UK Exports to China Resume High Growth Trend in Q1 2021, After Plunging in 2020

Posted by Written by Bob Savic, Advisor to Dezan Shira & Associates Reading Time: 4 minutes

UK companies are seeing a significant rise in exports of goods and services to China, in spite of the ongoing deterioration in political relations between the two governments. Indeed, China as a trading partner for the UK, overall, in terms of both imports and exports of goods and services is showing signs of reaching new highs, in 2021, after a hiatus last year.

By contrast, over 2020, UK exports to China fell by a precipitous 37.7 percent, to £13.8 billion (US$18.6 billion) from £22.9 billion (US$30.1 billion) in the previous year. The bulk of the decline was made up of goods exports which decreased by 42 percent, while services exports fell by 16 percent.

The mending UK-China trade picture

According to recently released data by the Office for National Statistics (ONS) for the first quarter of this year, the UK’s exports to China were up by 6.2 percent at £3.9 billion (US$5.5 billion), versus £3.6 billion (US$5.1 billion) in Q1 2020. This made China the seventh largest market for UK exports in that period.

Meantime, exports fell sharply to Hong Kong, which typically acts as a conduit for UK goods into mainland China, from £2.3 billion (US$3.2 billion) in Q1 2020 to £1.5 billion (US$2.1 billion) in Q1 2021, dominated by a major decline in unrefined precious metals exports. Yet despite the quarter’s weak export performance, Hong Kong remained the UK’s eleventh largest export market for that period and ahead of other much larger Asian economies. These included Japan in 12th place with £1.45 billion (US$2.04 billion), South Korea in 14th with £1.18 billion (US$1.66 billion), and India ranked 17th with £1.04 billion (US$1.46 billion). Exports to other smaller Southeast Asian economies, where the UK has recently secured free trade deals, such as with Singapore and Vietnam, came in with exports at £948 million (US$1331 million) and £149 million (US$209 million), respectively, over Q1 2021.

It is worth noting that the rise in UK exports to China over Q1 2021 exhibited a rapidly surging trend over the course of the first three months. This is especially reflected by the 60 percent rise in March 2021’s exports over the previous month. On an annual basis, the UK’s exports to China, in that month, were the third largest expansion in exports ever in respect of all international export markets, up by 40 percent, in March 2020.  Of course, this is mainly attributable to the low baseline arising from China’s strict coronavirus pandemic lockdown which took effect across the country in early 2020.  Even so, the UK’s annual rise in exports to China, for that month, significantly exceeded both Europe’s overall 25 percent increase in exports and the 28 percent global average increase.

While exports to China were rebounding over the first quarter of the year, seven of the top ten traditional UK export markets, including the United States and in western Europe, experienced substantial decreases. Other than China, economies recording increased exports from the UK were Belgium and Switzerland, although exports to the latter rose solely on account of surging re-exports of unrefined precious metals.

Sector and region-specific export gains

The Q1 2021 increase in exports to China was led by UK manufactured goods such as machinery and transport equipment achieving £1.8 billion (US$2.5 billion) in export value. Motor vehicles also performed well with exports of £1.05 billion (US$1.47 billion). Other major industry sectors evidencing a strong pick up in export levels. over the quarter were also mainly concentrated in the manufacturing sectors, including chemicals (£784 million), pharmaceuticals (£531 million), mechanical machinery (£509 million) and material manufactures (£346 million).

Non-manufactured goods exports, by contrast, were relatively lackluster with the exception of mineral products such as crude oil. As the Chinese economy grows off the back of private and public investment, each expanding by around 26 percent over Q1 2021, supported by a 39 percent growth in foreign direct investment, over the first four months of the year, the UK’s specialized machinery and capital equipment exporters are anticipated to see strengthening export growth prospects throughout the year.

Over 2020, the top five UK regions having the largest goods exports to China were the country’s main manufacturing heartlands where industries such as motor vehicles, specialized mechanical and electrical machinery, transport equipment, and aircraft, among others, managed to survive the intensive deindustrialization of the 1980s and 1990s.

These include the west Midlands with £2.2 billion (US$3.1 billion) in China exports and accounting for 15.5 percent of total UK exports, followed by the East having £2.1 billion (US$2.9 billion) in China exports and constituting 14.6 percent of total UK exports, the North West with £1.7 billion (US$2.4 billion) in exports to China, the UK’s Southeast (excluding London) having £1.6 billion (US$2.2 billion) in China exports, and London with £1.1 billion (US$1.5 billion) in China exports albeit mostly made up of services exports including travel, intellectual property, financial and other business services.

The future of British exports to China

To support most of these regions further regain their export competitiveness, and in boosting exports to countries such as China, the UK government has introduced a variety of new industrial incentives in the March 2021 Budget. These included extensive R&D tax credits for businesses and the introduction of eight free zones to be located in ports around England’s coastal and inland waterways. The so-called free zones will act as low-tax and clean energy special economic areas, mimicking China’s policy of long employing special economic zones to power light industry export-led growth across its booming coastal provinces.

The new measures are anticipated to not only increase export levels from existing UK exporters to China but are set to raise the potential for new entrants looking to tap into the world’s second largest and fastest growing economy. For instance, in 2019, there were around 11,300 VAT-registered businesses exporting to China having annual exports worth £23.6 billion (US$31.7 billion).

While 2019 marked a pre-pandemic peak in the value of UK exports to China, it is expected the number of UK companies exporting to China will rise significantly as economic conditions return to normal. This is supported by the pre-pandemic rate of UK export growth to China, from 2018 to 2019, which had been accelerating at over 53 percent per annum. It was also far in excess of the second highest growth market for UK exports, being the US, having a 10.6 percent annual rate of expansion. Meanwhile, exports to most major European Union markets were negatively trending downwards even before Brexit.

China, of course, won’t be the only major growth market for UK exporters in years to come. The government’s ambitious agenda of negotiating free trade agreements across the Asia-Pacific, including the Comprehensive Progressive and Trans-Pacific (CPTPP), will mean that UK exporters will need to become increasingly aware of how to seize business opportunities a half-world away from their main traditional European markets in the dynamic but complex growth markets of Southeast and South Asia.

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