3Impact on UK trade in manufacturing and services sectors
29.Limitations of time did not allow us to look in depth at the impact of the pandemic on all aspects of UK trade in non-essential goods and services. However, we took evidence that provided an overview of the situation in the manufacturing and services sectors, and we heard directly from a small sample of significant industries.91 As we noted in Chapter 1, ONS data, PMI returns and sector-specific indices all clearly show pronounced impacts on these sectors in the UK; and this is amply confirmed and illustrated by our evidence. There are obviously important implications for the scale and nature of the Government response that is required (as discussed in Chapter 4).
30.We are likely further to consider the situation facing UK trade in both manufactured goods and services as the commercial effects of the pandemic become clearer and the contours of the economic recovery take shape.
Manufacturing
31.We heard that the pandemic had had a major impact on UK trade in manufactured goods. Dr Carlos López-Gómez, Head of Policy Links at the University of Cambridge’s Institute for Manufacturing, cited ONS data showing that around 44% of manufacturers had said that their exports and imports had been affected. He noted that this was “significantly higher” than for other sectors. Stephen Phipson CBE, the Chief Executive of Make UK, the national manufacturers’ organisation, said a survey of his members showed “around 50% overall of manufacturers reporting significant declines in economic activity, but around 80% now are saying their export orders are rapidly declining”.92 We heard that factors compounding the impact of the pandemic on UK manufacturing trade included disruption to freight transport93 and the imposition of border controls in Europe (with some alleviation of the latter by the creation of “green lanes”).94 It was emphasised to us that different sectors of manufacturing have been affected in different ways.95 We took evidence on three particular sectors as case studies: automotive; plastics; and fashion and textiles.
32.Regarding the automotive industry, Mike Hawes, Chief Executive of the Society of Motor Manufacturers and Traders (SMMT), said there had been “generally an international stop” in supply chains. Since the UK automotive industry was “predominantly part of the European automotive industry”, it had been significantly affected by shutdowns in “Italy, Spain and Germany, the big manufacturing countries”. As manufacturers scaled down production, this then “flowed through to tier 2, 3 and 4 suppliers”. Further afield, “when the USA went into lockdown, China was coming out, so for some suppliers it was more of a seamless challenge”.96 A big issue for the sector would be how in due course to manage the restarting of production. This would require “a degree of co-ordination, and [that] is not easy to achieve”;97 the supply chain was having to respond to “syncopated timing in different markets”, as the normal rhythms of supply were disturbed and interrupted at different points.98 And companies along the supply chain could face a shortage of liquidity when it came to meeting the costs entailed by restarting production.99 On the demand side, Mr Hawes stressed the importance of international markets for the UK automotive industry, with 80% of production being exported.100 The closure of car showrooms in many countries had meant a major dip in demand.101 At the same time, UK sales had fallen dramatically, with car registrations for April down by 97% compared to 12 months previously.102 Against that backdrop, Mr Hawes expressed relief that demand was already beginning to recover in China. Without the prospect of overseas sales reviving, “we would still be in total lockdown with no sight of where the demand will come from”.103
33.Philip Law, Director General of the British Plastics Federation (BPF), told us the plastics industry was highly varied and diverse, with over 20 different sectors within it. Supplies of raw materials had been affected by the pandemic. These “come in from all over the world, particularly Europe, the Middle East, Asia and the United States”. On the demand side, there had been a significant reduction in domestic demand for certain products (notably in the construction industry). On the other hand, there had been spikes in demand for “food and hygiene products, disinfectants, and so on”.104 Regarding export demand, Mr Law said this had “clearly dropped”. A survey of his exporting members showed that about 52% thought their export business would fall significantly over the next year.105
34.Paul Alger MBE, International Business Director of the UK Fashion and Textile Association (UKFT), said the impact of the pandemic on his industry had been intensified by the widespread use of “just-in-time” business models.106 The impact had been compounded by the lack of air freight capacity.107 A particular issue that had arisen in the industry was that of larger companies cancelling orders, refusing to pay for goods already in the supply chain and demanding extra discounts from suppliers. This was reported to have had a particular impact on suppliers in developing countries. Mr Alger said that such action “effectively passes the pain of this down to the smaller guys, who are less able to cope with it, and that then causes all sorts of problems further down the line.”108 A key risk was the danger of suppliers going completely out of business, leaving major holes in the future supply chain.109 On the demand side, Mr Alger said that his Association’s perception was that “online business will bounce back much more quickly than bricks and mortar”; but it was “too early to know what the trend will be”.110 Mr Alger also said there could be particular issues for businesses that belonged to the category of “born global”—meaning “brands that are not particularly well known in the UK but which are great British brands, and where a major part of their production is sent overseas, for example, to the United States, Japan”.111
Conclusions
35.UK manufacturing industries have suffered significant adverse effects from the disruption of international trade caused by the pandemic, with the flow of raw materials, parts and sub-assemblies seriously impeded and the ability to sell finished products greatly curtailed.
Services
36.In April, the WTO predicted that “services trade may be the component of world trade most directly affected by COVID-19 through the imposition of trade and travel restrictions and the closure of many retail and hospitality establishments.”112 Further, it warned that there were no inventories of services to be drawn down and restocked later, so declines in services during the pandemic may be lost forever.113 This contrasts with the 2008 financial crisis, when services trade was generally more resilient than trade in goods.114 John Drummond, Head of Trade in Services at the OECD, told us:
it is going to be different this time around, in particular because the measures put in place for health precaution reasons—such as travel limitations and social distancing—are particularly pertinent and complicating for trade in services.115
While many service providers are facing significant challenges, we nonetheless did receive evidence that some service industries have experienced a positive demand shock as a result of lockdown policies. This has primarily been the case for ICT, e-learning, telecommunications and digital payment services.116 We took evidence from two service sectors as case studies: financial services and higher education.
37.Miles Celic, Chief Executive Officer of TheCityUK, representing the UK financial services industry, told us that the impact of the pandemic on the sector had been mixed, but demand for financial and related professional services had remained “reasonably high”; and businesses had adapted to remote working well.117 He told us there was a focus on trade finance for essential goods in the banking sector and this was an area where the industry had been working with governments and international institutions to support the wider economy, including considering what help could be offered to micro, small and medium enterprises (MSMEs) in exporting. He also noted that there had been a focus on business restructuring, and the industry was working with the Bank of England, HM Treasury and others on how to recapitalise businesses after the crisis. However, mergers and acquisitions activity had declined.118 Mr Celic said TheCityUK “was concerned about a rise in protectionism” and told us the financial services industry was “underpinned by an outward, internationally facing approach.”119 In seeking to recover from the pandemic, he argued that “we need to make sure that we have a regulatory system and a supervisory system that learns the lessons we are learning at the moment” in areas of e-commerce and digital trade, including avoiding data localisation and making the case for open markets.120 Further, he said the UK could play a strong role internationally making the case for greater data flows and reducing “behind-the-border barriers” such as regulation, taxation bands and data localisation.121
38.Universities engage in international trade in services through the delivery of education services to international students. This occurs when non-resident students travel to the UK to study (Mode 4 supply) or where students undertake courses of UK universities overseas without travelling to the UK.122 Vivienne Stern, Director of Universities UK International, told us that the universities sector earns £6.9 billion per year from international student fees; and £20 billion in export earnings overall from education exports.123 She said that the process for “bringing onshore” prospective students had been “significantly disrupted”.124 Some universities were forecasting an 80% decrease in international student enrolments in the coming year, and for some universities, that would be of “existential” importance.125 Ms Stern cited the availability of flights, quarantine and social distancing arrangements as areas that will influence how well universities can adapt. Further, she said the Home Office could support the sector by allowing prospective students to apply for visas earlier than normal and offer reassurance that students who began their studies online would not be refused a visa later.126 She also noted that the impact of the pandemic on wider university activities, such as research, had been “enormous” and emphasised the need for financial support for the sector.127
Conclusions
39.UK trade in services has also been adversely affected by the pandemic, although the type and degree of harm varies considerably between sectors according to the extent to which they are dependent on their customers, or those delivering services, being able to travel, as well as their ability to provide services digitally.
91 We acknowledge that our colleagues on the Business, Energy and Industrial Strategy Committee are undertaking an inquiry into “The impact of coronavirus on businesses and workers”.
106 Qq146, 147. The just-in-time model involves inputs to production being delivered by suppliers just at the moment when they are needed in the production process, with manufacturers holding little or no stock of inputs.
112 World Trade Organization, Trade statistics and outlook: Trade set to plunge as COVID-19 pandemic upends global economy (8 April 2020), p 4
113 World Trade Organization, Trade statistics and outlook: Trade set to plunge as COVID-19 pandemic upends global economy (8 April 2020), p 4
122 The modes of supply of services are defined in the World Trade Organization’s General Agreement on Trade in Services. Mode 4 “Provider crosses the border” involves the migration and presence of natural persons to fulfil the service. See also Trade in Services and Brexit, Standard Note SN8586, House of Commons Library, 20 December 2019.
125 Q176. Research by the Institute for Fiscal Studies, published in July, estimated £11 billion in long-term losses for the sector with thirteen universities at risk without government assistance or debt restructuring – “COVID-19 pandemic puts several universities at risk of insolvency”, Institute for Fiscal Studies, 6 July 2020.
Published: 29 July 2020