The competitiveness of British industry refers to whether British goods/service are more attractive to consumers than in other countries. A big factor is the relative price of British goods and services compared to other economies. However, as well as price competition, for many goods non-price competition will be important. For example, British fashion labels may be attractive – despite the high price.
The main factors affecting the competitiveness of British industry will include.
1. Relative Inflation Rates. If the UK has a higher rate of inflation that its major competitors then our goods will tend to become relatively uncompetitive leading to a fall in demand.
This shows that between 2009 and 2013, UK inflation was above the EU27 inflation, therefore there was a decline in UK competitiveness in this period.
- However, the impact of inflation also depends on the exchange rate. If inflation is higher, competitiveness may be retained by an equivalent depreciation.
- Also, a rise in global cost-push inflation (e.g. higher oil prices) won’t cause a decline in UK competitiveness because it affects all countries equally.
2. Exchange Rates. The exchange rate will have a significant bearing on the competitiveness of UK exports. A devaluation will cause exports to be cheaper and therefore improve competitiveness – at least in the short-term.
This shows that in 2008/09, the UK experienced a sharp fall in the value of the Pound by approx 30%. In theory, this fall in the exchange rate should boost competitiveness with UK exports becoming cheaper compared to imports.
- However, a devaluation may only cause a temporary improvement in competitiveness. True, it reduces the foreign currency price of our exports, but, it doesn’t affect long term competitiveness. In fact, it is argued devaluation can reduce incentives to cut costs in the long term. Also, a devaluation causes rising import prices which increase cost-push inflation and will contribute to reduced competitiveness in the long term.
- A key factor is the real exchange rate. The real exchange rate takes into account inflation. For example, if the exchange appreciates more than inflation, then the UK will see lower competitiveness.
3. Wage Costs. An important factor in the declining competitiveness of UK manufacturing goods viz a viz China is that the UK’s average wages are much higher than China’s. China is benefiting from an elastic supply of labour which is keeping wages down. In labour-intensive industries, such as clothing manufacture relative wage costs will be more significant than capital intensive industries, such as computer design.
- The UK has tended to have good competitiveness in industries like financial services, which are less labour intensive. Here the UK may be able to have a comparative advantage and strong competitiveness because of its expertise and accumulation of knowledge in the sector.
4. Adoption of new technology Are UK firms able to innovate and invest in new technologies which are important for developing dynamic efficiencies? A report by the World Economic Forum suggested the UK was poorly prepared for upcoming changes to the economy
WEF report argued that Britain currently looks less prepared than some of its economic rivals to take advantage of rapid technological change, given weak rates of adoption of IT equipment, relatively poor provision of mobile and fibre broadband, and the relatively poor digital skills of the population (Britain falls in competitivenss, Guardian)
5. Relative productivity. Labour productivity is the output per worker. If labour productivity faster than other countries, then ceteris paribus, the UK will experience increased competitiveness. However, since 2008, UK labour productivity growth has been weak – even by global standards.
6. Tariff barriers and non-tariff barriers
UK manufacturing is concerned that leaving the EU Single Market will result in higher tariffs and/or higher non-tariff barriers. This will increase costs for firms manufacturing goods in the UK but who rely on importing raw materials and parts from across Europe.
7. Non-price factors
For some goods, price is only a small factor in determining competitiveness. For example, UK higher education may be costly for foreign students, but the reputation for the quality of education may exceed the price factor. The UK has relatively strong competitiveness in sectors like tv shows and film – where the quality of the product is more important than the price.
Evaluate the effects of a fall in the UK’s competitiveness?
Several indicators suggest the UK’s competitiveness has been slowly falling in recent decades. A fall in competitiveness will tend to have the following effects.
1. Lower economic Growth
Lower competitiveness makes exports less attractive, therefore there will be a fall in exports causing lower economic growth.
- Economic growth could still occur due to strong consumer demand. The UK’s manufacturing export sector has been decreasing in importance; now, it only contributes a relatively small % of the UK’s growth. In recent years, it has been consumer spending which has kept growth high (despite an increasing current account deficit)
- Does the fall in competitiveness extends to all sectors of the economy? Maybe the UK is losing competitiveness in manufacturing exports but retains a competitive advantage in the financial sector. Therefore, there is still room for growth from these other sectors.
2. Impact on Employment
There is concern that a fall in competitiveness can lead to structural unemployment. If UK industry becomes uncompetitive, then jobs will be lost. However, it is uncertain whether these newly unemployed workers will have sufficient skills and flexibility to retrain and gain employment in new sectors. A rapid fall in competitiveness does tend to cause at least short-term or structural unemployment.
3. Impact on wages
A fall in competitiveness will put greater pressure on firms to cut costs. This may lead to lower wage growth and new jobs that are low-paid and temporary. A feature of the UK’s economic performance since 2008 has been stagnant wage growth – partly related to low productivity growth and declining competitiveness.
3. Current Account Deficit
Lower competitiveness is likely to cause lower exports, higher imports and an increase in the current account deficit.
- A fall in competitiveness should also lead to a depreciation in the exchange rate. Therefore, the UK should retain its competitiveness through exchange rate changes. Therefore, although the current account deficit may get worse in the short term. In the long term, the devaluation in the pound will help the current account deficit to get smaller again.
- Depends on the elasticity of demand. If the demand for UK exports is inelastic then a decline in competitiveness will only have a small fall in demand. If demand is elastic it will be much more serious. (Elasticity is always a good tool for evaluation purposes)