Written evidence from The Institution
of Engineering and Technology (IET)
Rebalancing the Economy: Trade and Investment
The Institution of Engineering and Technology is
one the world's leading professional bodies for the engineering
and technology community. The IEThas over 150,000 members in 127
countries and has offices in Europe, North America and Asia-Pacific.
The Institution provides a global knowledge network to facilitate
the exchange of knowledge and to promote the positive role of
science, engineering and technology in the world.
This evidence has been prepared on behalf of the
IET Trustees by the Manufacturing Policy Panel. The IET would
be pleased to provide further technical assistance and evidence
as part of this inquiry.
Summary
At the outset it is worth stressing the importance
of exporting manufactured goods, an area where the UK still has
a large deficit, if we are to rebalance the economy. Research
has shown that if the UK increased manufactured exports by just
10% (current levels for manufactured exports stand at just over
50% of total UK exports) and reduce manufactured imports by 10%
then the impact of a resulting £40 billion improvement in
the balance of payments in 2008 would be the equivalent to the
surplus produced by all financial services export activity in
the same year[13].
This simple fact highlights the importance of manufacturing
products for domestic consumption and export, in order to get
the economy rebalanced We are pleased that the government has
taken this on board as part of its Trade White Paper, in addition
to focussing on Advanced Manufacturing as part of the Growth Review.
The 20% devaluation of Sterling in the wake of the financial crisis
has clearly helped manufacturing, but this advantage (as with
earlier devaluations) could be short-lived, and in any case produces
an added burden for those manufacturers with increased raw material,
energy, and imported component costs. In short, the further up
the value chain UK manufacturers are, the better the prospects
are for UK exports in the current climate.
It is possible to deliver on an export-led recovery
if measures are taken to move UK companies (particularly SME's)
up the value chain, while taking advantage of economies of scale
along the way. To that end the positive feedback from SME's on
their outlook for exporting (75% of SME's expect to export more
over the period Oct '10-11[14])
is good news for the UK economy, but we should be wary of simply
allowing the UK's manufacturing sector to coast without strategic
direction, assistance and advice from government on export opportunities.
A combination of SME's moving up the value chain,
a low and stable exchange rate and an increase in technical skills
can combine to produce a sustained export-led economy for the
UK.
The role of BIS in providing support for exports
and investment
BIS has an important role to play (in collaboration
with other government departments) in supporting exports in many
markets, since international and national regulations effectively
govern the function of healthcare, aviation and transportation,
energy and oil and gas sectors.
All of these sectors and many others are effectively
driven by UK government requirements, incentives or regulations,
to achieve national aims such as carbon footprint reduction, national
health outcomes, safety setting etc. The way that the government
provides incentives strongly influences the development of an
indigenous manufacturing base in the supply chain.
The comparison between Germany and the UK on carbon
foot-print incentives may be constructive in the renewable electricity
generation sector. The German Feed-in-tariff (FIT) is credited
with the development of a globally competitive solar electricity
generation industry, particularly when compared to southern European
countries, despite the handicap of limited solar resources in
Germany. The aspects of success here are that the FIT supports
a national market which is fed by a national supply chain and
that this leads to a supply chain base advance in terms of technology
and size. As a result, there does not exist outside Germany (until
China very recently) a capability to supply the German domestic
market competitively.
The example above illustrates how a market incentive
to encourage a reduced carbon footprint is targeted in Germany,
toward the development of a supply chain base as well as the actual
reduction of Germany's carbon emissions. In contrast the UK subsidy
for offshore wind seems decoupled from the development of a local
supply base, and early projects indicate the use of only around
10% of UK content, despite the projections for the UK being the
largest market for offshore wind.
In the IET's response to the House of Lords Science
and Technology Select Committee's call for evidence on "Public
procurement as a tool to stimulate innovation", the IET pointed
out that incremental change to a relatively small proportion of
total government spending is unlikely to bring about enough of
a rebalancing of the UK economy. If the government is serious
about rebalancing the economy, it must seek to harness the £220
billion[15]
currently deployed in public procurement to foster companies which
can then export their innovative products to international markets.
Government procurement can be a major driver of innovation which
then shows up in export activity (one only needs to look at the
role of the Department of Defence in the US, and the French Government
stimulus for a range of hi-tech sectors to see the importance
of "smart" government procurement leading through in
due course to export success).
BIS has a role to play, in collaboration with UK
Trade and Investment, in providing a joined up long run view on
procurement contracts (for example along the lines of an Impact
Assessment). During a tender, UKTI could feed back to BIS on the
opportunities for export of products under review, with the UK's
comparative advantage and other export related factors being considered
as part of the overall procurement contract. Such suggestions
are usually automatically ruled out as being in breach ofEU directives,
however contrary to the common view; European Union procurement
directives are usually flexible to new approaches to public procurement.[16]
Rebalancing the economy also requires a regional
and not just a sectoral change. The domestic economy is often
forgotten when decisions about trade are made, internal comparative
advantages between regions should also be assessed to ensure local
strengths are exploited and appropriate capabilities developed
This could be achieved through Local Enterprise Partnerships fully
assessing strengths in their areas. Given the mobility of start
up companies (prior to the deployment of startup/sunk costs used
for capital machinery and raw materials), new manufacturing companies
can be located in areas suitable to their goods (eg the right
balance of skills from colleges/universities, raw materials etc).
The Government Trade White Paper
The Trade White Paper provides a good evidence base
from which discussions on how to create an export lead recovery
can take place. However, one important factor not mentioned in
the White Paper, is access to a globally competitive talent pool
in the industrial sector and the skills required to develop products
for trade. This must not be overlooked by BIS.
Skills are a key issue; manufacturing relies heavily
on the supply of engineering technicians from Further Education
and graduates from universities. If we are to compete in a global
economy and be leaders in emerging sectors, such as renewable
energies and advanced materials, we will require a more highly
skilled workforce, particularly at intermediate (technician) level
The "Baker" technical colleges offer a good long-term
goal, in the interim however a pragmatic approach to immigration
will be needed to fill the skills gap, which could otherwise hinder
an export-led recovery.
The problem is not just a case of not enough people
possessing the right skills for the UK manufacturing industry,
in addition to this there is a major problem with attracting young
people into a career in engineering and manufacturing. We need
to attract good graduates into manufacturing design and production;
we should be seeking to encourage businesses to take on current
students and new graduates on projects (for example through preferential
selection as government suppliers, or other tax measures to incentivise
and foster exporting firms).
At the moment the UK economy is growing as it returns
to its post-recession steady state. Once this point is reached
the limits of the UK's available manufacturing skills pool will
become apparent. Some evidence of this is already becoming apparent,
the IET 2010 Skills and Demand in Industry Survey shows that the
number of organisations finding it difficult to recruit suitable
senior engineers went from 49% in 2008, prior to the recession,
during the recession this fell to 22% in 2009 and in 2010 this
went back up to 37% with the expectation that the figure in 2011
will be higher than the 49% recorded in 2008.[17]
We need to develop the appropriate skilled resource base now (this
cannot be done overnight) otherwise we may be in a position of
creating the market, but not be in a position to deliver on it
in a sustainable way in the future.
There is a role for BIS to play in highlighting to
the wider public the job opportunities and careers available in
manufacturing. Priority issues for BIS should include:
- (i) How workers can be quickly re-skilled
in the short term; and
- (ii) Working with industry, the technical
and other associated skills that are required to sustain this
sector in the long run.
The message needs to go out that engineering based
manufacturing is a viable, rewarding long term career in the UK
and a facts based positive campaign should be developed by BIS
to make the wider public aware of this.
The manufacturing sector already has the highest
GVA per employee than any other sector; this ratio should be monitored
to ensure UK manufacturing remains competitive and innovative
and not suffer from diseconomies of scale or peaks and troughs
in export output.
The role of UKTI with regard to identifying opportunities
in: established markets—emerging markets—key sectors
and working with businesses both large and small to take advantage
of these opportunities
UK Trade and Investment provides a suite of products
for companies looking to export, from their online "Areyou
ready to export" tool, to Trade Advisers, Passport to Export,
the Export Marketing Research Scheme and Business Opportunities
Alerts, to name just a few items.
The challenge for UKTI is how to communicate this
information. UKTI already has sectors which it targets; a holistic
approach could be developed whereby newly registered companies
(sourcedfor example from Companies House) in those sectors where
the UK has an export advantage, are targeted by UKTI and provided
with information on export markets and ways that UKTI can help
from the outset.
The German equivalent of UKTI spent 2010 conducting
a high profile campaign, which travelled the country providing
advice and giving opportunities for companies to raise questions
on foreign trade and investment. As part of the campaign, an injection
of resources saw the speeding up of decision making on export
credit guarantees, with these guarantees being emphasised to SME's
across Germany.[18]
UKTI has an impressive record on the (inward) "investment"
side of their remit. They need to deliver comparable success on
the export part of their "trade" remit.
The effectiveness of the Export Credit Guarantee
Department and the flow of trade credit
With the prospect of consumer spending being negatively
affected due to the reduction in government expenditure and limited
consumer confidence, economic growth will be more dependent on
exports. UKTI and the Export Credit Guarantee Department should
be strengthened as it is difficult to see how an export-led recovery
can be achieved without this resource.
The ECGD has dedicated Business Divisions for Aerospace
and Civil and Defence projects, BIS needs to explain what they
are doing to promote exports in other sectors such as Automotive,
Pharmaceutical and Chemicals and important growth sectors such
as low carbon technologies and goods. These sectors offer potential
for export growth and should be supported.
How other countries, similar to the UK, export
to emerging markets and what our Government could learn, if anything
from them
Germany recorded a $211.6 billion merchandise trade
balance over the period October 2009-10, over the same period
Britain recorded a comparable figure of: $145.1 billion[19].
Germany's strength is its exposure to emerging markets. Although
throughout this response we have highlighted the need for government
action, what would be catastrophic for future growth is a retrenchment
away from globalisation and free trade and we are pleased this
fact is recognised in the Trade White Paper.
As the world economy begins to grow, with international
trade slowly increasing, emerging markets will play a vital role
in ensuring this growth continues. In 2009, despite a drop in
total exports by 18%, the German economy saw an increase in exports
to China of 7%[20],
which demonstrates the importance of an established emerging markets
presence to cushion future trade shocks in developed countries.
As developing countries begin to move up the value chain to exploit
their export advantages, access to capital machinery, among other
things, will become vital. The UK needs to be ready to provide
these capital goods to such countries.
The Government aims to develop a UK trade policy
based on the principle of comparative trade advantage as outlined
in the White Paper. However, comparative advantage is a static
theory and the UK needs to ensure that where the comparative advantage
is minor in a particular sector, resources are not over allocated
to that sector as comparative advantages between countries can
quickly change, with sometimes alarming consequences.
It would be more prudent for BIS to focus on helping
the UK foster a distinct absolute or competitive advantage in
goods where there is both sufficient domestic and European demand,
coupled with a long term production requirement Such an example
would be low carbon goods and technologies such as offshore wind
products for the UK market, with the surplus from such an advantage
being redirected toward export markets. The challenge for government
is to ensure that it doesn't then stand in the way in the future.
BIS should play midwife to new manufacturing sectors and not nursemaid
and couple this with a consistent set of economic and trade policies.
Deutsche Bank have been quoted as having an optimistic
estimate which shows that by investing in renewable energy, the
level of job creation could reach between two and four times the
current number of jobs. With a £10 billion investment the
UK could re-skill 1.5 million people; bring 120,000 back into
the workforce and increase earnings of those on lower incomes
by £15 billion.[21]
The example of Germany and Feed in Tariffs is given
above as an excellent example of what other countries are doing,
an additional example includes Sweden where advantages have been
realised and exploited in ball bearings (SKF a Swedish manufacturer
is the world's largest producer) and trucks such as Scania and
Volvo.[22]
As emerging markets grow, these products will increase in demand.
The export-led recovery via British manufacturing
has been assisted by the low exchange rate of sterling (with a
similar low Euro rate relative to the currencies of their export
markets, assisting German manufacturing exports). Where possible
the Government and other actors should use their influence and
measures to maintain a low and stable sterling during this recovery
period.
The role of the British Business Ambassadors
The Business Ambassador Network has been in existence
since 2008 and during that time has certainly assisted in increasing
the amount of foreign direct investment to the UK, along with
ambassadors conducting trade events in other countries with UKSME's.
The number of manufacturers who make up the list
of ambassadors is a welcome sign given the need to increase the
exports of this sector. Greater transparency would help more SME's
understand what ambassadors can do, along with allowing informed
scrutiny of whether or not ambassadors are put to the best possible
use, ie are they doing activities which UKTI could have done themselves.
UKTI needs to ensure that a greater focus is given to the export
side of their remit if an export-led recovery is to succeed.
January 2011
13 "Prospects for the UK Balance of Payments",
K Coutts and R Rowthorn, Centre for Business Research, University
of Cambridge. Working Paper 394, December 2009. Back
14
From Surviving to Thriving: Doing Business Overseas, UK Trade
and Investment, October 2010 Back
15
Figure from www.ogc.gov.uk (03/12/2010) Back
16
L Georghiou, Demanding Innovation: lead markets, public procurement
and innovation (Nesta, 2007) Back
17
Engineering & Technology Skills and Demand in Industry Annual
Survey 2010, The IET Back
18
"Help Companies Take Full Advantage of Market Opportunities",
Interview with the Federal Minister of Economics and Technology
Rainer Bruderle about the Foreign Trade and Investment Campaign.,
Germany Investment Magazine, Volume 02/2010 Back
19
Trade, exchange rates, budget balances and interest rates, The
Economist, October 2010 Back
20
Why Germany is different, The Economist, 25 October 2010 Back
21
Why manufacturing matters for the UK economy, Andrew Simms, Policy
Director for New Economics Foundation writing in The Engineer,
29 November 2010 Back
22
Swedish export managers eye Asian upswing, Swedish Wire, 26 August
2010 Back
| 
