The Role of the FCO in UK Government

Written evidence from the CBI

Executive Summary

1. The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington DC, Beijing and New Delhi, the CBI communicates the British business voice around the world.

2. This submission responds to those questions in the inquiry terms of reference that are of direct concern to business; namely, the FCO’s role in promoting UK trade and economic recovery, the role of the FCO’s network overseas and cross-government cooperation.

3. As the UK continues to emerge from recession, future economic prosperity will be greatly determined by the UK’s success in overseas markets – in exports and ability to attract and supply foreign direct investment (FDI) in ways that will let UK companies succeed in multiple markets.

4. The UK government must continue its efforts to set the right trade policy framework at an international level. The CBI strongly advocates a timely conclusion of the Doha Development Agenda (DDA) negotiations in the WTO, and urges the UK government to do all it can, e.g. within the EU and in groupings such as the G20, to secure political support for this. The CBI also strongly supports bilateral free trade agreements (FTAs), as building blocks towards a multilateral agreement.

5. UK official support in Brussels is vital. The European Union is key to the UK’s economic recovery process – both as the negotiator of international trade and investment rules, but also because it is effectively both ‘home market’ and the number one export destination for the UK. When considering ways in which to improve the UK’s trade and investment performance, therefore, the Single Market should not be overlooked.

6. In terms of direct UK government support for companies, the CBI believes there is a vital ongoing role for the FCO and UKTI, in particular the expertise and intelligence provided by overseas posts. We accept that the FCO must bear its share of cuts in funding at this particular time, and believe that the spending levels announced in the Comprehensive Spending Review of October 2010 were tough but acceptable. They do, of course, increase the pressure on the FCO/UKTI to deliver as efficiently as possible. We suggest half a dozen ways in which FCO/UKTI might increase its performance, e.g. by putting a particular focus on a more limited number of priority markets.

Introduction: Trade and investment are essential to our growth prospects

7. The UK is still in the early stages of a modest and gradual recovery. The CBI expects growth of only 2% in 2011, and 2.4% in 2012. We expect net trade to be an important component of that limited growth.

8. S upport to the recovery must therefore come from business investment , and from net trade. Net trade actually detracted marginally from growth in Q3, but we forecast that it will add to growth in the quarters ahead, as relatively weak gains in domestic demand restrict import growth and exports continue to be boosted by the past depreciation in sterling.

9. As many commentators have noted, to date this fall in the value of sterling has not delivered the boost to trade that might have been expected. On a trade-weighted basis, the pound has fallen more in the recent years than in the period after it exited the ERM. An assessment of whether the benefits are only now kicking in, or whether there are other reasons holding back the UK’s export performance, will be important in the next months.

10. Promisingly, t he CBI’s manufacturing survey data has shown quite strong export demand at the end of 2010. But prospects for export growth will also depend crucially on the pace of recovery in the UK's key trading partners. Ongoing fiscal concerns in peripheral European states, and the effect that this may have on activity and confidence in the Eurozone as a whole, therefore poses a key downside risk to our export prospects.

11. Against this background, the CBI strongly supports this government’s emphasis on trade and investment. We welcomed the Prime Minister’s commitment to free trade and open markets and to step up the commercial focus of the UK’s foreign policy. We welcome the efforts by the Foreign Secretary, Secretary of State for Business Innovation and Skills and their departmental ministers to reinvigorate the UK’s overarching trade and investment strategy. We particularly support the strengthening of bilateral relationships with countries including India, China, Brazil, Turkey and the Gulf States. Enhanced partnerships such as that envisaged between the UK and India give a clear signal that joint business development is high up the agenda.

12. We recognise the key role of the FCO in contributing to deficit reduction by helping to facilitate improved export and investment performance and by supporting UK business presence in high growth markets such as those mentioned above.

13. FCO Heads of Mission play an important role in delivering trade and investment objectives, especially where there is only a small UKTI or local commercial team. The political insights they can offer as well as contact networks they can instigate are invaluable in briefing businesses.

14. The CBI welcomes the creation of the FCO’s Commercial Task Force in August 2010, in particular the emphasis on upgrading and embedding commercial awareness amongst staff and working towards a whole-of-government approach to progress the prosperity agenda.

15. We are pleased to see all Ambassadors and UK government representatives overseas putting support for business as their key priority.

Getting trade policy ‘right’: the DDA, FTAs and resisting protectionism

16. In addition to getting the basics of international competitiveness right, the government and FCO can help British companies overseas by working to get the right trade and investment policy in place. Both of these areas are now within the competence of the European Union, so above all, this means focusing on getting the right policy decisions taken in Brussels.

17. The CBI strongly advocates timely conclusion of the WTO Doha Round (DDA). We believe that an effective multilateral trade agreement is by far the best way to create a level playing field, increase market access and improve global rules. We acknowledge that it is increasingly difficult to rouse much enthusiasm for the DDA, as the negotiations have now dragged on for a decade. Nevertheless, CBI member companies clearly expect that the British government should continue to push for an ambitious outcome to the negotiations.

18. We fully support bilateral free-trade agreements as they are a key to increasing market access for European companies in fast-growing markets such as South Korea, India, Mercosur and South East Asian countries. While the multilateral route will always provide the optimal route for trade liberalisation, well framed free trade agreements (FTAs) can also bring important benefits for all parties, including businesses.

19. FCO work to shape and reform key international institutions and organizations such as the EU, G20 and UN Security Council lead to enhanced stability and co-operation and is therefore good for business.

20. In all negotiations – both multilateral and bilateral - the CBI believes the EU must give priority to economic objectives, strongly promoting the export and investment interests of European business. The British government with support of the FCO should make this point strongly in Brussels.

21. Across the board, UK government officials should play an instrumental role in shaping the EU’s negotiating FTA mandate, taking into account the potential benefits and costs to all UK sectors through comprehensive impact assessments and seeking to balance offensive and defensive interests. 

22. One major area for potential growth is trade in services. At the European level, services make up 70% of European GDP, but represent only 28% of European external trade. This disparity presents a major opportunity for a future EU trade policy to make a substantial contribution to European competiveness and prosperity – and the UK, in particular, would benefit from this.

23. Achieving market opening for services requires a more complicated and difficult process involving a range of government departments and regulators. This makes ongoing discussions both at the European-level and Member State-level important in facilitating information exchange and legislative adjustments where necessary to open up services.

24. Trade can only be a driver for business opportunities when there is strong and effective enforcement of governing rules. A firm line should therefore be taken on countries which do not adhere to international trade commitments.

The FCO supporting business in the EU

25. British business is a strong supporter of the Single Market and the many advantages and opportunities it provides. Internally, it has enabled the EU’s 20 million business to provide goods and services to almost 500 million citizens. Externally, the 30-country European Economic Area is the world’s largest trading bloc and gives Europe its global strength.

26. The Single Market is the foundation of the EU’s recent economic success. It is estimated that 52% percent of UK trade, half of inward investment and nearly 3 million jobs are linked to the EU. Similarly, some 300,000 British businesses operate in non-domestic markets across Europe, generating prosperity and growth at home and on the global stage.

27. Open markets and free trade, internally and externally, are integral to business interest in the EU. The economic downturn has, however, highlighted the Single Market’s vulnerability to protectionism and barriers to completion remain. British business therefore supports policymakers’ renewed focus on delivery of the Single Market and the five freedoms it represents.

28. FCO work to focus the EU agenda on issues such as climate change, energy security, better regulation, the effective enforcement of EU rules and the possible implications of further enlargement all enhance prospects for UK and European growth and competiveness.

FCO global support for British business

29. Beyond setting the right policy frameworks, government has a key role to play in providing direct support for companies looking to expand their presence overseas. At a time of extremely constrained public finances, it is understandable that funding for these efforts will have to be somewhat restricted. Nevertheless, the CBI believes that government support for FCO/UKTI is extremely valuable; delivers a significant return on investment for the economy, and should be preserved as far as possible. We believe that the spending levels announced in the Comprehensive Spending Review of October 2010 were tough but acceptable.

30. Reduced resources do, of course, increase the pressure on the FCO to deliver as efficiently as possible – the classic ‘do more with less’. The CBI supports the direction that the FCO and UKTI have been moving in over the last eighteen months. We are hopeful that the FCO will continue to recognise the need for a tailored offering that precisely identifies priority markets and sectors, and particular business needs.

31. Business is looking for consistency of strategy and therefore supports the FCO four year Business Plan and implementation strategy to ensure cohesion across all government activities overseas, and the sharing of best practice across Whitehall.

32. In the short term, the CBI supports a greater focus on a smaller number of high growth export markets, alongside work to build on success in more developed markets especially in innovation. UKTI has identified seventeen high growth markets; amongst these it should prioritise markets such as China, India and Brazil to ensure the greatest return possible on taxpayer investment.

33. When measuring success of services provided, more sophisticated metrics are needed than headline ‘new entrant to market’ numbers. Quantitative targets are useful – and necessary when dealing with public funds – but should not become a sole end in themselves. They should be complemented with qualitative targets in terms of work provided and outcomes in terms of business won.

34. Similarly, a focus on meeting numerical quotas for chargeable services should be qualified by other metrics. An over-focus on the targets, we believe, detracts from the imperative of identifying additional opportunities for existing proactive exporters and investors.

35. The Passport to Export and Gateway to Global Growth (G3) programmes are valued by new and established exporters respectively. The OMIS (Overseas Market Introduction Service) is also broadly supported by business. However, as with economic and political briefs, it vitally important that there are effective quality and consistency controls in place.

36. FCO posts must ensure that commercial objectives are thoroughly integrated into their other policy objectives e.g. commercial opportunities arising from policy areas such as climate change. Excellent communication between UKTI and ‘pure’ Foreign Office staff on the ground could deliver a really valuable intelligence product for UKTI clients. (Another example of best practice here would be the US network’s work on business opportunities from the US Stimulus package, which involved staff from the Embassy in Washington, DC, as well as the Science & Technology network and all UKTI posts in the US.)

37. FCO/UKTI should also move to a more account management style of interaction with its largest client companies. This would enable it to have a much better understanding of companies’ needs and market strategies and thereby tailor the UKTI/FCO offering more precisely. It is also important that there is close liaison between UKTI and BIS sector teams, who perform similar account management roles.

38. An area of particular opportunity that has already been identified is large-scale projects requiring multiple company involvement. UKTI has estimated that there is currently a potential of around £700bn of non-defence contracts and projects that could be secured in this way, with UKTI helping to pull together consortia. It should be noted that this is also a very good way of helping SMEs into new markets, by plugging them into supply chain relationships.

39. Major infrastructure developments in the high growth economies and international sports events such as the World Cup and Olympic Games in Brazil will provide interesting test cases for these project and consortia approaches.

40. UKTI has been shifting towards a more sectoral based approach, both at a national level and via sectoral dimensions to all regional and overseas staff. The CBI believes this can be an effective approach. We would urge UKTI to build better relationships with key trade associations in the relevant areas in support of this. We also believe there could be an improvement in the relationship between business sector advisory groups and staff covering priority markets, to ensure there is no duplication of effort between regional/national or sectoral/market levels.

Visa policy: international businesspeople need to travel

41. Companies looking to do business internationally are highly likely to want to move their staff around the globe – bringing locally-based sales staff back to a UK headquarters for training, for example, or sending senior management overseas to establish new business partnerships. It is therefore crucial to the UK’s prospects that it is as easy as possible to move staff from country to country.

42. It is vital overseas posts maintain adequate consular resources in order to facilitate visa services for inward business visitors and prospective investors. Awareness among senior consular staff of FCO/UKTI trade promotion objectives would be helpful in terms of avoiding unnecessary delays for significant business partners.

Financial Management

43. We welcome the new Foreign Currency Mechanism to restore protection to FCO purchasing power overseas and thereby secure best value for money in delivery services to UK businesses in market.

High-level involvement: ministerial delegations and the British Business Ambassadors Programme

44. The involvement of key ministers in supporting UK business in overseas markets – e.g. by leading delegations on foreign trips, attending JETCOs, welcoming incoming delegations – is very helpful, and we commend the Government for the priority it has given to these.

45. The CBI believes that there is potential for prioritising this commitment further. Greater partnership working between the FCO and UK business in briefing ministers as well as direct ministerial briefings by companies on the ground can further increase the effectiveness of ministerial interventions. Learning from the approach of other European countries could also be helpful.

46. While we understand the difficulties in scheduling overseas visits especially for ministers with parliamentary commitments, more advance warning of dates and visit plans would facilitate greater senior-level input and involvement by companies.

47. It would also help in securing senior-level commitment if visit programmes can be made available as early as possible, and demonstrate that business leaders involved in ministerial delegations will get real value for their time input. Delegations where the minister has significant bilateral meetings, and the business ‘input’ is restricted to little more than providing an audience at a speaking opportunity or attending a networking reception, will not secure the right level of business involvement.

48. We would also suggest that UKTI and the FCO review the coverage and content of the UK’s high-level dialogues. It is not clear to us why some countries have a JETCO or similar dialogue and others do not – what is the guiding strategy? The existing JETCO vary in substance. They can be very valuable forums for focusing political attention on key business issues and should strive to avoid becoming formulaic. Bi-lateral business development should be higher up the agenda.

49. The CBI has always supported the British Business Ambassadors scheme, and we welcomed its re-launch in November 2010. We also commend the government for securing the involvement of some very significant figures in the UK business community. However, in the past it has been difficult to identify exactly what the impact of the scheme has been. The Secretariat will need to be extremely proactive in terms of co-ordinating with the Ambassadors about their travel schedules and possible opportunities. The Ambassadors will also require first class briefings to fulfil this role to their best ability.

Conclusion

50. Countries all around the world are seeking to increase their exports as a way of generating growth and jobs. Everyone recognises the same fundamental realities: the rise of the emerging and expanding middle classes in countries such as India and China, and across Africa and the Americas, are the next generation of consumers. The UK will have to work hard to position itself in this race – UK business will need strong FCO/UKTI support to get international policy frameworks for trade and investment right; and tailored support services to companies to enable them to enter and thrive in rising economies.

CBI

January 2011