U.S. exports to the United Kingdom score major gains despite exchange rate turn

Just a little more than a year ago, in September 1992, the United Kingdom captured the world's attention when it announced that it would withdraw sterling from the fixed bands of exchange demanded by its membership in the European Community's Exchange Rate Mechanism (ERM). Sterling was then free to float against the dollar and other currencies. Almost immediately, sterling fell against the dollar by nearly 15 percent, from $2.00, the rate of exchange before ERM withdrawal, to $1.73 where it settled shortly thereafter. Since then, sterling has settled into a trading range between $1.43-$1.53. But fears that the devaluation of sterling would price U.S. goods out of their top European market, and erode their 12 percent share of the U.K. import market, have since been devalued as well, allayed by the strong performance of U.S. exporters.

U.S. exports to the United Kingdom continue to grow at a record-setting pace, undeterred by the appreciation of the dollar and a hesitant recovery in the U.K. economy. U.S. Department of Commerce data show total merchandise exports from the United States to the United Kingdom in the first eight months of this year exceeded $16 billion, a gain of more than 9 percent over the same 1992 period. This strong performance clearly reveals the ability of U.S. exporters to remain competitive in the U.K. market, even during unfavorable economic and exchange rate conditions, and the unabated U.K. demand for imports.

If this pace continues, U.S. exports will pass last year's record level of $22.8 billion and possibly reach $25 billion or more this year. Prospects for continued export expansion next year are excellent as consensus forecast for the U.K. economy indicates expectation that the U.K.'s gross domestic product will show real growth of close to 3 percent in 1994 and further expansion in 1995. Passage of a meaningful, trade liberalizing Uruguay Round of multilateral trade negotiations would not only stimulate world trade, but also enhance the U.K. as a market for a wide variety of U.S. exports.

U.K. data show the total value of imports from September 1992-July 1993 grew by more than 12 percent. The volume of imports during the same period showed no change, an indication that higher import values reflected higher prices because of the depreciation of sterling. Imports from countries other than the United Kingdom's European Community partners, though, went up by 25 percent in the same period. Approximately 12 percent of this increase can be attributed to the changes in sterling exchange rates and the remaining 13 percent to increased volume. Clearly, demand for imports remained robust, and exporters and their channels of distribution accommodated that demand by holding down prices, thereby giving up some of their traditional profit margins.

A look at the mix of leading exports indicates the United Kingdom remains the strongest European market for U.S. capital goods exports. Through June 1993, significant increases were registered by U.S. exporters of electronic components, computers and business machine parts, non-electric motors, analytical instruments, and telecommunications equipment, electrical machinery and apparatus, electrical power apparatus.

A range of factors account for the ability of U.S. exports to continue to grow regardless of any uncertainties about the future of exchange rates. These same factors will enable exporters to capitalize on the expected expansion of the U.K. economy. The leading factor is doubtlessly the enhanced competitive position of U.S. manufacturers resulting from restructuring. These efforts have enabled U.S. companies to reduce production costs and improve productivity. According to the Institute for Management Development in Lausanne, Switzerland, the United States now stands second on the Institute's World Competitiveness Scoreboard. The scoreboard ranks countries according to their ability to compete in international markets. Weighing more than 300 criteria, including capital formation, government policies, labor attitudes, research, and development spending, the Institute put the United States second among all the industrialized members of the OECD it ranked. Another study, recently released by a U.S.-based international consulting company, indicates that U.S. productivity is now ahead of Japan's.

U.S. companies are demonstrating a new and, in many cases, a strengthened commitment to export markets. Last year, exports became as important to the United States economy as they are to Japan and the European Community as a whole. According to a calculation termed "trade intensity," which measures the percentage of gross domestic product accounted for by exports of goods and services, the U.S. trade intensity in 1992 reached 25 percent, the same percentage figure shown by the EC and Japan. This figure should continue to grow as trade continues to account for an increasing percentage of the U.S. economy, as more companies enter the export arena. With only 10 percent of all of U.S. firms exporting directly into foreign markets, and less than 20 percent of these exporters shipping to more than five foreign markets, there is enormous potential for expanding this base of exporters.

Its position as the largest European market for the United States, along with a market free of any meaningful trade, language, or cultural barriers, makes the United Kingdom the European market of first choice of many new U.S. exporters. Further, the general ease of doing business and gaining access to the continental markets of Europe make the U.K. an ideal starting point and gateway for new exporters that recognize the enormous potential in foreign trade. Every year since 1978, the United Kingdom has been the largest European market for U.S. exporters. U.S. exports to the United Kingdom have doubled in less than seven years. The strong presence of U.S. companies that have invested in the United Kingdom--$78 billion in book value last year--will continue to contribute major customers for many U.S. exporters, providing demand for capital equipment, parts, and components.

Various factors in the U.K. industrial base will continue to fuel demand for imports. According to the Bank of England, the U.K. faces a "fundamental weakness" in its large trade deficit, which will take years to correct. The U.K. deficit on manufactured goods alone may reach $20 billion in 1993, almost double the figure in 1992. The Bank attributes the growing trade gap to a lack of competitiveness and to problems concerning the labor force, training, and education. During the past 30 years, the U.K. manufacturing sector has lost jobs at a rate of 2.2 percent per year, a rate faster than that of any major industrial country.

Even at current dollar-sterling exchange rates, the price competitiveness of U.S. goods has not been significantly eroded. Comparison of U.S. prices with U.K. prices on identical goods last fall, before the exchange rate swing, revealed that U.K. buyers routinely paid the same number of pounds sterling in their stores as U.S. buyers paid in dollars. The most recent price comparisons on a wide variety of goods sold in both markets--from toys and clothing to electrical products, sporting goods, and software--show that U.K. consumers still pay 30 percent more for the same articles than do U.S. buyers, even at a dollar-sterling exchange rate of $1.58.

The higher prices reflect not only higher costs of doing business in the United Kingdom, where land, labor, and distribution costs generally exceed average U.S. costs, but also the higher profit margins experienced by retailers due to an absence of competition, which made price discounting unnecessary. British consumers, with insatiable appetites for U.S. consumer goods, have had no alternatives to the higher prices (and shorter shopping hours) of the three U.K. superstore chains, until recently.

The marketing opportunities created by the different retailing and pricing practices have not gone unnoticed. U.S. operators of warehouse shopping clubs and superstores have already responded to the U.K. consumer, encouraged by a recent U.K. High Court decision that will allow them to operate as "wholesalers" rather than as retailers, which would have subjected then to more rigid planning criteria, thus greatly restricting their operations. The decision clears the way for U.S. superstores, one of which has plans to open a 140,000 square foot store in Essex where it will begin its warehouse club retailing operations.

Other U.S.-style marketing techniques are being employed successfully by U.S. exporters to get started and to keep sales costs at a minimum. Mail order selling of various products ranging from clothing to computers and peripheral equipment has enabled many U.S. companies, large and small, to start up quickly and begin exporting. While certain outdoor apparel and equipment suppliers have launched such successful efforts, so, too, have small companies with lower "profiles." One such new-to-export company, a Connecticut-based reseller of computers and software, has seen its overseas business more than double in the first half of 1993, and its exports rise to 6 percent of its total sales.

Television shopping has also been introduced in the United Kingdom by a U.S. firm. Now available to 3 million cable and satellite television subscribers, home shopping could prove as strong a business in U.K. homes as it already is in U.S. homes.

Other well-established firms have taken bold, new approaches to gain or increase market share, to contain or reduce the impact of currency swings. U.S. companies have been creative in rearranging their channels of distribution and other marketing links, for example, to maintain their competitive edge. One major software supplier eliminated one link in its software distribution chain by consolidating all distribution services at a single warehouse that will eventually serve all of Europe, eliminating the need to carry inventory and maintain warehouses in each country market. The firm no longer has to serve as its own master distributor, importing products separately in each country and then supplying the products to distributors.

While price sensitivity will always affect many purchase decisions, U.S. companies can and do compete on quality terms. In fact, the trend in the United Kingdom, from large, government procurement contracts to the average consumer purchases, is to seek "value for money." Consumer market surveys show that improved product quality, performance, and service, rather than lower prices, are still major factors influencing buyers.

Recently, President Clinton announced the National Export Strategy to assist all U.S. exporters to all markets. An important part of this plan is the streamlining of the export control licensing system. U.S. barriers to the export of some of the United States' most advanced technology--computers and telecommunications equipment--will be dramatically reduced, consistent with U.S. national security and foreign policy interests. The result will eliminate or significantly reduce regulation of technology exports on an estimated $35 billion of U.S. exports worldwide. Eliminating the need for validated licenses, or speeding the administrative process, will enable U.S. companies to continue to compete successfully in these U.K. markets. Both the computer and telecommunications sectors are on the list of the top 10 U.S. exports to the United Kingdom.

The US&FCS staff in the U.S. Embassy in London has identified 25 product markets in the United Kingdom that offer U.S. companies the best export opportunities. In addition to computers and telecommunications, these "best prospects" include computer hardware and software, oil and gas field machinery, telecommunications equipment, pollution control equipment, electronics components, hotel and restaurant equipment, medical equipment, apparel, security equipment, building products, cosmetics and toiletries, and sporting goods. Market research briefs on export opportunities in nearly 150 specific U.K. industry sectors are available to U.S. companies interested in exporting to the United Kingdom. Copies of these studies, other documents published by the Commerce Department, and market counseling are available by contacting the United Kingdom Desk on tel. (202) 482-3748.

Companies whose products are not covered by one of these market briefs, or who desire more detailed market information, can also commission market research on their specific products via the Commerce Department's Competitive Sales Survey Service, which is administered jointly by the Commerce District Offices and the US&FCS staff in London.

Robert McLaughlin United Kingdom Desk Officer U.S. Department of Commerce

COPYRIGHT 1993 U.S. Government Printing Office
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