Look East? : Where should Wales target its exports?

The latest export figures, and an RBS report, highlight the increasing importance
of the Middle East, Asia and South America to European exporters - and in the
case of the Middle East, Wales in particular.
(Pic : oceanbasket.com)

I've covered Welsh exports in some detail last year, but the export figures for Quarter 2 2013 were recently released by HM Revenue & Customs.

• Total value of goods exports (in 2013 so far) - £7.09billion
• Total value of goods imports (in 2013 so far) - £3.72billion
• Net export of goods from Wales in 2013 (so far) - +£3.37billion

So, currently, Wales exports almost twice as much goods as it imports - services are a different matter. Despite overall exports being down 6.4% on Q2 2012, and a relatively low number of exporting companies, if the trend continues then we could be looking at a big rebound on 2012's disappointing figures, possibly heading towards the highest exports in a calendar year for some time.

The figures also show Welsh exports are diversifying slightly. In the last few years, Wales has been too reliant on too few export sectors. That's still the case, but there's been a clear boost to manufacturing exports in particular.

First Minister Carwyn Jones was understandably pleased, saying :

"Businesses in Wales have benefited from one of the highest increases in the value of exports since 1999 while the value of exports from Wales this quarter are at their highest level since 2011.

Not only are we working with businesses to develop existing and new export markets, but we are also setting the pace in terms of attracting inward investment projects to Wales – with the number of investment projects increasing by almost 200% last year, according to latest UKTI figures.”

“International trade clearly remains a priority for us and we continue to provide assistance to Welsh businesses at all stages of their efforts to increase exports. This includes a comprehensive programme of overseas trade missions and exhibitions, where we will be taking businesses to markets such as Qatar, China, India, Germany, Russia, Brazil and the USA."

In terms of where the exports are going, it makes interesting reading.

Although the EU is on course to remain Wales' single largest import-export market, the Middle East is the fastest-growing, almost doubling compared to 2012 figures. The United Arab Emirates is now Wales' fourth largest export partner (p10) – exports grew by 31.2% - and Wales is the only UK nation or region to have a Middle Eastern country in its top 5 export partners.

Wales (43%) remains less-reliant on the EU for exports than England (49%), but not to the same extent as Scotland (40%). Northern Ireland remains more reliant on the EU for exports than the rest of the UK (57%) perhaps because of cross-border trade with the Republic of Ireland.

And, once again, only Wales, Scotland, Northern Ireland and North East England are net-exporters of goods.

So the current picture is rosyish, but it's worth considering where Welsh business should target its exports in the future and where new or expanding markets for Welsh products could be.

Istanbul has been a key link between east and west for centuries, and looks like
Turkey should be an increasingly important market for Welsh businesses.
(Pic : goturkey.com)

Royal Bank of Scotland (RBS) produced their own concurrent report – In search of export opportunities (pdf) – which aims to identify "the best non-traditional markets for UK goods exporters".

RBS weighed several key characteristics, including : trade compatibility, growth rankings, GDP per capita and ease of exporting.

As a result, they put "non-traditional markets" into four broad categories : attractive and large, unattractive and large, attractive and small and unattractive and small.

India is (surprisingly) categorised as an unattractive market, said to be due to widespread income disparities, low trade compatibility (they don't need the things we export) and barriers to exports like high tariffs and taxes.

China, Brazil, Taiwan, Malaysia, Hong Kong, Indonesia and South Korea are – unsurprisingly – seen as large and attractive markets. Turkey is also included, which might influence the debate on future European Union membership, and would explain why the First Minister has been making trade visits there.

The surprise "large and attractive" market though is Mexico, based on good compatibility with UK exports and good growth prospects, being described as a "dark horse". Despite the drug cartel wars being particularly vicious, clearly it's not having a massive effect on the wider Mexican economy.

In terms of the small and attractive markets, you have mostly Gulf States – Saudi Arabia, Kuwait, Qatar, and emerging markets like Argentina, Bolivia, Chile, Peru and South Africa.

The small and unattractive nations are mostly politically unstable nations like Zimbabwe, Pakistan and Algeria, and perhaps two surprise inclusions - Venezuela and Vietnam.

However successful Hugo Chavez's social policies were, his failure
to tackle things like corruption and rampant inflation are starting to bite,
with shortages of basic essentials.
(Pic : Reuters via BBC)

Venezuela's inclusion is understandable. Compared to Hugo Chavez, his replacement Nicolas Maduro is a hard line ideologue (and that's saying something) currently seeking to rule by decree. Despite their oil wealth, there are said to be serious structural problems within the Venezuelan economy, and Chavez's social reforms – while popular and somewhat successful – are likely to damage the economy in the long-term.

The country has become almost entirely dependent on oil exports; while being reliant on imports for practically everything else has sent prices of everyday items - including food and things like toilet paper - skyrocketing. The Bolivarian Revolution in Venezuela is on its last legs and will probably be judged by history to be a failure.

I think Vietnam will be one to watch in the long-term though. It's been predicted for several years that Vietnam would be one of the world's fastest-growing economies. Despite undertaking reforms similar to China under Deng Xiaoping (called Đổi Mới), the Vietnamese are still waiting to reap economic rewards on the same scale. They still have some way to go, but they have a lot going for them, including a Latin alphabet, the fastest growth rate of all of the nations RBS assessed (~11%) and huge amounts of foreign direct investment in manufacturing.

Despite their disgraceful treatment of migrant workers, Qatar might be increasingly important too. I'd imagine steel and chemicals will be high on their list of priorities due to the construction of Lusail City and venues for the 2022 World Cup. Order books in Port Talbot might be buoyant as a result.

The picture you get from the RBS report is that the best nations to target exports at are "nearly developed" ones – nations that aren't full members of the developed world yet but rapidly on their way to reaching that status. The economic centre of power is shifting east and south, with Asia and South America becoming increasingly important to European and North American exporters – Wales included.

Exports and currency strength are inextricably linked.
Is Sterling holding Wales and Scotland back?
(Pic : Click on Wales)

There is a problem though, as many of the nations listed are themselves generally net-exporters. You wonder if there's any logic in net-exporters trading with other net-exporters.

You know I'm obliged to bring up independence, and one of the big economic arguments in its favour is related to this.

Net-exporters, generally, should have a weak currency as it makes their products cheaper to buy and imports more expensive, boosting domestic production, domestic consumption and external trade.

A Welsh currency, or even the euro (because it's weaker than the pound), should on paper – along with the right economic policies - boost Welsh exports/exporters and the wider Welsh economy. It could also lead to Wales retaining more service sector spending due to currency staying within Wales.

At the moment, the UK economy is geared towards imports, with a strong currency based around a strong service sector. That's totally out of kilter with what Wales and Scotland need based on our respective economic strengths, and it's probably damaging the Welsh economy, playing a big understated role in the widening of Offa's Gap.