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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.

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 componentsand 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 more than 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 2003 the world stock of foreign direct investment was equivalent to 23% of world GDP compared with 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 but do suggest that there could be substantial gains from significant liberalisation.

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.

Research shows that trade liberalisation generally helps to alleviate poverty. Trade openness can have 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.

Contact:

Chris Alexander
Tel: 44 (0)20 7215 2267
E-mail:chris.alexander@berr.gsi.gov.uk