Europe's export stars: Ireland and UK as laggards Part 2

In 2012 George Osborne, UK chancellor, spoke of the "march of the makers" challenging companies to double exports to £1tn by 2020 — the target will not be met. Neither will the British government target to add 100,000 exporters be met — the numbers fell in 2014. Last March in Ireland, Enda Kenny, taoiseach, said in a speech on the Irish 2014 trade performance that "export growth at 12.6% was the strongest since 2001." This jump on the 2013 export headline value masked a reality that is a taboo issue at official level — the indigenous international trading sector is among the worst in Europe.

In Part 1 we selected Austria, Denmark and Germany as the export superstars of Europe and according to Bruegel, the Brussels think-tank, based on 2000 prices for manufacturing exports, in the period 2000-2013 German exports increased by 154% compared to 127% in Spain, 98% in the UK, 79% in France and 72% in Italy. Austria matched Germany for most of the period and Irish exports at current prices rose by 112% in the period 2000-2014.

Europe's Worst Exporter: Poor export performance of Greece

Ireland

In a business demography analysis the Central Statistics Office (CSO) estimated in 2014 that Ireland had 185,500 active enterprises in 2012. The data showed that there were 11,999 industrial enterprises (Table 1).

In the same year the CSO said that with three or more persons working in an enterprise, the Census of Industrial Production showed that there were 4,580 industrial enterprises in 2012.

This issue is important because the one-person operation for example is unlikely to be an exporter.

In Part 1 we discussed how we arrived at an estimate of 4,200 active exporting firms, in the absence of official data.

Enterprise Ireland, the indigenous tradeable exports promotions agency, approved grants under the Internationalisation Support Programmes to a total of 2,124 companies in 2005-2010. Between 2009 and 2012, Enterprise Ireland approved grants to the Going Global Fund to 253 companies. While there are likely to be some firms who do not seek assistance, it's unlikely that the number is in the thousands.

Using a narrower definition, the European Commission this year estimated 145,000 Irish enterprises in 2013.

The Commission said that SMEs in Ireland account for a significant share of private sector employment (70%; EU average: 67%). Their share of value added (48%) was lower than the EU (58 %). Most SMEs can be found in services and trade. This is also a feature of other EU countries, but is particularly marked in Ireland. The Irish construction sector relies almost entirely on SMEs, who deliver 98% of the sector’s production and employ 94% of construction workers. By contrast, SMEs are underrepresented in manufacturing — the Commission had said in 2013 that only 3% of Irish SMEs (small and medium size firms with up to 249 employees) are active in manufacturing, whereas the equivalent figure for the EU is 10%.

Irish SMEs are specialised in high value-added activities such as high-tech manufacturing, including pharmaceutical products, computer, electronic and optical products. The 124 SMEs active in these sectors generate one third of the economic value added produced by all SMEs in manufacturing — most of these are likely foreign-owned.

In contrast with other member countries the Irish authorities could not give estimates of intra-EU trade and extra-EU trade.

Data for Austria: 308,000 firms

SMEs with intra-EU exports of goods (percentage of SMEs in industry); 2011; Austria: 27.2%; EU avg: 13.89%

SMEs with extra-EU exports of goods (percentage of SMEs in industry); 2011; Austria: 15.06; EU avg: 9.68

Data for Denmark: 213,000 firms

SMEs with intra-EU exports of goods (percentage of SMEs in industry); 2011; Denmark: 23.15; EU avg: 13.89

SMEs with extra-EU exports of goods (percentage of SMEs in industry); 2011; Denmark: 19.76; EU avg: 9.68

If one-fifth of Ireland's 144,000 SMES were exporting to Europe, we would have 29,000 exporters similar to Denmark's level.

Ireland simply does not have enough firms overall while the export ratio is too small.

In the 10 years 2005-2014, enterprise agency assisted Irish indigenous firms in Information, Communication & Computer Services, added 8,000 jobs to total 24,000 — including 11,000 in consultancy. Total indigenous employment in exporting firms grew by 2,000.

Merchandise exports were valued at €106.8bn in 2014 and services exports at €101.0bn giving a total of €207.8bn compared with €184.1bn in 2013 — a rise of almost 13.0%. This partly reflected tax avoidance related booking by mainly pharmaceutical firms of overseas production in Ireland giving an artificial boost to the data.

The trade statistics showed a value of €89.0bn for merchandise exports and the additional €11.8bn relates to overseas "contract manufacturing". The rise in the value of actual merchandise shipments in 2014 was 2.4% compared with a 14.1% jump in the data in the national accounts.

There was a 9.6% rise in services exports in 2014 and that was also partly fake due to tax avoidance.

Exports by Irish indigenous firms were valued at €18.6bn in 2014, and coupled with €7bn covering inward tourism and transport, the indigenous ratio of total exports for the year was 12.4%.

Nevertheless, the chart here shows that Irish exporting firms employ more than foreign exporting firms.

Food and drinks exports were valued at €10.5bn in 2014 or 5.0% of total exports.

The value of inward tourism in 2014 was €3.7bn compared with a peak of €4.4bn in 2007. Outward tourism was valued at €4.7bn in 2014 and it peaked at €7.0bn in 2008.

Computer services exports were valued at €43bn in 2014 or 42.6% of total services exports up from €12.6bn in 2003. Most of the €43bn total is fake as it reflects diversions of revenues/ sales from other countries that do not originate in Ireland. Google books about 40% of its global revenues in Ireland; Microsoft books about 25% and Facebook books half its global revenues.

There are also Business services revenues that are boosted by tax avoidance.

There was a massive merchandise trade surplus of €46.0bn in 2014 reflecting profit shifting for tax purposes up from €27.3bn in 2000, €28.6bn in 2007 and €36.0bn in 2013.

There was a €6.2bn deficit in services as royalty payments rose from €35.8bn in 2013 to €46.5bn — Google for example receives charges from its Irish offshore shell company in Bermuda and it transfers profits that are treated as royalties which are booked in accounting transactions as if they move from Dublin via the Netherlands to Bermuda.

Total employment (foreign + indigenous) in Chemicals and related products was 50,428 in 2005 and 52,563 in 2014 while exports rose from €40.3bn to €51.6bn in 2014 — a rise of 28%.

The jump in Irish exports in the period 2000-2014 hardly produced any additional direct jobs despite a 20% growth in the size of the workforce.

Over-reliance on foreign investment with an underperforming indigenous sector, results in a high percentage of the workforce on low pay, low workforce skills, and no occupational pension coverage for most workers in SMEs. 

UK

The UK exported goods to the value of £500bn in 2014 - £277bn in goods and £207bn in services — the target of £1tn by 2020 would likely require a miracle to achieve.

Ireland was the fifth biggest merchandise export market at £18.6bn and ahead of China at £13.8bn. The US was the biggest export market at £36.9bn followed by Germany at £30.9bn.

Among the big trading partners surpluses were only achieved on US and Irish trade.

Annually, the total trade deficit widened to £34.8bn in 2014. This was the largest deficit since 2010 when it stood at £37.1bn.

Between quarter 2 (April to June) 2015 and quarter 3 (July to September) 2015, the trade in goods deficit widened by £5.9bn to £32.2bn. The widening was as a result of a £6.0bn decrease in exports to £70.1bn, there were falls in exports of oil (£1.3bn), chemicals (£1.1bn) and finished manufactures (£1.7bn). Over the same period imports decreased by £0.1bn to £102.3bn.

Figure 5: Number of businesses Exporting and Importing by Section, 2014, Great Britain

The Office for National Statistics said Thursday that the proportion of businesses exporting in Great Britain fell from 11.6% in 2013 to 10.8% in 2014. This was due to a decrease in businesses exporting goods from 6.0% in 2013 to 5.2% in 2014 and in businesses exporting services from 7.1% in 2013 to 7.0% in 2014.

The number of exporters dropped to 221,300 last year from 228,900 in 2013, but it compares with 201,900 in 2011.

The estimates show that the size of businesses increases the likelihood of international trading of goods and/or services. This is the case for both imports and exports in 2014, with almost half (48.0%) of large businesses (those with 250 or more people in employment) importing goods and/or services and 40.8% exporting. By contrast, only around one-tenth (10.1%) of small businesses (those with fewer than 50 people in employment) import goods and/or services and 10.3% export.

However, due to the much higher number of small businesses in the Non-Financial Business Economy, this category contributes the majority in terms of counts of businesses trading at 292,900 in 2014, compared with 13,800 medium-sized businesses (those with 50 to 249 people in employment), and 4,100 large businesses.

The ONS also reported that the Professional, scientific and technical activities sector was the largest in terms of exporters, with more than 60,000 businesses exporting. Manufacturing was third, behind wholesale and retail trade, with just over 30,000 exporters.

In 2014, 73,600 businesses in London exported and/or imported goods and/or services. This made up 23.7% of the total number of businesses trading within GB. When looking at direction of trade, London accounted for a larger share of the total number of exporters (25.5%) than importers (22.7%).

The ONS said that estimates suggest that there were 188,100 businesses exporting goods and/or services in 2010. "These estimates should be treated with caution when comparing against 2011 to 2014 estimates as they are based on different methodology," it added.

The 2,390,000 firms are in the Non-Financial Business Economy.

The over all estimate of the number of SMEs in the UK is over 5m but the ONS sample excludes self-employed individuals who have no employees or have a low turnover.

The European Commission estimates that German medium and large firms account for 3% of all firms compared with 1.9% in the UK.

The Cole Commission's June 2015 report on UK export strategy says:

Britain remains one of the world’s biggest exporting countries by volume and value (fourth in 2013; second for services, eighth for goods), according to the WTO (World Trade Organisation). However, overall performance in the current decade has so far been disappointing: we are certainly not experiencing export-led growth. Net trade is likely to have dragged down GDP by around 1% in 2014 and has been a brake on the economy for at least three years, according to the CBI. Services exports in Q3 2014 remained below their Q4 2007 peak; goods exports marginally above their Q2 2008 one. The trade deficit for the year as a whole was £34.8bn, the highest since 2010. There are some bright spots, however, with the share of UK exports going to non-EU countries rising from 48% pre-crisis to 57% in Q3 2014, according to the ONS. The share of exports of goods and services going to the BRICs (Brazil, Russia, India and China) has increased to 7.2% in 2013 (up from 4.6% in 2007), the CBI says. The UK is now the second largest trading partner with China in the EU after Germany, with exports up 300% in that same period, according to ONS. Those to India have risen 51% while the UK is that country’s biggest G20 investor and India’s investments in the UK amount to more than in the rest of the EU-28 combined. The reverse side of that coin is that these two countries — likely to be the world’s largest and second largest economies respectively within the next 30 years — have seen their exports rise 400% in the decade to 2013, according to the WTO. They are leaving us behind.

The governor of the Bank of England sees finance as a better bet than traditional metal-bashing. Jeremy Warner of The Daily Telegraph commented on Wednesday:

There were howls of outrage in some quarters after Mark Carney made his remarks. The horror! How could the governor of the Bank of England, speaking at the Bank’s first Open Forum on the future of finance, seriously contemplate a financial sector that is 15 times the size of GDP? Was it not banking liabilities of a far smaller order of magnitude that brought Ireland and Iceland to their knees, and very nearly sunk the UK economy too, requiring tens of billions of pounds in publicly funded bailouts? Is not a UK financial sector of six times GDP, which is roughly its present size, still far too big, and should we not be shrinking it further? But no, the governor wants to expand it till kingdom come. How could he be so recklessly minded?

Low innovation in Ireland and UK

The 2012 Irish R&D rate of 1.58% of gross domestic product is low compared with peer countries.

The UK had a rate of 1.63% in 2013 which compares with Ireland on a gross national product basis (mainly excluding the profits of the foreign-owned sector) and Canada's level. Small countries such as Austria, Denmark, Sweden and Finland have rates of 3% or more.

Typically business spending accounts for more than two-thirds of a country's R&D spending and is mainly driven by manufacturing. In the case of Ireland, Belgium and Israel, more than 60% of business spending is accounted for by foreign-owned companies and in 2013 it was at 54% in the UK.

Israel had the highest R&D (civilian) among the 34 OECD member countries with a GDP ratio of 4.2% in 2013. Spending by business was at 85% of the total or 3.5% of GDP compared with Ireland's 1.14%. The majority of Israeli R&D is in services.

Simply, American companies favour Israel over Ireland in locating high level overseas R&D facilities there.

The Government said earlier this year that 54% of IDA Ireland client companies are R&D inactive; 300 firms accounted for almost 70% of total R&D expenditure in 2012. Thirteen% of foreign-owned firms (107 firms), each spending over €2m, accounted for 88% of R&D spending in the foreign-owned sector in 2012 (which accounts for 65% of total business R&D in 2013; 63% in 2012).

Most indigenous R&D expenditure is in Irish-owned firms (72%) which are not significant exporters — Ireland with about 4,200 manufacturing firms (foreign and Irish) have the second-lowest number in the OECD. Luxembourg is last with over 800. Denmark with a population of 1m more than Ireland has about 15,500 manufacturing firms according to OECD data for 2012.