Today it is a very unrealistic view that a country can be self-sufficient and not take part in international trade. The experiences of countries that have tried to follow this principle by replacing imports with domestic supply can be unsuccessful. It is very difficult for a country to be able to produce a range of goods that are demanded by its citizens and industries at competitive prices. This policy would in effect lead to have significant inefficiencies and comparative poverty, in relation to countries that that participate in international trade.
United Kingdom International Trade
Britain like other countries has had a long trading history. Prior the WW1, exports and imports accounted for nearly 25-33% of national income. The war interrupted trading patterns and the years that followed were symbolised by economic and political instability by the growth of tariffs and other barriers to trade. By 1938 the share of exports had fallen to around 16% of national income, but after the Second World War, successive agreements were negotiated that substantially reduced tariffs. The removal of barriers to the movement of goods resulted in specialisation of nations in exports.
World trade grew and with it UK imports and exports, Sawyer (2004, page 7).
To understand international trade you have to look at in a globalised economic perspective. The UK is one of the most developed economies in the world, indicated by the fact that UK exports and imports accounted for nearly 30% of UK GDP in 2004. The UK ranks fourth in the share of global trade of good and services.
International Trade is extremely important for the UK economy. The pattern of the UK’s trade has changed much over the past 150 years; at the present time it is strongly focused on the EU on other developed economies
The UK has seen a considerable decline since the mid nineteenth century when it was responsible for over 25% of the world’s imports and exports of goods and services, but this declining share has only occurred as a result of the immense expansion in world trade over the years. The amount of goods and services exported by the UK economy remains on an even increasing trend. A result of the decline of manufacturing in the UK economy has also meant that is imports are needed more
Just as the UK remains an important nation in international trade, trade has had a very great impact upon the UK economy. The significance of international trade can only be calculated by the level of openness of the economy. This openness can be measured by the proportion of total final expenditure in an economy which is taken up by sales abroad.
International trade has a higher proportion of GDP than when compared to some developed economies such as Japan and the United States. International Trade accounts to about 30% of GDP, and about 11% and 15% respectively, they are relatively more closed economies. This means that international trade is less significant for the US and Japan, than for the UK.
Despite the influence of globalisation, the UK tends to do the majority of its trade with its neighbours. The UK’s major trading partner is the European Union. Since joining the EU in 1973, the proportion of trade with the EU has risen substantially, currently the exports account to approximately 59% of all UK exports, and 56% of all UK imports. The US remains the country with which the UK does the most trade, accounting for 15% of our exports and nearly 10% of our imports
Importance of International Trade to UK
Many of the goods and services produced in the UK will not be consumed by domestic households. They will be exported to satisfy the wants of consumers in foreign economies, this is an essential factor in UK international trade.
International trade is an essential feature of the UK economy, In terms of import and export of goods and services, the UK has a strong service sector which is exported to the world, and in the balance of payments it surplus compared to goods balance, the UK has seen a rapid decline in domestic industry from the heydays of the empire. The British Empire was a significant factor in the UK’s previous economic strengths, as the empire declined so did the economy of the UK, as well as a result of the First and Second World Wars.
Nowadays the UK does not possess the political and economical influence that it had with the British Empire; it is still a major industrial country.
The UK economy is dependent on the import of essential raw materials. Today the service sector is an increasingly important element of the UK economy as a result of the decline of the manufacturing sector. Imports are critical for consumption and manufacture. Growth is therefore influenced to some extent by imports.
The supply of exports is commonly referred to as the excess of the goods supplied in a domestic economy. This is essential so when the UK economy is experiencing slow demand and growth, then goods can be exported to countries that are experiencing increased demand and growth.
A key problem in relation to international trade is the issue of exchange rates, and how they affect the UK economy. Exchange rate fluctuations have a significant impact on the UK economy due to its openness and relative importance of trade in terms of GDP. Fluctuations may cause uncertainty for UK firms due to the changes in export and import prices; it can even discourage firms to engage in international trade, and may decide to concentrate on the home market. In effect this will reduce their potential market and as a result to take advantage of economies of scale.
A slowdown in the world economy can affect the performance of the UK economy is a number of ways, it might be expected that exports will fall further damaging the balance of payments on the current account and potentially worsening unemployment. Given the UK situation, this might be countered by falling imports and so the effects are not as bad.
Comparative Advantage
The underlying principle of competitive advantage is that trade between countries will be mutually beneficial as long as their domestic opportunity costs differ. As a result, consumption increases by the way of specialisation and trade, compared to a situation where a country attempts to be self-sufficient. This principle allows us to understand why international trade is important in leading to an allocation of the world’s scarce resources. The well-known economist David Ricardo stressed this in his theory of international trade. Ricardo’s theory, which is still accepted by most modern economists, stresses the principle of comparative advantage.
Comparative advantage is a key determinant of UK international trade and has significant consequences on the country’s Balance of Payments.
Services are a crucial component of the UK economy and its international competitiveness. The services sector makes a significant contribution to the UK economy. The UK has had a Trade surplus in services which has illustrated a competitive advantage in many services in the global economy.
The UK also has significant threats to its competitive advantages from emerging market economies, and this has been seen in the significant loss of competitive advantage in relation to manufacturing, this has been caused by the development of other economies such as low cost Asian competition.
Economic Growth
Economic Growth is one of the government’s key economic performance indicators, growths rates are used to indicate and monitor the country’s performance; it is most commonly measured by GDP (Gross Domestic Product). The UK has experienced a sustained period of growth and has done so for the last 10 years, and what is remarkable about this fact is its stability. This sustained growth followed the UK recession that occurred in 1991; the economic revival began in 1993 after the UK’s departure from the ERM (Exchange Rate Mechanism). As a result of this factor, the value of the pound fell steeply, which in turn improved the current account balance significantly another factor that played an important role in the improvement was the recovery in overseas markets.
The fluctuations in the current account balance tends to be counter-cyclical, this means that they follow the opposite course of an economic cycle. During the following the 1992 recession, the recovery of the UK economy was export-led, which meant that due to the state of the domestic markets, UK firms looked to sell in faster growing abroad. This was accounted to by the rapid growth of markets overseas such as the US which led to a surge in investment and export of services.
The UK has a very open economy, similar to other major industrial countries, the UK’s economy is characterised by significant contributions from manufacturing and services and by the significance of international trade. The open structure of the UK economy means that international trade is important
The UK has traditionally run a deficit on its balance of trade, but it has worsened over the last five years, although the deficit as a percentage of GDP has remained fairly constant. One important commodity that has consistently been in surplus the oil balance, this has prevented the goods deficit from worsening even further however this has recently moved into deficit.
The UK tends to run a fairly healthy surplus in services, the value of trade in services tends to be lower than in goods as some services are not easily tradable. However services are becoming increasingly important in value terms to the UK balance of payments. The UK has a substantial competitive advantage in financial services and professional and business services, although the UK tends to run a large deficit on tourism and transport. The surplus in services does not counterbalance the deficit in goods, however, so the balance of trade in goods and services has been deficit for some years now and is worsening. The other worrying thing regarding trade in goods and services is that the UK has a high degree of import penetration compared to its major competitors. The UK has a high Marginal Propensity to Import, which indicates that high economic relation in relation to other developed countries means that economic growth is driven by consumption which is also “sucking” in imports.
The importance of international trade to economic performance has been strongly highlighted in new or endogenous growth theory. While neoclassical theory regards technical progress as an exogenous process, endogenous growth theory views commercially oriented innovation efforts that respond to economic incentives as a major engine of technological progress and productivity growth (Romer, 1990; Grossman and Helpman, 1991). Endogenous growth theory disputes that international trade allows a country to use a large variety of technologically advanced physical capital, which may enhance the productivity of its own resources. International trade promotes across-the-board learning in product design, facilitates the diffusion and imitation of foreign technologies and helps the creation of innovations.
Conclusion
We have seen the importance and influence of international trade on the UK economy. The level of importance varies in comparison to some other developed economies; in relation to the proportion of the UK’s GDP that trade possesses.
Bibliography
Grossman, G. and Helpman, E. (1991), Innovation and Growth in the Global Economy, Cambridge: MIT Press.
Romer, P. M. (1992), 'Two strategies for economic development: using ideas and producing ideas', World Bank Annual Conference on Economic Development, Washington, D.C. The World Bank.
Sawyer, Malcolm (2004), The UK Economy Chapter 01 - 16th edition Oxford University Press – Page 6
Web links
http://www.dft.gov.uk/stellent/groups/dft_transsec/documents/page/dft_transsec_030128-01.hcsp - Exports and imports rates
http://www.number10.gov.uk/files/pdf/ECONOMIC%20STABILITY%20GROWTH%20AND%20PROSPERITY.pdf. - Economic Growth Rates
