently do not take advantage of the UKTI offering, as well
as to plug the shortfall in funding that the fall in sterling
has had in the trade fairs and promotion activity.
20 April 2009
18
As table 1 shows, in volume terms exports grew by an annual
average of 3.7% in that time, which was clearly slower than import
volumes and little more than one percentage point above the GDP
growth rate. To put that in context, export volumes had grown
by 4.3% per annum over the 1973-1998 era, some two percentage
points above the GDP growth rate and almost matching the expansion
in imports. In value terms-which matters from a balance of payments
perspective-export growth also fell short of import growth over
the 1998-2008 period, whereas the opposite pattern applied
over the previous 25 years. Back
19
"Mandelson export pledge" Financial Times 6 April
2009 http://www.ft.com/cms/s/0/6fa595d8-2243-11de-8380-00144feabdc0.html Back
20
NAO report "UK Trade and Investment: Trade support"
3 April 2009 Back
| 
