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).
This may have been because of many different economic and non-economic reasons. Economically this could have been because of interest rates in the two nations. The interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange markets. A good deal of the trade in foreign currencies is for speculative purposes - traders moving funds from one currency to another to take advantage of price movements or to take advantage of better returns in different countries.
For example, if the rate of interest in the US was 3% but was 5% in the UK, there may be advantages gained from transferring funds from the US to UK .( e.g. moving money from a bank account paying 3% to another bank account paying a higher rate of interest.) If this happened, there would be a move towards selling dollars on the foreign exchanges and buying Sterling, with the result that the demand for Sterling would raise and the supply of dollars would also raise. This would put pressure on the price of Sterling and push its value up against the dollar.
The end result would be an appreciation of the pound meaning that it would be worth more in terms of dollars (e.g. rising from £1 = $1.60 to £1 = $1.70). This in turn means that the US buyer now has to give up more dollars to buy the same amount of Sterling, which is an effective rise in price for imports.
Non-economically this could be because of the US terror attacks and the commencing of the war on terror, or the US presidential elections in 2000.
The graph demonstrates the fact that over the last 10 years trade in goods and services, income and current transfers has gradually increased. The Pink book tells us that the USA is consistently the single largest counterpart country within the UK’s balance of payments, representing 20 per cent of current account credits and 15 per cent of debits in 2003. There has been a current account surplus with the USA in each year since 1992. Prior to 2000 these were typically between £2.0 billion and £4.0 billion, whereas the most recent periods have seen significantly higher surpluses. 2003 shows a record surplus of £18.6 billion.
Evaluation
The UK’s trading position is heavily reliant on the changing nature of competitiveness across the world. Emerging markets, notably five nations dubbed as the BRICK nations -- Brazil, Russia, India, China, and South Korea are all becoming viable competitors to more established countries and now can benefit from international trade.
There are a number of factors which influence the competitiveness of the UK internationally, these include- the level of domestic inflation compared to our competitors, levels of productivity compared to our trading patterns and the level of physical and human resources. These all effect the unit cost of production. By monitoring who we trade with helps us to identify the changing global trading positions and how the UK may be able to influence this. The UK can gain from trade in many ways; decrease in costs, increase in competition, differences in demand and other non-economic advantages.
