United Kingdom, despite currency turmoil, will remain a major U.S. export market

The United Kingdom market will remain attractive to U.S. exporters despite the recent turmoil in currency markets that has affected dollar-sterling exchange rates. The price competitiveness of U.S. exports in the United Kingdom, the United States' largest European market, could be adversely affected by any further serious weakening of sterling against the dollar. However, the performance of the U.K. economy will likely have a greater impact on U.S. export prospects. Over the longer term, U.S. exports could even gain market share against Germany and France, whose stronger currencies will make their exports relatively more expensive than dollar-denominated exports from the United States.

On Sept. 16, the U.K. government withdrew sterling from the Exchange Rate Mechanism of the European Monetary System (ERM), leaving the pound to float against other currencies. Sterling-dollar exchange rates immediately adjusted, with the value of the British pound falling quickly to $1.73.

From 1985 to 1991, U.S. exports to the United Kingdom showed enormous growth, benefiting from a growing and open U.K. economy with expanding import markets for American products. In the same period, dollar-sterling exchange rates greatly enhanced the price competitiveness of U.S. products. The dollar peaked against the pound in early 1985, trading at $1.03. Then the so-called "super" dollar of the early 1980s began to weaken. With some fluctuations, the dollar progressively depreciated against sterling until bottoming out at $2.00 against the pound, shortly before sterling was pulled out of the ERM.

As the dollar fell against the pound sterling, U.S. exports rose dramatically. Over the 1985-91 period, U.S. exports more than doubled from $11 billion in 1985 to $23.5 billion in 1990, before falling slightly last year to $22 billion, in the midst of the United Kingdom's most serious postwar recession.

U.S. exports to the United Kingdom this year are slightly ahead of last year's pace. Through August 1992, U.S. exports were 2 percent higher than in the comparable 1991 period. In the near term, the post-ERM drop of the British pound against the dollar should not have a major impact on U.S. exports to the United Kingdom, for a variety of reasons.

The magnitude of the recent sterling devaluation does not appear deep enough to jeopardize the price competitiveness of most U.S. goods in the U.K. market. At the late October 1992 sterling rate of $1.62, the dollar now trades only 8.5 percent above its average 1991 rate of $1.75, the level at which it also traded last April. Using 1991 exchange rates, the Organization for Economic Cooperation and Development figures that a basket of goods valued at $100 in the United States would cost $112 in the United Kingdom. This would indicate that a more significant devaluation of sterling against the dollar would disrupt the significant flow of U.S. exports.

Even at current dollar-sterling exchange rates, many goods from the United States will remain competitive in the United Kingdom. Comparing U.S. prices with U.K. prices on identical goods reveals that U.K. buyers of a range of products routinely pay the same number of pounds in their stores as U.S. buyers pay in dollars for a wide range of goods. Personal computers, for example, selling in the $1,500 range here, are priced at 1,500 pounds sterling in the United Kingdom. Price comparisons of other, identical items in U.S. and in U.K. department stores and mail-order catalogs reveal similar dollar-sterling price differentials, on products ranging from clothing and apparel to jewelry and sporting goods.

Other products will remain relatively immune to currency swings. For example, one British firm, in order to successfully weather the recession in its home market, manufactures heavy-duty lawn mowers that sell at the equivalent of $2,500 to $3,200, strictly on the basis of quality and value. U.S. exporters who similarly position their products in the U.K. market will remain competitive, regardless of exchange rate fluctuations. Other product markets dominated by U.S. producers, such as those for aerospace, semiconductors, and certain raw materials, have become global markets priced solely in dollars. The United Kingdom does not produce but must import from the United States, and from European sources, various agricultural chemicals, fertilizers, and feeds. These markets, too, will be somewhat insensitive to changes in exchange rates.

The long-term weakness of the dollar enabled U.S. exporters to establish themselves more firmly in the United Kingdom, even into the U.K. recession. Many American firms have built strong, permanent niches in the United Kingdom and other European markets, from which it will be hard to dislodge them. Major customers include American subsidiaries and other U.S. multinationals in the United Kingdom. It is estimated that one-third of all U.S. exports of manufactured goods to Western Europe go to European affiliates of U.S. firms.

These exports include intra-company shipments of parts and components, and finished goods. For example, Genrad Corporation of Concord, Mass., will soon begin delivery of its automotive diagnostic system to Ford Motor Company's European operations, a transaction reportedly valued in excess of $20 million. These exports are generally not affected by currency fluctuations or are insulated from currency fluctuations of the magnitude of recent sterling devaluation because of dollar-denominated contracts, and other methods.

Further, U.S. exporters, and their agents, will act to offset the recent currency realignments. A 10-15 percent currency appreciation can be accommodated by both the buyer and seller, in various ways. End-users often will absorb a marginally higher price to maintain established supply links, and exporters can forgo price increases to maintain customers and market shares. End-users can hold down product cost increases stemming from currency fluctuations by eliminating maintenance contracts and performing repairs and service in-house.

Many internationally active firms operate in foreign exchange markets to insure against swings in currencies that might affect their pricing. To protect delivery prices against the obvious weakness of sterling before ERM withdrawal many companies employ a variety of strategies such as currency hedging, options, and futures transactions. These techniques enable buyer and seller to circumvent price uncertainties arising from floating exchange rates.

Being able to minimize or avoid altogether the high cost of retail space rental, which can run as high as $1 million annually in London, contributes greatly to the cost competitiveness of many U.S. exports. Selling via direct mail, or in large warehouse-style outlets, a number of U.S. retailers have successfully penetrated the U.K. clothing, apparel, and toy markets. Even the U.S.-origin practice of selling personal computers by mail has taken hold in the United Kingdom.

Other indigenous U.K.-European factors support the competitive position of many U.S. exports. The absence of rational, uniform transferable product warranties keep prices inflated on European-produced goods. Product variations, such as the 2,000 different kinds of refrigerators and 600 kinds of microwave ovens, also inflate the final cost of European-made goods to consumers.

U.S. exports should remain competitive against products of the United Kingdom's major supplier countries, Germany and France, whose currencies have strengthened. Over the intermediate term, displacement of U.S. imports by domestically-produced U.K. goods can and will likely be made up by U.S. market share gains at the expense of German and French suppliers.

The greater concern for U.S. exporters is the current state of the health of the U.K. economy. Solid, if restrained, export opportunities for U.S. products remain in the United Kingdom--opportunities more likely to be affected by the expected emergence of the U.K. economy from recession rather than the sterling devaluation.

The U.K. economy remains mired in its longest, deepest recession since the 1930s. The downturn began in September 1990 and no recovery is yet observable. Some believe that evidence of an anemic recovery will emerge sometime next year. Having withdrawn sterling from the ERM, the U.K. government can now use monetary and exchange rate policies to influence the direction of the economy.

Since ERM withdrawal, interest rates have been lowered 3 percentage points to 7 percent. Many economists believe that additional cuts in interest rates, perhaps to 5 percent, will be needed to have a meaningful, but not guaranteed, effect on the U.K. economy.

The Forecast for 1993

According to the U.K. Treasury, the economy is expected to show 1 percent negative growth this year, the second consecutive year of contraction. If interest rate cuts provide at least a psychological boost and preferably trigger some increases in consumption and investment next year, real growth of 1 percent may be attained, according to the Treasury's forecast for 1993. Imports are projected to rise 6.5 percent in 1992 and slightly below 6 percent next year. The Treasury also expects that retail price inflation will remain steady, rising less than 4 percent both years.

Domestic demand has remained weak, given the reluctance of consumers to spend in the face of high levels of personal debt, declining real wealth due to falling real estate prices, and fears of becoming unemployed as the jobless rate continued to rise, hitting 9.9 percent of the workforce in August. Industry has been concentrating on improving balance sheets and increasing productivity through workforce reductions. Hopes for an export-led recovery, although boosted by the devaluation of the pound, are unlikely to be realized soon since the U.K.'s major markets are either in recession or experiencing slow economic growth.

Private organizations, such as the Confederation of British Industry (CBI) and the British Chambers of Commerce, view the interest rate cuts as beneficial to the stimulation of exports and encouragement of business confidence. Still, recent surveys by both groups show U.K. industry may have already entered a second recession. Companies responding cited declines in domestic orders, no growth in the service sector, cuts in investment plans, and continued reductions in their workforce.

Prime Minister Major has promised to pursue a pro-growth policy that will include strict controls on budget deficits to prevent any resurgence of inflation. Major's plan envisions economic growth stimulated by lower interest rates, depreciation of sterling, and government-backed capital spending programs to improve U.K. infrastructure. A target of 2 percent was set as the government's inflation commitment. Growth of the consumer price index this year is estimated at just under 4 percent.

Brief sketches follow of the U.K. market sectors offering the best export opportunities for U.S. suppliers.

Computer Software and Services. The U.S. share of this $6.5 billion market is estimated to be in excess of 40 percent. Software continues to be dominated by U.S. firms, which also increased their influence in the computer-related services sector during 1991. While relatively recession-proof, the industry is heavily reliant on human resources and subject to the "flywheel effect," whereby the passing on of higher-than-average costs results in commensurate revenue growth. This effectively guarantees the continuation of the 15 to 20 percent growth rate seen in 1991.

Computer Equipment and Peripherals. The subsectors showing greatest potential appear to be systems providing enhanced graphics and multimedia capabilities. Other subsectors of the computer hardware market show evidence of both recession and saturation (notably in large systems and desktop PCs). The modest 5 percent market growth in 1991 to $19.2 billion is largely accounted for by increased sales of laptops, networked systems, and enhanced peripherals.

Telecommunications Equipment. Deregulation and increased competition among carriers have boosted demand for enhanced services that require additional equipment both at the exchange and on the subscriber's premises. The telecommunications market, which totaled $6 billion in 1991, is supplied chiefly by local companies, but there are niche markets which do provide solid business opportunities for U.S. exporters. These niches include data compression and expansion systems, satellite terminal equipment, modems, and multiplexers.

Capital Electronics Equipment. While adversely affected by defense spending cuts, the market for radio, radar, navigational aids, and avionics is substantial. Britain has significant expertise in these product areas, and almost half of the United Kingdom's $6.9 billion annual production is exported, but capital electronics equipment worth approximately $2.6 billion was imported during 1991. Nearly 30 percent of these imports are from the United States. Projects and planned expenditure in both the civil and the defense sectors are likely to ensure a continuation of the pattern.

Industrial Process Controls. The market declined in 1991 by nearly 20 percent due to cutbacks in capital expenditure and the deferral of projects in end-user industries. Nevertheless, this $1.6 billion market still absorbs approximately $700 million worth of U.S. modules and subsystems annually, most of which are integrated into locally assembled control systems.

Biotechnology. Biotechnology is evolving from a research-based to product-based industry. Estimates suggest that this market, which exceeds $2.3 billion, could grow 10 percent a year. U.S. firms enjoy a strong position, and U.S. exports account for 8 percent of the U.K. market. Health care products constitute a major segment of total demand.

Laboratory/Scientific Instruments, Equipment. U.S. firms account for 12 percent of this $1.7 billion market. While total demand is increasing at a modest 4 percent per year, U.S. suppliers have been able to achieve twice this growth rate. The market includes specialized computer-based laboratory data management systems and associated software. Best prospects are applications software ($105 million), spectrophotometers ($86 million), chromatographs ($86 million), and electronic recorders/loggers ($70 million).

Medical Equipment. The total market for medical equipment is almost $1 billion and is growing at a rate of 10 percent per year. The most important area is single-use devices, although the United Kingdom also buys a wide range of capital equipment. Most health care in the United Kingdom is provided by the National Health Service (NHS). Substantial reforms in the NHS have given greater autonomy to individual hospitals, with the result that there are now greater opportunities to market U.S. medical equipment in the United Kingdom. Private health care is growing in importance and seems increasingly inclined to adopt practices employed in the United States.

Pollution Control Equipment. The U.K. will spend an estimated $250 billion over the next 10 years on air, water, and land pollution control. This represents enormous new growth potential for equipment suppliers. New integrated pollution control legislation implementing EC directives continues to drive industrial investment in pollution monitoring and control. The United States is seen to be leading the world in the supply of sophisticated pollution control equipment, and continues to be a major supplier of equipment to the United Kingdom.

Hotel and Restaurant Equipment. The hotel and catering industry should experience a period of steady growth over the next three years. Estimated market size in 1991 was $5.6 billion, and real growth is forecast to be around 4 percent per annum over the next two to three years. The British tourist business was badly hurt by the Gulf Crisis, during which time bookings for holidays and hotel accommodations in the United Kingdom fell by over 30 percent.

Since then, the British hotel trade has shown some signs of recovery. Although the number of international visitors has in part recovered from last summer's slump, travel consultants do not anticipate London's normally lucrative tourist business to climb back to the levels achieved two years ago for quite some time. The industry is, however, hoping for a greater number of visitors from Continental Europe with the opening in 1993 of the Channel Tunnel.

For more information about any of these export opportunities, contact the Commerce Department's U.K. Desk Officer; tel. (202) 482-3748 or fax (202) 482-2897.

EC-U.K. Environmental Rules To Be Subject of Conference

A conference on "European Community/United Kingdom Environmental Regulations: Liability and Compliance Considerations for U.S. Corporations" will be held in New York, N.Y., Feb. 25-26.

The conference, to be presented by Zola Sookias Associates Environmental Consultants, will include discussions on understanding and managing environmental liability in the EC, case studies, and recommendations for U.S. firms. For information, call (212) 330-0914.

U.S. Firms Can Get Help At U.S. Embassy in London

The U.S. Department of Commerce provides a wide range of services for U.S. business domestically--through its network of district offices in the United States--and overseas, through the U.S. and Foreign Commercial Service (US&FCS) of the U.S. Embassy in London.

US&FCS offers a unique resource to U.S. exporters: the International Marketing Center (IMC), an exhibition and conference facility located within the Embassy building, available to U.S. exporters at competitive rates. The IMC staff can provide comprehensive logistical support for trade events. These services include compilation of mailing lists, printing and mailing services, appointment scheduling, media promotion, and catering. Major exhibitions planned for 1993 include:

Feb. 11-13, Computer Software Matchmaker, International Marketing Center; March 2-5, American Hardware Manufacturers Association Trade Mission, International Marketing Center; March 3-6, International Book Fair, Olympia; May 1-3, Process Control Matchmaker, International Marketing Center; and Sept. 1-6, Offshore Europe Trade Fair, Aberdeen, Scotland.

Additional information and assistance are available from the U.K. Desk at the U.S. Department of Commerce, Washington, D.C. 20230, tel. (202) 482-3748 or fax (202) 482-2897, and from district offices of the Department's International Trade Administration; see inside back cover of this magazine for a listing.

COPYRIGHT 1992 U.S. Government Printing Office
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