Rising trade deficit shows UK economic weakness

I wrote here that the fundamental difficulty with the global economy (the cause of the crisis) is its trade imbalance and inevitably consequent debt. From figures I have recently seen, this is very bad news for the UK.

The UK has consistently run a trade deficit of a little over 2% since the 1970s. This means that the value of all UK residents import is typically over 2% higher than the value of what they export – leaving the rest to be funded from debt. We drive German cars, drink French wine, watch American programmes on Japanese TV sets while surfing Chinese smartphones; but the music, magazines, marketing services and pharmaceuticals we export back to them do not make up the balance. Obviously, this cannot go on forever.

The biggest challenge for the UK, therefore, is to do at least one of increase the value of exports or decrease the value of imports. There have been some staggering success stories – for example, the UK exported more cars in 2013 than in any year since 1976 and will soon surpass France as Europe’s second biggest car builder. Northern Ireland alone has seen recent announcements of major contracts in missile defence systems and hybrid buses, as well as growth in the tech sector.

However, it is currently nothing like enough, it turns out. In fact, the UK’s trade deficit, far from decreasing, is now hurtling towards 4% and may even be in line to hit 6% later in the decade. This is disastrous – it inevitably means greater levels of debt (of all forms – government, household etc), and the outcome of that has to be a further crash.

Currently, the UK Governments – centrally and in devolved settings – are busily toying around with fiscal, financial and monetary policy but they are not (with, interestingly, the arguable exception of Northern Ireland) investing time and money where it really counts to address the fundamental problem. That fundamental problem is that the value of our exports is too low, partly because our financial institutions have been too busy financing property speculation rather than the right aspects of business (R+D etc) and largely because our skills base is inadequate.

The current “economic recovery” in the UK is not real; it is just another bubble. Even worse, it is entirely possible that this bubble is being deliberately created for political reasons. It’s all very depressing.

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One thought on “Rising trade deficit shows UK economic weakness

  1. True a trade deficit is not desirable. The goods element of the UK’s current account balance has been poor, and negative, since the 1980s; while the services element has been in surplus.

    One could argue that a trade deficit (which pertains to goods only) matters in as much as the UK is more reliant on such trade in its economy, i.e. the UK exports nearly a quarter of its GDP relative to less than 10% in Japan and the USA (source: http://www.s-cool.co.uk/a-level/economics/the-balance-of-payments/revise-it/problems-of-balance-of-payments-disequilibria )

    And it also matters how much of your economy’s current account is balanced through domestic versus foreign debt; the nature of a country’s balance of payments, which is more instructive.

    A country’s long-term exchange rate makes everything above all relative — a considerable advantage of having a floating exchange rate (and staying out of the Euro). Though another counterbalance is your long-term interest rates (needing to ever increase in order to attract foreign investors if your currency is tanking; makes me think of Italy before they joined the Euro).

    So, complexities abound. Here is a single (long) page reference that I found useful: http://www.economicshelp.org/blog/5776/trade/uk-balance-of-payments/

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