The Welsh Economy X: Wales in the Global Economy

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Part IX included a more detailed look at how the Welsh economy fares within the UK, so now it’s worth looking at how Wales fits within the global economy – a particularly important topic with Brexit just around the corner.

How does the Welsh economy compare with the rest of the world?

See also: How rich is Wales?

The latest figures from the ONS (for 2016) show that Welsh Gross Value Added (GVA) – as mentioned in Part I, a measure of the total productivity in the economy – was £59.6billion, working out at £19,140-per-person (GVA-per-capita).

But GVA-per-capita isn’t measured in pounds, it’s measured in dollars. £1 was worth $1.34 in June 2016, so the Welsh GVA-per-capita was approximately $25,674 at the time. In global terms, it looked like this:

We won’t have an idea of what Wales’ GVA for 2017 was like until the end of 2018 as that’s usually when the ONS publishes the figures.

If Wales is “too poor to be independent” (though GVA isn’t a measure of wealth, but a measure of productivity), then so is every single nation – more than 100 – that rank below us.

Though Wales would place a few places lower if all of the UK’s nations were counted independently, we’re near enough toe-to-toe with one of the world’s pre-eminent manufacturing hubs (Taiwan), two former imperial powers (Spain & Italy) and several oil-rich and gas-rich nations (Kuwait, Bahrain, Brunei).

We could do better with the right economic policies in place and a clear plan, independence may provide the catalyst to do so (in the same way as has happened in the Republic of Ireland and parts of eastern Europe).

Wales: An Exporting Nation?

For most of the last 20 years, Wales has been a net exporter of goods but since 2013 something’s changed (perhaps a new statistical model by HMRC, though I’m not sure). Apart from 2016, Wales has been a net-importer but broadly maintained a balance between exports and imports.

The UK as a whole has a huge trade deficit (imports massively exceed exports); at the year ending Q2 2018, it stood at £138.6billion.

Some economists argue that trade deficits and surpluses don’t mean very much, but others argue that having excessively large deficits and surpluses can impact demand for goods and can lead to nations with a trade surplus getting richer at the expense of its neighbours, due to the effect it causes things like exchange rates.

A big note of caution though: goods and services traded between the nations of the UK aren’t counted as imports or exports. It’s hard to tell how the figures would be impacted by independence or who our biggest external trading partner would be (I come back to that later) – it’s likely to shift from Germany to England.

Also, while Wales probably exports more goods to England, we’re reliant on English and Scottish-based services (particularly banking and investments) which would even the score a lot and impact decisions on things like what currency to use or whether there should be a formal currency union.

In terms of total UK exports, Wales punches pretty much at, or even above, our weight. Particular areas of strength are manufactured goods and machinery, as well as minerals and fuels.

At a deeper level, Wales is responsible for 15% of the UK’s electricity supply exports (presumably to Ireland), just under 8% of the UK’s plastics and rubber, 20.1% of the UK’s iron and steel exports and 25.7% of transport equipment exports. I return to this later.

The most interesting figures relate to exports as a proportion of total economic activity, which suggests that Wales has a highly globalised economy.

In 2016, exports made up 23.4% of Welsh GVA, compared to just 15.2% for the UK as a whole. This puts Wales in the top-10 globally for economic activity relating to exports, close to Singapore (27.9% of GVA) though still behind the Republic of Ireland (37.4%).

What does Wales import and export?

I touched on this earlier, but there are some areas Wales specialises in.

Just over half (53.4%) of all Welsh exports relate to machinery and transport equipment, the biggest sub-category being “other transport equipment” (which presumably includes engines and car parts). Another big sub-sector is power-generating equipment.

General manufactured goods (including miscellaneous goods) make up around 20% of Welsh exports. This includes scientific equipment, iron, steel, rubber and paper.

Chemicals and related products are the next largest category, making up 11.8% of Welsh exports, dominated by medicine/pharmaceutical products, organic chemicals and plastics.

Areas where Wales perhaps underperforms include food and live animal exports (just 3% of exports) – when you would’ve expected it to have been higher (Part IV). Wales also barely exports any beverages (presumably this means alcoholic drinks) – just £29million in 2017.

According to HMRC, the biggest import categories for Wales in 2017 include machinery & transport equipment (£6.87billion), minerals & fuels (£3.54billion) and manufactured goods (£2.08billion).

Where do Welsh exports go?

With the exception of the United States and UAE, there’s a very clear European (and EU) bias in terms of where Wales exports to. Of the top 20 export partners for Wales, 15 of them are either EU member states, have access to the customs union (Turkey) or trade with Wales under the terms of an EU-negotiated trade agreement (which would no longer apply to the UK after Brexit).

According to HMRC, in 2017 the Welsh imports mainly came from the European Union (£7.33billion), Asia & Oceania (£3.33billion) and North America (£2.94billion).

In terms of individual countries, the biggest exporters to Wales were (pdf) the United States (£2.4billion), Germany (£1.9billion), China (£1.2billion), the Netherlands (£1.1billion) and France (£900million).

Wales is probably one of the few countries in Europe which exports more to Germany than we import.

This is why the Brexit deal is going to be so important to the Welsh economy. Just under 60% of our exports in 2017 went to the EU. The total flow is also huge – about 57%, meaning exports and imports make up the equivalent of 57% of the Welsh economy ( £34.1billion).

Wales is a trading nation. Anything that places barriers between us and our major trading partners – like tariffs in a “No Deal Brexit” scenario – will have a noticeable impact on the Welsh economy.

Business Ownership & Foreign Direct Investment

According to a 2017 ONS report (pdf p5-6), although only 0.4% of all businesses active in Wales are non-UK owned, 34.6% of all large businesses (employing 250+ people) and 11.9% of all medium-sized businesses in Wales (employing 5-249 people) are owned by companies based outside the UK.

The proportion of foreign-owned businesses in Wales has increased by 31.8% since 2003, again with the more sizable increases being in the large and medium-sized business band.

In addition, 155,300 people – about 14% of the workforce – were employed by foreign-owned companies in Wales.

While during the 1970s-1990s, Wales had an enviable record for attracting foreign direct investment (Part II), the record during the 2010s has been less than stellar.

Responsibility for attracting foreign investment to Wales lies mainly with the UK Government’s Department of International Trade (formerly known as the Department of Trade & Industry), with the Welsh Government playing a walk-on role and often trying to do its own thing – within the confines of the devolved powers we have – with mixed success (Part III).

Only once in the last six years has Wales matched or exceeded our UK population share (4.9%) in terms of new FDI projects – hitting 5.1% of the UK total in 2014-15. Since then, and particularly since the Brexit referendum, there’s been a massive slump in the number of investments – though the number of jobs created or safeguarded remains relatively high.

While it’s right to say the number of FDI projects declined by about 10% since 2015-16 across the UK, foreign investors haven’t lost interest in London, but they certainly have lost interest in Wales.

Discussion Points

Oh, boy….(Pic: BBC Wales)

Wales is a nation of engineers, but not investors & inventors – Wales has as much a claim to the first title as Scotland judging by the heavy economic importance industry and construction have to the Welsh economy. If you need something made, Wales is the place to be.

However, while there’s plenty of manufacturing prowess, as mentioned in Part VII, there’s a clear weakness in turning ideas into finished products. Making parts of bigger finished items may well be good for jobs, but it’s worthless in terms of economic growth. We could do more to encourage all those companies which have placed faith in Wales down the years and set up branch factories to do more research and development. We also need to do more to encourage companies to develop products from start to finish in Wales.

What will Brexit mean? – Wales has what could be described as a very open economy – proof of that being the very high proportion of exports and imports compared to our GVA. “Openness to trade” was listed in The Flotilla Effect as one of the key advantages of smaller nations and while it’s clear Wales ticks the box there, we perhaps haven’t seen it fulfil its potential.

The biggest stumbling block on the horizon is Brexit and if – as a nationalist – you’ve read through all this and decided that putting up any sort of trade barriers between Wales and our key markets is a good idea, then I don’t think there’s any hope for you. It’s not something we’ll notice immediately, but after 5-10 years it’ll start to bite as the UK economy becomes more internalised; in any such scenario, Wales is going to lose out (Part IX).

I’d go so far as to suggest that if the UK and EU can’t agree on a deal that protects the free trade of goods, it may be justification for a snap independence referendum.

This is a decision so important that Wales can’t afford to leave it solely to London yet again. I fear though that the Welsh Government don’t have the spine to stand up for our interests and while it’ll no doubt save Wales’ place in the Union, there won’t be much of a Wales left for them to rule.

Is UK economic policy harming or helping Wales? – You can see from the FDI figures that the UK Government haven’t done a particularly good job of promoting Wales to the rest of the world; neither have the Welsh Government, to be fair. I don’t believe it’s being done willfully, but perhaps it’s caused by blurred lines and confusion between what is devolved and what isn’t.

It’s also no excuse, as Scotland has always done relatively well in terms of attracting FDI, with Scottish nationalist and British nationalist governments in power in Edinburgh and London respectively.

Looking at the bigger picture of how the Welsh economy is structured and what our areas of specialism are, has UK economic policy deliberately or inadvertently sabotaged our attempts to close the productivity gap/Offa’s Gap with the rest of the UK?

Wales will never have London or Scotland’s financial service sector, yet policy in London has been primarily about protected the City because it’s the golden goose and, in theory, tax revenues are redistributed via the Barnett Formula and alike.

However, it’s come at the expense of everywhere else and there’s no desire or drive to develop the economy of places like Wales or NE England, just keep us in Giro cheques until the best and brightest that we do have, make the decision to leave and never come back.

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