UK Trade and Investment
The UK is an open economy. More
than many countries, our living standards and the competitiveness
of our industry depend on our ability to trade and invest freely.
- We are the world’s fifth largest
exporter of goods (£ 186 billion in 2002) and second largest
exporter of services (£ 81 billion in 2002). Charts
1-3 below show the
trend in the value of UK trade since 1990, the main locations
the UK trades with and the principle goods and services traded
by the UK.
- Exports are equivalent to
more than one-quarter of GDP
- We have the highest ratio
of inward and outward investment to GDP of any leading economy
As an open economy we benefit
from a liberalised world trade system. It is in our interests
that the achievements from past liberalisation are not lost
and that the momentum of liberalisation is maintained.
Trade and Investment: how the
UK benefits
Maximising the opportunities for international trade is in our
best economic interests. Trade allows countries, and the firms
and individuals within them, to specialise in economic activities
which best allow them to exploit their relative strengths, abilities,
resources and expertise, and to buy from and sell to other countries
doing likewise. In this way trade:
- Means lower prices and wider
choice for consumers.
- Benefits industry through
better access to competitive sources of components and materials,
boosting their performance at home and abroad.
- Stimulates competition and
innovation, and provides a conduit for the transmission of
ideas, know-how and technology across borders.
- Promotes economic growth in
developed and less developed economies, and helps generate
the resources to promote higher standards of employment and
environmental protection.
- Helps underpin political stability
throughout the world.
Gains from liberalisation
Trade has brought real benefits
in the post-war era. The world’s politicians agreed to establish
the GATT and work for trade liberalisation after witnessing
the damaging and tragic effects of widespread protection during
the 1930s.
Since then, average industrial
tariffs of developed countries have fallen from nearly 40% to
less than 5% through eight rounds of multilateral trade liberalisation.
This has gone hand-in-hand with a twenty-fold increase in world
trade and a more than six-fold increase in world incomes. A
more liberal investment environment has facilitated increased
overseas investment. By 2001 the world stock of foreign direct
investment was equivalent to 21% of world GDP compared with
less than 6% in 1982.
Although there is no simple formula
for economic success, and trade liberalisation alone is no panacea,
over the past thirty years those countries with the highest
levels of integration in the world economy have achieved the
fastest growth in living standards.
There is significant scope for
further gains. In OECD countries tariffs higher than 15% remain
in sectors such as clothing textiles, footwear and motor vehicles.
In non-OECD countries tariffs in excess of 15% typically cover
as much as three quarters of tariff lines. A number of estimates
have been made of the potential impact of further trade liberalisation.
They are not directly comparable because of differences in assumptions
made and methods of estimation. A 1999 study published by the
European Commission concluded that an ambitious package of liberalisation
could boost world prosperity by nearly $400bn pa.
Protection is costly
The folly of protection has been confirmed by a range of studies
from around the world. These indicate that that it has brought
few benefits but imposed substantial costs. Protection has proved
an ineffective means of sustaining employment. Trade barriers
in the form of tariffs distort domestic markets, pushing up
the prices faced by consumers and insulating inefficient sectors
from competition. They penalise foreign producers and encourage
the inefficient allocation of resources both domestically and
globally. There are no rich closed economies.
Developing Countries & Trade
Trade doesn’t just benefit UK. Developing countries also have
much to gain. The available evidence suggests that open economies
have faster growth rates than closed economies. Although the
precise figures obtained from studies may be open to challenge,
there is no evidence to suggest that closed economies grow faster
than open ones.
Gains for developing countries
do not come solely through improved access for their exports.
Liberalisation by developing countries themselves is just as,
if not more, important. Competitive domestic markets are a necessary
condition for improving their rate of growth.
Trade liberalisation does not
automatically imply higher growth. It will have little benefit
if the domestic policy environment is inadequate. Weak economies
need to build simultaneously the institutional and human infrastructure
to take advantage of trade opportunities. Hence, the need for
a coherent approach amongst the international organisations
to best enable them to do that.
Developing countries have much
to gain from further liberalisation. On average manufacturing
exports from developing countries to developed countries face
an effective tariff 4 times higher than that on exports between
developed countries. They would also gain from lower tariffs
on trade between themselves, which are currently far higher
than those in developed countries. In a study published by the
EU Commission, of the $400 billion gains from liberalisation,
developing countries would gain $140bn a year; more than the
EU ($92bn) and the US ($45bn).
Research shows that trade liberalisation
generally helps to alleviate poverty. In East Asia increased
openness led to higher wages and lower poverty. In general,
trade openness has beneficial effects on productivity, the adoption
and use of new technology and investment. It is through these
channels that trade stimulates economic growth and provides
the resources necessary for reducing poverty. If poverty increases
after trade liberalisation, it is because of failures in the
domestic market and the best policy is to correct those. The
virtue of trade liberalisation is as part of a package of measures
to strengthen markets - promoting greater use of the market,
more stable and less arbitrary policy intervention, stronger
competition and macro-economic stability. Studies acknowledge
that some can lose in the short run from liberalisation. The
plight of the losers should not be ignored, but the right way
to alleviate their hardship is through social safety nets and
job retraining rather than abandoning reforms that benefit most
people.
Annex
Chart
1, UK Exports and Imports between 1990 and 2002
Chart
2, Main UK trading (exports and imports) partners in 2002
Chart
3, Principle UK exports and imports in 2002
Source:
National
Statistics
Contact:
Chris Alexander
Tel: 020 7215 4225
Fax: 020 7215 4520
E-mail: chris.alexander@dti.gov.uk
Last
revised on 14 February 2003
