LONDON (Reuters) - In a first for a major economy, Britain’s exports of services from debt swaps to Downton Abbey are close to overtaking those of manufactured goods, offering a way to narrow a persistent trade deficit.
Britain was the world’s biggest exporter of manufactured goods in the 19th century before it was overtaken by Germany and the United States, and later by Japan, South Korea and China.
Services, by contrast, have been a more durable source of advantage for Britain and in recent years they have become easier to sell around the world, thanks to the spread of the English language and the Internet, and greater demand for the kind of financial and business services in which Britain specializes.
Sometimes dubbed ‘invisible exports’, Britain sold 220 billion pounds ($335 billion) of services abroad last year, second only to the United States.
Its services trade surplus is not yet big enough to offset a shortfall in goods that has left Britain with an overall trade deficit since 1998. Even so, the trend is in its favor: as other countries get richer, they tend to spend more on services, and prices have not fallen as they have for many manufactured goods.
British services exports last year almost equalled the value of exports of manufactured goods, up from just half their value in the 1990s. They are likely to overtake within three to five years, according to former Bank of England policymaker Andrew Sentance.
“Global services trade is growing faster than goods trade ... and the UK appears to have quite a strong comparative advantage,” said Sentance, who now acts as an advisor to PwC, which itself sells audit and consultancy services abroad.
For rich countries, manufacturing still tends to make up the lion’s share of exports. But Britain has proved an exception.
Some of this is due to advantages that date back centuries, such as the global influence of the City of London, the English language and its legal and educational systems.
But it also reflects how Britain is further along a path of deindustrialization affecting most advanced economies.
One person who has seen the change is Isabella Moore, who has run a translation agency, ComTec Translations, in Leamington Spa, central England, for more than 30 years.
Her first big clients were manufacturers seeking to translate technical documents. Recent growth has been in legal services as well as firms which sell training courses abroad.
“More and more, we see customers who want translations for new markets for e-learning materials,” Moore said.
What remains constant, however, is the range of languages in demand — French, German, Italian and Spanish, with no sign of a surge in appetite for Asian emerging markets.
Overall, almost two thirds of British services exports go to the United States, European Union or Switzerland.
By contrast, the decline in manufacturing exports, which in cash terms has been going on since the financial crisis, seems to have intensified recently as global economic growth slows.
Britain’s economy does rely less on domestic consumers — a goal of Britain’s government since the crisis — but the rebalancing has been driven by services exports, Sentance said.
The head of the British Chambers of Commerce, John Longworth, is frank about the problem, saying Britain was losing manufacturing market share in some key growth markets.
Tony Davison, operations director at freight-forwarding company MIES International, described the difficulties smaller British manufacturers face when trying to sell abroad.
China and India proved particularly daunting, and banks were still reluctant to finance firms’ overseas sales.
“There are a lot of companies who can make a nice product, but don’t know how to sell it and get paid for it. They shy away from selling overseas because there is a lot of red tape and bureaucracy,” Davison said.
Furthermore, Britain is a high-cost location for manufacturers — not helped by a 20 percent strengthening of sterling =GBP over the past 2-1/2 years.
Several steelmakers operating in Britain have announced site closures and thousands of job cuts in recent weeks.
Aside from higher-value manufacturing sectors such as cars and aerospace, services offer more hope of keeping good-quality jobs in Britain, PwC’s Sentance said.
Manufacturing employment has fallen even faster than its share of the economy as a whole, while services are often more resilient to automation or offshoring.
They now also offer greater potential for export growth. Regulatory barriers, which have hindered trade in services, are starting to come down. A planned EU-U.S. trade deal and EU efforts to build a single market for digital services could provide big boosts to British services firms.
“Services trade is not punching its weight in the international economy, and there is a lot of room for that to expand,” Sentance said.
Editing by William Schomberg/Ruth Pitchford