This chapter considers the implications of skills gaps for export performance by means of a detailed comparison of the UK with Germany. The results of analysis reported in the chapter confirm earlier findings that, relative to Germany, the UK's main deficiency is in craft and technician skills. But the extent of the skills gap varies considerably between sectors. Contrary to a common view, the quality of UK exports does not appear to be on average inferior to that of German ones, at least if quality is judged by price.

The chapter argues that the UK and Germany have comparative advantage in the same type of sophisticated manufactured goods. The UK's skill deficiencies tend therefore to show up as a lower volume of exports: the bigger the skills gap in any sector, the worse the UK's export performance relative to Germany's. UK and German exports to five major markets over the period 1978–87 are used to test this hypothesis.