UK Trade Performance and the Role of Product Quality, Innovation and Hysteresis: Some Preliminary Results

This paper seeks to explain the apparent contradiction in the UK’s manufacturing trade performance over the past two decades: on the one hand, the early 1980s witnessed a substantial contraction in manufacturing employment along with a considerable surge in imports and decline in UK exports; on the other hand, UK trade performance, particularly exports, seems to have improved in the second half of the 1980s and early 1990s. The paper shows that the substantial, but temporary, appreciation of sterling in the early 1980s caused permanent damage to both the UK’s trade performance and industrial base; and that the UK’s relative investment performance, via its hypothesised impact on product quality, helps to explain the subsequent improvement in UK trade performance since the mid‐1980s.