Manufacturing

Manufacturing has a long history in the UK, dating back to the late 1700s when it was the cradle of the industrial revolution. The development of the steam engine transformed production. Though the UK’s economy is now dominated by services, which account for 80% of GDP, the UK is still part of the World’s Top 10 manufacturing countries in terms of trade. And manufacturing for its part has also undergone far-reaching changes.

Manufacturing accounts for 10% of national output in the UK, but around 44% of UK exports and 56% of imports. UK manufacturing exports are dominated by motor vehicles and transport equipment; machinery; electronics and electrical equipment, and pharmaceuticals. The EU accounts for roughly 50% of the UK’s manufacturing exports, and 57% of UK manufacturing imports.

One of the striking features of manufacturing globally is the way in which the organisation of production has changed. Just as steam revolutionised production in the 18th century, developments in transport, communication and information technology have enabled the development of cross-border, geographically unbundled supply chains. Countries no longer trade final goods in which they specialise; they trade in specific tasks along the value chain.

The classic example of this is the production of smart phones such as Apple’s I-Phone. Inputs such as intellectual property and initial design processes may be provided by the United States. But other parts of value added come from China, Korea and other part of East Asia.

One of the features of these developments has been the blurring of lines between services and manufacturing, as the latter has come to depend on knowledge-intensive inputs. Analysis based on OECD data estimate that on average around 30% of manufacturing value added comes from services. Service-intensive economies such as the UK cannot therefore ignore policy shocks – such as Brexit – that can affect manufacturing.

This last point is related to the fact that unbundled supply chains have a substantial regional component to them. This is understandable given the influence of proximity, and the likelihood that regional groupings have evolved common standards, which favours the smooth operation of supply chains. The regional effect is one reason why close attention will be paid by both the UK and the EU to ensuring that the former’s departure does not introduce new frictions to trade.

Finally, supply chains tend to operate in a hub-and-spoke manner, in which “headquarter” economies capture much of the value added, primarily through knowledge intensive inputs, relative to “factory” economies.  This emphasises the importance to the UK of retaining access to skills, and ensuring that as a consequence of leaving the EU it is not pushed to the periphery of trade.

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