Trade Matters: Mind the Labour Content of Exports

Since the last UK General Election was fought over Brexit, and the UK gained sovereignty over its trade policy, one might expect trade policy to feature prominently in pre-election discussions. Since Brexit, the UK has signed free trade agreements covering 71 countries, and acceded to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Yet only the agreements with New Zealand, Japan, and Australia are new, rather than clones of EU agreements that the UK was part of prior to Brexit, and the trade agreement with the EU has served to increase, not diminish, trade barriers.

Trade policy remains intertwined with Brexit for many people, and Brexit-related discussions remain divisive. Although Brexit was voted for by the British public, only 9% now believe that Brexit was successful, according to a recent YouGov survey1. But the political parties in their different ways feel bound by the Brexit we have, which leaves little room for manoeuvre. Yet the long-term success of any future trade policy agenda hinges on trade relations with the EU and other countries.

The lack of much discussion of trade and clarity over future policy leads to greater trade policy uncertainty, a failure to appreciate that trade policy extends beyond trade to other economic issues, and risks downplaying its role in the post-election policy agendas.

According to YouGov's tracker, the economy rather than trade/Brexit has become the most important issue for people: 52% vs. 13%2. The importance of economy-wide issues can be captured by looking at UK productivity (Fig.1). While the UK’s labour productivity and average wages outpaced that of the OECD average since 1995, the reverse is the case over the last decade. In part this is due to Brexit-induced uncertainty, which reduced productivity by between 2% and 5%.3 This impacts on living standards and jobs in the UK. More uncertainty will not help. A clear trade policy, therefore, that reinvigorates trade, can be part of the solution.4

Trade can increase innovation, knowledge transfer, reallocation and access to higher-quality inputs and new markets for domestic products. Exports, in particular, accounted for 30% of the UK’s GDP in 2020 and are an important source of jobs for the UK economy5. Given the importance of jobs for workers it is worth appreciating the role of exports in supporting jobs.

First, more than 20% of UK jobs are supported by the exporting activity of firms, and more than three out of four of these are in services (Figure 2). Indeed, the UK has lost almost half of its exports-related manufacturing jobs over the last 25 years. The high share of services export jobs is well ahead of other OECD countries. This reflects the importance of exports in UK GDP and their high labour intensity.

Second, the higher share of jobs arising from services exports is largely a result of the direct exports of services (Fig 2). In contrast, given its size in manufacturing there are more jobs indirectly linked to exports (e.g. by firms supplying inputs to exporting firms), as opposed to direct jobs.

Third, exporting activity tends to be more productive and pays higher wages (Figure 3). The average wage of jobs embodied in exports is higher and has increased faster than the UK average wage. Given that productivity and wages are related, this partly reflects changes in the productivity of exporting firms. It also suggests that the UK would have lower productivity and wage growth in the absence of its strong exporting activity.

Fourth, Europe is the most important destination for UK exports and consequently also the major source of trade-related jobs (Figure 4). More than 3.3M UK jobs are embodied in exports to Europe, and more than half a million jobs have been added over the last 25 years.

A trade policy with labour content

Creating high-paying jobs and making them accessible to a broad base of workers will be the policy priority of any future UK Government that aims to generate inclusive growth. Turning to export promotion will be natural given that it constitutes a large source of high-paying jobs.

Governments can play a key role. They are not subject to the short-termism businesses face, can draw larger resources, and have greater leverage, as they design and regulate the domestic market as well as relationships with foreign ones. Yet, support should be offered to exporters to overcome barriers resulting from market failures, that they cannot overcome by themselves. An industrial policy should not aim at the growth of domestic exporters at the expense of others. Instead, active labour market policies, such as investment in education, can support workers in developing the skills exporting firms need and effectively navigate job transitions. Research and development subsidies can increase and direct innovation to improve the quality of exports. Foreign firms and workers (multinationals and immigrants) can bring knowledge and good practices from abroad. Importing inputs, the UK can help its exporters of final goods without undermining other countries’ exports.

Importantly, UK workers can benefit indirectly from trade. So far, we have looked at overall employment. In practice, access to export-related jobs varies across workers (by skill, age and gender) and across regions. Policy should aim to leverage the indirect channel, by making available jobs in exporters’ suppliers to workers who find it harder to find work in exporting firms. Lastly, both Europe and the services sectors have made a significant contribution to the UK jobs market over the last 25 years. The fact that some sectors or trade partners are more important than others should not be overlooked.

The new UK Government should embrace the new opportunities that show up without burning any bridges with sectors or countries that support UK workers. A trade policy does not need to be only about trade. Complementary investment, which helps workers benefit from trade, helps trade as well. Political parties can lay out an inclusive growth strategy that will increase firm productivity and wages, by increasing the labour content of trade, that is by providing workers access to high-paying jobs.