London attracts a large bulk of trade and investment in the UK, a situation that will have to change if the government’s levelling up ambitions are to be realised. (Photo by Vuk Valcic/SOPA Images/LightRocket via Getty Images)

The UK typically has a trade deficit for goods and a trade surplus for services, meaning it imports more goods than it exports and exports more services than it imports. In 2020, the UK imported £438bn ($592.83bn)-worth of goods and exported £309bn, according to the UK Office for National Statistics. This was a net deficit of £129bn. However, it exported £296bn-worth of services, while importing £164bn, representing a £132bn surplus. Overall in 2020, the UK was actually in a trade surplus for the first time in more than 20 years. However, it is expected to slip back into a deficit in 2021, when full-year figures are released. The UK was the sixth-largest importer and exporter of goods and services globally in 2020.

Although the UK is successful in attracting foreign direct investment (FDI), it is actually a net exporter in this area. For every inbound FDI project created in the UK, companies based in the UK create 1.6 projects abroad, according to GlobalData’s FDI Projects Database. The UK was the third-largest inbound FDI market globally in 2020, while it was the second-largest in terms of outbound FDI. The UK receives significantly more service-based investments when compared with industrial operations. Almost three-quarters (73%) of all FDI into the UK is in the creation of service activities. Outbound FDI ratios are similar, with just under 72% of outbound FDI in service-based functions.

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UK’s key sectors and partners

The UK’s leading goods exports in 2020 were cars, medicinal and pharmaceutical products, and mechanical power generators. It exported the most goods to the US, Germany and Ireland, with 47.5% of its total exports being to EU markets.

Cars and medicinal and pharmaceutical products, along with clothing, were the UK’s top goods imports in 2020. Its key import partners were Germany, China and the US. More than half (53.1%) of its total imports came from the EU.

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In 2019, the UK exported three times more financial and insurance activities (its top service export) than it did with its top goods export, which was cars at £31.6bn. Imports were also higher.

The UK’s top service exports in 2019 were financial and insurance activities, professional, scientific and technical activities, and information and communication. Combined, the UK exported more than £193bn worth of services in these three sectors. They were also the UK’s largest service imports. The UK imported an estimated £42bn worth of financial and insurance activities in 2019 too.

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The UK’s top inbound FDI sectors in 2020 were software and IT services, business and professional services, and communications and media. These three sectors were also the UK’s top outbound FDI sectors in those 12 months. Financial services was only the ninth-largest inbound FDI sector, having seen project numbers halved from 2019. Although Covid-19 was the key reason for most FDI sectors declining in 2020, the UK’s financial services sector has been affected by Brexit. Companies have been looking to other EU hubs (namely Ireland, the Netherlands and Germany) to establish financial services operations. Outbound financial service FDI from the UK was still relatively strong in 2020, ranking as the fourth-largest outbound sector. However, project numbers did decline by one-fifth in 2020 from 2019.

Although cars and pharmaceutical products are top goods sectors, they do not rank so highly in terms of FDI project numbers in the UK. There are a few reasons for this. First, there was the worry of the impact Brexit would have on the UK’s automotive industry. However, these concerns has been largely been unfounded. A more simplistic reason is that automotive investments, particularly for original equipment manufacturing, tend to be large in scale. There are only a few companies in the world that can create such projects. Other sectors, such as software and IT services, have many global players, both large and small. Often for investments in both the automotive and life science industries, the key is having a large-scale multinational corporation that is supported by a network of domestic (and foreign) supply chain companies. In the UK, examples of this would be Nissan and Jaguar Land Rover. Both companies have invested heavily in the UK and it is companies like these that are contributing to the UK’s exports in these sectors (in that one single FDI project is having a much larger impact on export levels).

The US, Germany and France are the key FDI partners for the UK. These nations are the top three countries for inward investment into the UK and outward investment too. The US is generally a dominant source market for most countries, and US-based companies accounted for more than one-third of all FDI into the UK in 2020. As a destination country, the US accounted for just over one-fifth of total UK outbound FDI. Germany and France are the two largest countries in the EU, and geographic proximity and similar business environments contribute to their FDI closeness with the UK. China is not as big a source market for the UK as might have been expected; however, this is generally because Chinese investments in the UK tend to centre more around mergers and acquisitions than they do greenfield FDI.

FDI in UK regions

In 2019 (the year of the most up-to-date subnational data), the UK had a trade deficit in goods of £131bn. Seven of the 12 UK regions were net importers of goods. The South East had the largest trade deficit in goods (-£51bn), attributed to many logistics and warehouse operations. Scotland had the highest trade surplus for goods (£12bn). The North East, South West, Wales and Northern Ireland were the other net exporters of goods, although all had a surplus of £1.5bn or less. In terms of inward investment, the UK is a net exporter. In 2019–20, there were 826 industrial-related outbound projects, compared with 499 inbound. The UK’s inbound investments are primarily service-based. Only the North East and Wales received more manufacturing/production-based FDI than they did in services.

The UK Office for National Statistics has produced experimental service trade estimates by industries and subnational locations within the UK, with the latest data being for 2019. This data shows the UK having a trade surplus in almost all service-based industries. Only primary, utilities, wholesale and motor trades sectors exhibited trade deficits. UK service exports are driven by financial and insurance activities.

Regionally, only the East Midlands had a trade deficit in services. London had the largest trade surplus of £62bn. More than half of service imports are located in the south of the UK, while for exports the concentration is more than 60% in the south.

London calling for inward investment

The UK’s trade in services, much like its inward investment, is driven by London. The capital accounts for almost two-thirds of the UK’s total trade in services, with the city specialising in high-valued services. Its largest service segment for exports in 2019 was financial and insurance activities – worth more than £21.5bn. Additionally, information and communication and professional, scientific and technical activities each accounted for about one-quarter of London’s service exports, some £15bn each.

London’s key service-based trade sectors align with its key inbound FDI sectors. London’s top three FDI sectors are software and IT services, business and professional services, and financial services. In 2019–20, London accounted for almost three-quarters (72%) of all inbound financial services FDI in the UK. Delving deeper into the actual FDI functions of operations, London accounts for half of all inbound UK investment in service-based operations. For reference, it accounts for 60% of the UK’s trade surplus in services.

Each UK region has its own FDI specialties. The table below shows the top three sectors for each UK region, with software and IT services proving to be a key sector across much of the country. For six UK regions it is the leading inward investment sector by number of projects. Business and professional services is also an important inbound sector, ranking as one of the top three sectors for eight of the 12 regions.

East of England, East Midlands and Wales have noticeably different leading sectors compared with other UK regions. While all three regions specialise in the food industry, East Midlands and East of England are also highly prevalent in the logistics sector. Wales, which received the lowest volumes of FDI of any UK region in 2019, was winning relatively more projects in renewable energy and communications sectors. As renewable energy FDI now outstrips non-renewables, it should be noted that Scotland and the North East are also key markets within the UK (Scotland accounted for almost one-third of all inward projects in the sector).

The map below shows the performance of UK regions for all sectors of investment in 2019–20.

Alignment and over-reliance

The synergies between trade and FDI are both evident and logical in the UK. Foreign companies enter the country to avail themselves of established markets and an array of high-quality talent, among other reasons. These foreign companies, alongside domestic companies, then export their specialities abroad. Within the UK, trade in services is more closely aligned to FDI volumes than trade in goods. This is due to the nature and scale of these types of investments.

The levels of exports of goods and services are very similar. However, the UK imports significantly more goods than services. This indicates that the UK has been successful in transitioning its economy from more of a manufacturing base to a service offering. Many services are provided by UK companies and there is a reduced need to import. The UK needs to import components to fulfil its manufacturing and production-based activities, however. This is because these types of goods are cheaper when manufactured in Asia and eastern Europe. It is more cost-effective for many UK companies to import such goods rather than produce them themselves. The UK’s focus is producing end products for domestic and foreign markets as well as the more complex, higher value-added stages throughout the supply chain. The synergies in this can be seen in the FDI sectors UK investment promotion agencies target as well as the types of operations established in the country.

The data also shows regional inequalities. Addressing these should be a key part of the UK’s levelling up agenda. Service exports and inbound FDI are heavily propped up by London, a city that accounts for 13% of the country’s population, yet takes 42% of inbound investment and 60% of the UK's trade surplus in services. The capital is also the second-largest region for exports of goods. Encouraging more companies to establish FDI projects outside of London may also contribute to a more equal dispersion of trade in goods and services as well as other positive externalities, all of which would work towards meeting the government's levelling up targets.

For more coverage across our publishing network of the issues created by the supply chain crisis, read the following: