UK's international trade competitiveness and the performance of UK's imports and exports since 1993 Introduction Many goods and services are traded internationally, e. g. international markets in oil, motor vehicles and insurance. There are many reasons why trade takes place. Availability, some goods can only be produced in certain locations around the world, e. g. Saudi Arabia is rich in supply of oil whilst there are no oil reserves in Japan. Price, some countries are able to produce at a lower cost, this may be because the availability of resources, skills of the labour force or quality of the physical capital in the economy.
Product differentiation, many traded goods are similar but not identical, international trade allows consumers a much wider choice of the product they buy. If one country has lower costs of production than another it's said to have an absolute advantage in the production of that good. International trade will take place even if a country has no absolute advantage in the production of any good. As long as it has a comparative advantage in the production of one good, international trade will be advantageous.
The theory of comparative advantage argues that international trade takes place because of the differences in the price of products; however much of the world trade is a result of no-price competition between nations. Design, reliability, availability and image are some of the factors which determine the purchase of goods. UK imports and exports of goods & services The UK trades both in goods and services. Since 1955 exports of goods has accounted for approximately three quarters of total exports whilst exports of services have accounted for one quarter.
Foreign trade has increased at a faster rate than that of national income. In 1955, total exports accounted for 24% of national income; by 1998 this had risen to 30. 4%. Although the proportion of trade in goods to services has remained broadly the same in the post-war era, there have been significant shifts in the composition of trade in goods. This graph shows that the importing and exporting of goods has been steadily increasing since the war, but a decline in the early '90s may indicate the beginning of the growth of developing countries.
Imports and exports of services has had a gradual increase up to 1985, but not as dramatic as goods, and then peaked further in the late '90s. The data provided shows that total exports and imports of goods to and from the UK had a steady rise from 1993 to 1996. The level of imported goods then reached an area of stability for two years from 1996-1998, whereas exported goods decreased by 3. 5% over the two years, this indicates that perhaps the UK's manufacturing industry was in decline.
At the turn of the century many economists were pointing out how the French, German and American manufacturers were overtaking the UK firms on both price and quality. Britain's textile industry, once one of the countries most important exporters, had shrunk due to competition, first from Europe then the third world countries. Whilst it is clear that the UK's loss of competitiveness in industries such as textiles has been due to high costs, this is less obvious in industries such as the motoring; poor quality, bad design and unreliability had been the downfall of the industry in the '80's.
Equally high quality, reliability and good design were an essential part for the revival of the industry in the '90's. At the turn of the millennium the amount of goods exported decreased, by 2003 exports dropped by 5. 1%. Meanwhile the amount of goods imported increased by 6. 44% at the same time. This indicates that developing nations, e. g. India and China are able to produce goods at a lower cost. This means that these nations have a lower comparative advantage in the production of these goods (e. g. textiles).
The law of comparative advantage is based on who is able to produce at a lower opportunity cost and thus base trade on specialisation. The loss of UK competitiveness in goods could be argued to be not important if they could be replaced by services. However as the graph above shows the growth of trade in services had been roughly the same as growth in trade of goods. Total exports of services have show a steady increase over the 10 year period and have increased by 116. 5%. Total imports of services have a similar trend but not as consistent over the 10 years- a slight dip in rate to 2.
5% in 1997 demonstrated this inconsistency. Further data has demonstrated the composition and change in trade in services since 1975. UK citizens spent more on foreign holidays than foreigners taking holidays in the UK, this therefore equated to deficits in transport in 1998. However the UK demonstrates significant comparative advantage in the financial services. These mainly provided by the city of London financial markets providing banking and insurance for instance. New York and Tokyo are the only likely competitors to London's financial market.
London is arguably the most significant financial centre in Europe- but Britain's refusal to join the common currency threatens that position. The UK's international trade pattern has changed since the war, where trade patterns established in the Victorian era were continued to be used, buying raw materials from developing countries and selling them manufactured. By the turn of the century UK trade had shifted dramatically, over half of exports were now within the EU- as shown by the graph. Exports to Asia were regarded as unimportant, as shown by the consistent low trend in comparisons to other regions.
Euroskeptics argued that the UK could withdraw from the EU and rely more it's US trading connections- thus becoming a free trading nation benefiting from its geographic location like Hong Kong and Singapore. The problem with this assumption is that the USA is a relatively unimportant exporting partner as shown by the pie chart. If the UK left the EU, they would impose higher tariffs and quotas. Certainly Europe is important from a trade viewpoint for the UK and is likely to increase over time. World total exports increased steadily from 93-97, then slumped at the end of 1999; trade then picked up during 2000 and is now generally rising.
The exchange rate records show us that at the turn of the century the rate declined rapidly, this shows that the Pound was stronger than the US Dollar. The UK seller receives money from the US buyer in return for selling the good. This represents an export to the UK and results in a flow of funds into the UK (export earnings) representing a positive entry/credit on the balance of payments. For the US, this transaction would represent an import and lead to a flow of funds out of the US (a negative entry (debit on the balance of payments).