'Special relationship' continues

'Special relationship' continues

When Great Britain opted not to adopt the euro a few years ago, naysayers declared that the United Kingdom would surely sacrifice its position as the most attractive location for U.S. companies in Europe. Yet the more things change elsewhere around the globe, the more Britain maintains its unique popularity for U.S. trade and investment.

Bilateral U.S.-U.K. trade rebounded to $76.4 billion in 2003, three years after peaking at $84.9 billion. Trade was up in both directions. U.S. imports from the U.K. rose to $42.8 billion in 2003 from $40.7 billion in 2002, while U.S. exports rose to $33.8 billion from $33.2 billion.

An Ernst & Young survey found that U.S. investors were involved in 314 of the 811 new investments and expansions in the U.K. by outside companies during the 12 months through March 2004, and that the U.S. projects created 40 percent of the 25,000 jobs that resulted. U.S. companies generated more new jobs with their investments than all the other nations of the EU combined, according to a survey by the U.K. Department of Trade and Industry.

Why does the U.K. continue to exert such a powerful pull? One factor is the continued steady growth of the British economy. Patricia Hewitt, Britain's trade and industry secretary, said recently, "It is no coincidence that inward investment is up and the U.K. is getting a bigger share of investment into Europe while we are enjoying our longest unbroken period of economic growth for over 200 years."

Over the past 12 months, Britain's gross domestic product has grown at a 3.7 percent rate. During the first quarter of 2004, the U.K.'s productivity growth rate reached 2.5 percent - a three-year high. Although the British pound reached a four-month high against the dollar ($1.855) on July 20, British exports are expected to grow throughout 2004 in response to the continued global recovery.

Longer term, the U.K. enjoys a wide range of "inherent strengths and comparative advantages" over its competitors, according to a recent white paper by the U.K. Department of Trade and Industry. "We have a well-developed business infrastructure and a long tradition as an open trading nation, including an integrated transport network; a telecommunications industry that is among the world's most advanced; and a strong financial and professional sector."

Britain's location also makes it a convenient U.S. gateway to Europe. Ties of culture and language between the U.S. and the U.K. strengthen the country's cultural appeal. English is the language of both nations, as well as the international language of business in Europe. Meanwhile, transportation links between the U.K. and the Continent continue to improve. "Low-cost airlines now make it much cheaper and easier for the British to visit the Continent on business. After 2007, a full Channel Tunnel Link, and a gradual standardization of high-speed rail systems in the European Union, will do the same," said James Woudhuysen, a consultant with Seymour Powell Forecasting.

Although many of Britain's labor-intensive manufacturers have lost market share, many U.K. products retain a strong global appeal. "Britishness is a key component of the appeal of many U.K.-made products, especially in traditional luxury goods such as pottery and china, clothing, foods and drink," the government white paper said. Famous brands that trade on "Britishness" include Aston Martin, Cadbury Schweppes, British Airways and Jaguar.

The U.K. remains the top destination in Europe for investments involving high-value-added products and services - not just manufacturing plants but research-and-development sectors for computer software, electronics, pharmaceuticals and telecommunications, including call centers. The roster of recent foreign-owned projects includes companies from the U.S. and elsewhere - for example, Black & Decker's global design center for household equipment in Durham; Nissan's design center in Cranfield, which focuses on software for power trains and engines; and Samsung's consumer electronics design center in London.

Although many less-productive U.K. companies have fallen by the wayside, the country's leading manufacturers continue to thrive. The U.K. government survey reported that 165 British companies with a combined market capitalization of $572.2 billion are on the "European 600" list. The second-ranked country on the list is Germany, with 89 companies with a combined value of $536 billion. France ranked third with 83 companies, worth $447 billion.

The United Kingdom has a strong presence in service sectors that support manufacturing - including the insurance industry, international finance, and legal, financial, and merchant services. "We lead the G-8 nations in terms of our research productivity and rank second only to the U.S. in internationally recognized measures of research impact," the Department of Trade and Industry report said.

Woudhuysen noted that Britain is leveraging its popularity with multinationals to expand its exports of goods and services, especially to Europe. "More exports than ever originate from foreign-owned firms in the U.K., in part driven by intra-firm trade" between U.K. facilities and their overseas headquarters. Moreover, the growing liberalization of world trade is making it easier for British-based firms to export services, especially to other members of the European Union. Between 1998 and 2001, the share of the U.K.'s exports of services to the EU rose from 38 to 41 percent, according to Woudhuysen.

Nevertheless, some say Britain will have to work harder to leverage its potential as a high-value-added manufacturer and service provider. The European Union's eastward expansion has sparked anxiety that many of Britain's remaining manufacturing jobs will be lost as low-wage manufacturers in countries such as Poland and Hungary force British manufacturers to relocate in Central and Eastern Europe - a development that would further erode Britain's manufacturing base.

Martin Temple, director of the EEF, the British manufacturing organization, said the U.K. must emphasize value-added products. "Instead of knee-jerk reactions, we need to continue to debate and define how to make the clearly targeted investment in skills, science and innovation to bring the performance of the underperforming companies up to the level of the best," he said.

Many companies that might be taking advantage of the expanded European Union are looking elsewhere. According to a recent EEF survey, more British companies are planning to invest in China and other parts of Asia than in the 10 new EU members. In the survey of nearly 600 British, French and German companies, 42 percent of British respondents cited China as their preferred location for future investments. In contrast, 52 percent of German companies and 42 percent of French companies cited Central and Eastern Europe as their preference.

The EEF is urging British manufacturers to take advantage of the long-term potential of Central and Eastern Europe. "EU enlargement is an ongoing process, and a failure to take advantage of the current growth opportunities will leave our competitors with a head start when other countries join in the future," Temple said.

Meanwhile, Asian-based multinationals are increasingly looking at the U.K. as a desirable location for their pan-European strategies. Sources of foreign direct investment, "while still strongly North American and European in origin, sometimes now tend to involve new kinds of investment from Japan, as well as from emerging economies in Asia," Woudhuysen said. In 2003, the number of investment projects in the U.K. that originated in China rose to 22 from 14 in 2002.

Long term, Britain's patterns of trade and investment will be more closely tied to Asia - and less dependent on the U.S. By 2024, China, India and Russia could be major targets for U.K. exports, Woudhuysen said.