Britain had a deficit in its trade in goods balance of £34bn in 2002 - Examine the likely causes of this deficit.

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Daniel Colton                        

        Britain has had a consistently growing deficit in trade of goods since 1982. Before then, deficits only existed in times of economic strength that boosted the UK’s marginal propensity to import. Since 1982, economic boom has only served to increase the deficit, which continued to exist even through the recession of 1990 to 1992. This £34bn deficit in 2002, as well as the deficits for years before, can be largely put down to trade in manufactured goods. Of this £34bn, £26bn is due to the net imports of finished manufactured goods. This loss in competitive advantage in these goods is shown by the fact manufactured goods has fallen as a percentage of the UK’s total exports by 9.5% from 17% in 1960 to 7.5% in 1984. Manufactured goods are not the only sector to create the deficit; the second biggest deficit is created by £9bn net imports of tobacco, food and beverages. The deficit in 2002 was the greatest since 1991. There are several reasons of varying importance that could explain the reasons for this deficit.

        Firstly is the issue of low price competitiveness in the UK that will naturally lead to reduced demand abroad for UK goods. When Britain was a strong exporter of manufactured goods, it did not have the expensive labour that it has today. This is partly through an indication of UK growth, and partly through the low levels of unemployment that currently stands at 5% on the claimant count, pushing up labour prices in the UK. By the industry in the UK having to pay more for labour, it looses the ability to compete with countries such as China that have far fewer regulations on employment. Without a minimum wage the average cost of production is far reduced, meaning the goods are much more competitive on the international market. This loss in competitiveness is shown by fig 1.1 below, showing how confidence has been lost in UK manufacturing through dramatically reducing investment.

This lack of competitiveness can also be put down to skill deficits in the UK economy, increasing structural unemployment. Even though the UK fares very well on international rankings for education, we do not have the right skills that are needed to boost manufacturing competitiveness. However, it is not in all goods that the UK has lost competitiveness, as manufactured goods have declined, the exports of high value added ‘knowledge’ goods. These include specialized machinery, pharmaceuticals, telecoms equipment and generating equipment, but the trade surplus in these goods is often overlooked as it is clouded out by the enormous deficits elsewhere. So we do have a comparative advantage in some goods, but this is not enough to make up for our lost competitiveness elsewhere.

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        Another crucial factor in explaining the trade deficits is the UK’s inability to compete in non-price factors such as marketing, design, and delivery date and product development. All these factors stimulate international demand, but Britain misses out on the opportunity to achieve a surplus by not being efficient enough in these sectors. The issue of delivery dates links in some ways with labour, as workers cannot be exploited to try and make as early a deadline as possible. Britain is also surprisingly poor at product development considering its strong science base that has fared it so well in the value ...

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