The Important Factors Affecting International Trade in the UK
The United Kingdom is the fifth-largest trading nation in the world. Its economy is in fact dependent on international trade. This has led many small to medium sized enterprises (SMEs) to increasingly trade internationally, with consequent benefits and disadvantages.
There are both modern and historical reasons for the UK’s reliance on international trade. Regardless, the current status of the UK in this regard is primarily due to recent economic changes.
1. Overview of the UK’s international trade
The UK is dependent on imports for almost all of its copper, ferrous metals, lead, zinc, rubber, and raw cotton. It also imports most of its tin, raw wool, hides and skins, and many other raw materials. One-third of the UK’s food is imported. This dependence has led to the UK government providing huge support to free and unrestricted trade, as well as championing many international trade organisations. It has also led to the implementation of very few restrictions on foreign investment.
Aside from the lack of restrictions, the UK’s strong currency and the state of the economy makes the UK a particularly popular investment location – the second-largest investment destination in the world. This allows the UK to fund the trade deficit caused by its reliance on foreign imports.
Although European SMEs are among the most internationalised in the world, UK SMEs are surprisingly slightly behind the average. Whereas about 25% of European SMEs trade internationally, just over 15% of UK businesses do so.
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2. Sectors responsible for exports from and imports into the UK
The vast majority of international imports to the UK are in sectors dealing in resources, such as metals and foods. On the other hand, most of the UK’s exports are in service sectors.
The following sectors are responsible for most of the UK’s imports
Industrial supplies 22.8%
Consumer goods 18.1%
The following sectors are responsible for most of the UK’s exports:
Financial services 28%
Business services 27%
Transport and travel 25%
3. Company size determines the likelihood of international trade
As mentioned, a smaller proportion of UK businesses trade internationally than the average among most European countries. However, this figure is largely attached to small businesses. Whereas 15% of small businesses are involved in international trade, 42.4% of medium-sized businesses (50-249 employees) trade internationally, and that figure rises to 52.7% with large businesses.
A major factor in small businesses’ reluctance to trade internationally is currency volatility. While banks allow big countries, transferring values of millions of pounds, to hedge their exchange rates, the service is generally not extended to smaller companies.
Thus, the recent increase in independent Forex companies, which offer more functional services than banks even to small companies, may have a direct effect on the growth of international trade among SMEs.
4. Overview of currencies used when invoicing imports and exports
When companies invoice for international trades, they can do so in foreign currencies. Nonetheless, most UK companies invoice in Pound sterling when dealing with countries from outside the EU.
The currencies used for invoicing imports to the UK consist of:
- Pound sterling 22.7%
- US dollar 65.6%
- Euro 5.2%
- Canadian dollar 2.8%
- Other 3.6%
The currencies used for invoicing exports from the UK consist of:
- Pound sterling
- US dollar
- Canadian dollar
- Japanese yen
The currency invoiced does, however, correlate highly per sector, with factors particular to the field coming into play.
5. Top international trade partners with the UK
The majority of the UK’s international trade occurs within the European Union, but that may be changing. The US and China are steadily growing in their trade relationships with the UK, while European trade is staying stable or slightly dwindling.
The biggest trade partners with the UK are:
1. Germany £90.8 billion
2. USA £71.7 billion
3. China £49.8 billion
4. France £44.5 billion
As the strength of the pound has steadily increased, the UK’s export market has had to face the challenge of remaining competitive within the EU. This has led many British companies to branch out and attempt to tap new markets. This is primarily why the EU’s high proportion of UK exports has fallen, going from a massive 61.9% in 2006 to 47.3% in 2014.
This is especially challenging for SMEs, as they struggle to find access to markets outside of the EU. The government has been assisting them in gaining access to faster growing markets, such as China.
The markets are changing, and international trade is vastly different to what it once was. The UK, however, remains one of the largest trade destinations in the world.
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This article is a part of MoneyTransferComparison’s Magazine (Small Business Guidance):