Section A: Exchange Rates and UK Manufacturing Competitiveness - To what extent are exchange rates the most important factor in determining the competitiveness of products manufactured int the UK?

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  • Created by: Megan
  • Created on: 14-06-15 18:47

Section A: Exchange Rates and UK Manufacturing Competitiveness - To what extent are exchange rates the most important factor in determining the competitiveness of products manufactured in the UK?

Advantages

  • YES, exchange rates are the most important factor in determining the competitiveness because... The value of the pound against other currencies will determine foreign demand for UK exports.
  • When the pound is strong, this will make UK's exports more expensive to foreign customers.
  • Demand for UK manufactured products will fall as a result.
  • Sustained strengthening pound may deter investment into manufacturing within the UK, as demand falls it becomes less attractive to produce in UK.
  • Less investment may cause manufacturing to slow and still decline, making the UK manufactured products less competitive if innovation is not occurring due to lack of investment.
  • Competitiveness manufactured products in the UK falls.
  • EV: Sharp devaluation in the pound during the 2008-9 recession didn't lead to a rise in UK manufacturing exports, does SPICED work?
  • YES, exchange rates are the most important factor in determining the competitiveness because... It can impact location decisions.
  • A weak pound may lead to many manufacturers deciding to re-shore or locate manufacturing within the UK as exports become cheaper.
  • Trend in re-shoring in recent year due to emerging markets seeing strengthening exchange rates as a result of economic growth from the exports, as well as other factors like rising wages in China and transport costs.
  • Cheaper exports leads to higher levels of demand for foreign customers.
  • Higher levels of demand for UK manufactured products works as an incentive for production to be located in the UK as they will receive higher profits.
  • UK is seen as a more competitive location for manufacturing and products are more competitive as they are cheaper.
  • EV: Emerging economies such as China have a fixed exchange rate, which means they make it a weak currency by flooding their currency market to increase supply of their currency in order to keep exports cheap. While China still has a fixed currency, is the UK products still more competitive with a weak pound?

Disadvantages

  • NO, exchange rates aren't the most important factor in determining the competitiveness because... Off-shoring and increasing globalisation has reduced the impact of significant movements in exchange rates.
  • Manufacturers are increasingly operating in multiple locations, including overseas near to customer demand.
  • Multinational companies deal with multiple currencies that often provide a natural hedge against exchange rate risk.
  • So if one exchange rate strengthens, but another depreciates, manufacturers will not be so effected.
  • UK manufacturers who also operate else where will not suffer as greatly due to fluctuations in the pound.
  • Exchanges rates do not determine the competitiveness of products manufactured in the UK as multinationals can cross-subsidies.
  • EV: Depends on the scale of manufacturing in certain countries to whether they are significantly affected by exchange rate fluctuations.
  • NO, exchange rates aren't the most important factor in determining the competitiveness because... Exchange rate movements are usually short lived and have short term effects on manufacturing competitiveness.
  • Short term effects might not deter manufacturers when choosing to locate manufacturing in the UK because if it's currently strong, eventually it will depreciate again, due to reduced demand, in the long run.
  • In the long term, other factors such as investment in R&D and the investment environment in the UK will be more important than exchange rates.
  • Competitiveness will be changed in the short term, but over time, it will be unchanged.
  • Competitiveness of products is not significantly affected by exchange rates.
  • EV: Short term effects may deter manufacturing away from the UK still if the exchange rate is not currently beneficial for the manufacturer when deciding on a location, as this will be in the short run.

Evaluation

Exchange rates do not feature highly on survey answers from UK manufacturers listing the most important issues facing them, which would suggest it is not the most important factor, maybe due to increasing globalisation and operating in multiple countries. I believe that exchange rates are not the most important factor, but still an important factor in determining the competitiveness of UK manufactured products because it does determine foreign demand and exports. However, it doesn't determine domestic demand within the UK as they will not be affected by the exchange rate. Furthermore, exchange rates are short term effects and in the long run it will not determine the competitiveness, unlike more important factors such as the skills gap being a current issue with manufacturing. This factor will deter manufacturing away from the UK and reduce the competitiveness of UK manufactured products as less can be manufactured in certain areas where there is skills gap. Therefore, it is not the most important factor.

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