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Can the UK get foreigners to buy its goods again?


In a bid to further boost the U.K. economy, the government, through the Bank of England, is planning to back lending to U.K. exporters – despite concerns it might be exposing itself to increased risk.

The announcement earlier this week of a plan to encourage banks to borrow from the Bank of England to lend to exporters, was overshadowed by the expenses and resignation row surrounding treasury chief George Osborne's colleague, Maria Miller.

Yet for the long-term future of Osborne's Conservative Party in government, the export initiative may be more important.

Port of Felixstowe, England
Peter Macdiarmid | Getty Images

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The Bank will issue U.K. Export Finance-guaranteed debt capital market notes to banks, which means it will essentially guarantee loans made by banks to U.K exporters. This is effectively a form of the Funding for Lending program targeted at exporters. By increasing money supply, it could also keep sterling at export-friendly levels.

There is no argument that U.K. exports could do with a fillip. They have been in decline for decades, as the country's manufacturing sector narrowed, much like other developed nations, as it became cheaper for companies to outsource factories.

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Economists are warning that the U.K. cannot just rely on its consumers to spend their way back into faster growth, and that there must be a "balanced recovery" with exports starting to rise again. To that end, the government has been on a huge beauty parade in countries like China and India.

"Fundamentally it is a good idea," Jane Foley, currency strategist at Rabobank, told CNBC. "We cannot have an economy sustained by domestic consumption alone."

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Switzerland's position as a hub for luxury goods manufacturing is one model the UK could follow. It became a net exporter of cars in 2012, for the first time in 36 years, boosted by higher-end manufacturers like Jaguar Land Rover.

Yet other sectors don't seem to have followed the automobile industry. In the first two months of 2014, exports fell by more than 4.5 percent from the last quarter of 2013, despite a pick-up in manufacturing output. Mulberry, the luxury handbag maker which was one of the U.K.'s great export hopes, saw sales plummet over Christmas after pushing up prices.

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"The government via the Bank of England is manipulating market forces and there is a risk in that," Foley said.

"However, sometimes the government does need to back risk, and enhance lending to some high-risk groups if banks don't want to take on that risk."

According to U.K. business lobby group the CBI, the government should be targeting public procurement contracts for U.K. companies in countries like China, Indonesia and Turkey which are spending on improving their infrastructure.

"The size of the exports prize for public services firms in emerging markets is growing at a rate of knots, driven by a ballooning middle class and an ageing population," Katja Hall, CBI Chief Policy Director, said.

"This is a huge opportunity for UK businesses, which have an established track record in many key growth areas like health, transport and recycling. But winning public contracts in these countries is often an uphill battle, so firms need a leg-up."