Britain is an open, trading nation that does not export enough. Blame the lack of medium-sized firms and the frothy years before the financial crisis

WHEN ships arrive at Felixstowe after their seven-week voyage from Asia, they are laden with fridges, furniture, food and shoes. On the return journey, 60% of the containers that pass through the nation’s main sea-trade artery are empty. Britain’s biggest export, say people in the shipping trade, is fresh Suffolk air. The country that once boasted 40% of the global goods trade has become an export pygmy.

In 1990 Britain placed fifth in a league table of goods exporters, in line with the size of its economy. Although all OECD countries have slid down the ranking, as China and India have moved up, Britain has dropped the most. It now stands 11th, behind Belgium, Italy and Russia. Its colonial links, which for other countries create strong trade ties, appear to be failing: in 2012 Britain was 19th in a ranking of exporters to India, bagging just 1.5% of the market.

In some ways the country is still world class. It has had a trade surplus in services since 1966 and now exports more of them than any country except America. And because British investments abroad give larger returns than foreigners’ investments at home, it has a large income surplus too. But the country’s growing goods deficit, of almost £80 billion ($128 billion) in the first three quarters of 2012, more than wiped out its surplus from services and income (see left-hand chart).

The balance of trade is no longer the urgent political issue it was when Britain was a manufacturing superpower. But it matters nonetheless. The gap between what the country buys and what it sells must be plugged by borrowing from abroad. Exporters tend to employ more workers and offer better wages than non-exporters. They are also more productive and invest more in research and development. The reassuring notion that Britain can import goods while exporting services is too sanguine: selling goods abroad is a good way of developing a market for services, as firms like Rolls-Royce have shown. In any case, countries can do both more-or-less equally. Just look at France. Britain’s trade deficit is growing more puzzling, too. Between 2008 and 2009 sterling lost 25% of its value against trading partners’ currencies. City economists got ready to cheer an export revival. When currencies depreciate, they reasoned, exports cheapen for foreigners, while imports become more expensive. In the early 1990s Britain’s exit from the Exchange Rate Mechanism and the subsequent collapse of the pound almost abolished the country’s trade deficit (see right-hand chart). This time things were different: exports hardly picked up at all and the current account actually got worse, not better. Britain is unusually welcoming of foreign investment. It has some heroic exporters: in 2012 just over 200,000 Minis rolled out of BMW’s Oxfordshire factory, of which 80% were exported. Tata, an Indian conglomerate, sells British-made Land Rovers to the emerging-world rich. Why is the country as a whole so feeble? To see one reason why, compare two successful firms. David Mellor Design, which employs 40 people, makes cutlery and silverware in Derbyshire. The need for strict quality control means it makes sense to manufacture at home, says Corin Mellor, the firm’s boss. Its suppliers are mostly local companies (moulding is done in Barnsley, silver plating in Sheffield). The firm’s costs are in sterling, as are its prices, which are not adjusted to offset changes in exchange rates. The falling pound has enabled the firm to sell more knives and forks in America.

Near the other end of the scale is URENCO, which employs 1,600 workers. At its factory near Chester, tubes filled with uranium gas spin, forcing heavy particles to separate from the lighter U235 isotope needed to sustain a nuclear reaction. The enriched uranium can then be sent to firms that fabricate rods for power generation. The company is a world leader, providing more than a quarter of global supply.

Yet URENCO also has three other facilities, in America, Germany and the Netherlands. The tight regulation of uranium transport means locating each part of the production chain in a different country would be costly. Instead, firms tend to be located close to their ultimate customer. URENCO’s American clients receive uranium enriched at its New Mexico factory, rather than from Britain. This generates income rather than exports. And because URENCO’s sterling, dollar and euro costs and revenues broadly balance, it has a natural hedge and does not need to adjust production in response to currency fluctuations, explains Paul Harding, one of the firm’s directors.

Middle-sized is beautiful

A big reason Britain exports so little is that jobs tend to be in large international firms like URENCO rather than in medium-sized ones like David Mellor Design. Of Britain’s 24m private-sector workers, 10m have jobs in firms that employ more than 250 workers. Such outfits tend to reach foreign markets by investing in them; currency shifts matter little to them. The weight of large businesses in the economy explains why 70% of British firms report they are unaffected by exchange rates.

Still, the structure of British business is not the whole story, says Nick Baird, head of UK Trade and Investment (UKTI), a government agency. He also points to a low rate of exporting among the country’s small and medium-sized firms (SMEs). Of Britain’s 200,000 or so SMEs, just 20% export, according to government figures. If this could be lifted to 25%, the EU average, exports would pick up. Hit the Belgian rate (almost 35%) and they would jump.

UKTI tries to spot export opportunities from its offices in 96 countries, working with Britain’s banks to identify SMEs that could benefit. Once a potential trade has been spotted, UKTI can help SMEs club together to reduce costs; a new joint project with Felixstowe will help reduce the cost of shipping, for example. It offers export insurance to minimise the risk faced by firms that must often wait a long time to be paid for shipments abroad.

A recent audit shows that UKTI compares well to its French and German counterparts. But it has a greater weight to shift. Britain has a rump of firms that are so inward looking they are unlikely to export much, however much assistance they receive. Between 1997 and 2007 Britain boomed, with much of the froth in the public sector and construction. New government jobs were created, and consultancies sprang up to bid for public contracts. Capital and labour were sucked in by the construction boom. Unlike a manufacturing firm, which can sell its products at home and abroad, much of Britain’s boom was specific to the domestic economy. It will take time for the country’s productive resources to be reallocated.

There are some reasons to be hopeful. Britain’s manufacturing, whether domestically or foreign-owned, is held in high regard: people who buy Land Rovers and Minis want them to be made in Britain. Some of its SMEs produce tradable goods and could export more. And policy is moving in the right direction: UKTI is one of the few parts of government where the budget is rising rather than falling.

Perhaps the struggling economy will prove the tonic that awakens Britain to the role it can play in supplying an emerging-market middle class, keen for premium goods. But until Britons’ historic urge to sell to the world is revived, the island remains a trader that did its best business in the past: well connected and with a few profitable lines, but trading at a loss.