Britain's Trade and Economic Structure

The Impact of the EU

Lynden Moore

• Publisher: Routledge
• Year: 2002
• Topic: Economics
• eBook ISBN:
  9781134701438
• Subtopic: Business General
• Index: Economics

This work examines the reasons behind Britain's economic decline since the 1960s. Focusing on the restructuring of British industry and trading policy, the author discusses the causes and effects of deindustrialization and changes to traditional trading patterns. Particular attention is devoted to the impact of the EU. The work provides: * A new perspective by focusing on industry and trade rather than monetary issues; * A good comparative study of Britain's trading partners and rivals; * An accessible and relatively jargon-free discussion of a topical and far-reaching subject.

1 Introduction

Britain approaches the millennium with some trepidation; a succession of bright promises, of the new world that was going to be built after the Second World War, the great opportunities provided by entry into the EC, and the wealth of North Sea oil seem a distant memory. Even the ‘peace dividend’, that is, the reduced requirement for defence expenditure with the ending of the Cold War, seems to have been dissipated.

The return of a Labour government after the election in May 1997 raised hopes that the harsher aspects of the legacy of Margaret Thatcher, British Prime Minister from 1979 to 1990, might be ameliorated. But the Labour government has pledged to retain the previous Conservative government’s spending plans. Furthermore privatization, which was the outstanding feature of the Thatcher ‘revolution’, is now being copied by other EU countries. The relatively low social security payments and the removal of restrictions on the employment of labour that she introduced are also being studied by other EU countries as a means of reducing unemployment. The UK has one of the lowest rates of unemployment and the highest rates of labour participation in the EU. Thatcherite policies, far from being abandoned, are presented both by Britain and the Commission of the EU (CEC) as the way forward for the other Member States.

High unemployment in Western Europe has been the effect of government endeavours to keep down the rate of inflation in the context of lowered rates of growth and inflexible labour markets. The other large Member States of the EU are refraining from any addition to their expenditure to increase employment in order to conform to the Maastricht requirements for monetary union.

At present Britain’s economic performance in terms of unemployment and even in terms of growth compares favourably with that of other members of the EU. This is in contrast to her situation in most of the post-Second World War period when she has appeared a laggard in terms of economic growth. Britain’s gross domestic product (GDP) increased on average at 2.3 per cent per annum in real terms between 1960 and 1994, with the result that her economy doubled in size over the period. Most of this was due to an increase in productivity because her population was almost static, increasing at only 0.3 per cent per annum and employment 0.1 per cent from 1960 to 1994. But this rate of growth of GDP was lower than that of the other Western European countries and less than half that of Japan.

This poor economic performance meant that she became a much smaller economy in relation to the rest of the world. In 1950, in the immediate aftermath of the Second World War, the UK was the second largest western manufacturing nation after the US. Until 1960 Britain’s total output, that is, her GDP, was the largest in Western Europe; at current prices and exchange rates it was 63 per cent greater than that of the Japanese economy but only 14 per cent of that of the US, then by far the largest economy in the world. The position in 1994 was that the British economy was smaller than that of Germany and France in Europe, 22 per cent of the size of the Japanese economy, and 15 per cent of the size of the US economy (which had also been growing relatively slowly), when measured at current prices and exchange rates. This indicates the decline in the UK’s importance in the world economy.

The UK’s macroeconomic fluctuations and monetary situation have been described by numerous economists. This book will be concerned with the change in structure of her economy. Although structure is sometimes thought of in terms of the division of activity between the public sector and the private sector, in this book the emphasis will be on structure in terms of industries. Britain has exhibited the phenomenon of ‘de-industrialization’, that is, the decline in the relative size of the manufacturing sector. This has been due to the transfer of factors of production, labour and capital away from manufacturing to other areas of the economy. Employment in manufacturing began to fall in 1966 at an accelerating rate, from 1973 to 1979 by 1.3 per cent per annum, from 1979 to 1989 by 3.3 per cent per annum, and from 1989 to 1993 by 5.5 per cent per annum. The reduction in employment was partly compensated by a more rapid increase in productivity in manufacturing than in other sectors of the economy. Nonetheless output in manufacturing was lower in the mid-1980s than it was in 1973.

This change in the composition of her output is associated with the change in her trading position. In 1950 Britain was the paradigm of an industrial power exporting manufactures for food and raw materials. Four-fifths of her exports were manufactures; she was the second largest exporter of manufactures after the US, accounting for 26 per cent of world trade in them. Obversely she was the largest importer and net importer of agricultural products in the world. Imports of food, beverages and tobacco accounted for 40 per cent of her imports in 1950 and agricultural raw materials for 18 per cent. Fuel in the form of petroleum products accounted for 7 1/2 per cent (Mansell 1980).

Yet by 1980 she had moved into deficit in her trade in manufactures. Why has this radical shift in specialization occurred? Was it due to the development of North Sea oil in the mid-1970s and her shift from a position as a net importer of fuel to the position of net exporter? Does this represent a shift in her comparative advantage?

How far was it due to changes in her preferential trading arrangements, first as a member of the Commonwealth Preference Scheme to which she belonged until 1973, second the formation of the European Free Trade Association (EFTA) in 1959, and finally her membership of the EC in 1973? This represented a shift from a preferential position in her export markets for manufactures to greater and greater direct competition with her manufacturing rivals. As a member of the EC she also acceded to the Common Agricultural Policy (CAP), which entailed the imposition of substantial levies on imports from Commonwealth countries.

She now appears in the drag of a continent whose economic performance is in decline, having cut her preferential links with the Commonwealth, in particular the Asian countries, which have been growing far faster. In 1970 roughly a fifth of her merchandise trade was with the EC(6) and a fifth with the Commonwealth. But by 1994 approximately half UK trade was with the EC(15) and 10 per cent with the Commonwealth. There remains the question that dogged the previous Conservative government, that is, whether Britain should integrate more closely with the EU by joining a monetary union.

In Chapters 3 to 7 of this book Britain’s preferential agreements concerning trade and other EU policies that affect it are considered. The indirect effect of EU trade policy on inward foreign investment into the UK will also be discussed.

Then in Chapter 8 the fuel sector and the impact of government policies towards it is examined. The shift from the consumption of coal, the extraction of which was labour intensive, to North Sea oil has had significant effects both on employment and on government revenue. The EU has only had a marginal influence on this sector.

In Chapters 9 to 12 individual sectors which are subject to considerable EU or government intervention are discussed. The most notable of these is agriculture, discussed in Chapter 9.

Finally, the implication of these changes in specialization and trade for the regional disparities in employment and income is considered in Chapter 14, together with the UK government’s and EU policies towards the poorer areas. Associated with this is the problem of alleviating poverty without incurring ever greater government expenditure on social security. A brief mention will also be made of the change in the system of taxation which was required for EC entry.

We shall begin by looking at the UK’s comparative position more closely, and then consider why trading agreements can affect a country’s specialization.

REFERENCES

Mansell, K. (1980) ‘UK visible trade in the post-war years’, Economic Trends, Central Statistical Office, October.

2 Britain’s comparative position

The UK is one of the most populous countries in Western Europe with 58 million people in 1994, almost the same as France and Italy; only unified Germany with 81 million people is appreciably larger (see Table 2.1). But in terms of geographical area the UK is considerably smaller than they are, and her density of 238 people per square kilometre is exceeded only by the Netherlands and Belgium.

In the immediate aftermath of the Second World War Britain was also the second largest industrial economy in the world after the US. When Germany recovered, however, this position was ceded to her. By 1960, as can be seen in Table 2.1, Britain’s GDP was less than that of Germany but greater than that of France and Italy. The Netherlands had the highest GDP per head in terms of 1990 price levels and exchange rates, but it was not much higher than those of Germany, Britain, and France.

In this chapter the transformation Britain has undergone from being a major industrial country and the second largest exporter of manufactures to a predominately service economy will be related to developments in the world as a whole. We shall begin by considering her position up to 1970 within the framework of the international financial system. As her financial position in relation to the rest of the world is shown by her balance of payments a brief explanation of this term will now be given.

BALANCE OF PAYMENTS

The balance of payments of a particular country is a summary of all the transactions between its residents and the residents of the rest of the world over a period of time, here taken to be a year. These must logically add up to zero because this is a form of double-entry bookkeeping. An item is regarded as being positive if it adds to the country’s supply of foreign exchange, and negative if it uses it up—exports are therefore positive and imports negative.

The balance of payments is divided into the current account and the capital account. The current account is a record of the value of goods and services traded and income payments. Visible, or merchandise trade, refers to trade in goods, and invisibles to all the other items. The latter includes trade in services described in Chapter 12. There is also the receipt of interest and dividends by British residents from their ownership of foreign assets, and the payment of these to foreigners because of their ownership of assets involved in production in the UK. Generally Britain earns more than she pays out, that is, she has a net positive balance of interest, profits, and dividends. In addition there are transfers, that is, payments made without any goods or services received in exchange. These include all foreign aid, both that provided by the government and that by private persons or agencies. They also include government subscriptions to international agencies and the EU. Transfers could be put into a separate account but in Britain they are included in the current account. The total balance of the current account must be equal and opposite to the balance of the rest of the account.

Table 2.1 Britain's comparative position with respect to income and population

The other major account is of investment and other capital transactions which we will call the capital account. Within it certain subcategories are distinguished, such as direct investment, which involves some control of assets acquired abroad; in the UK this is defined as a holding of 20 per cent or more in a foreign enterprise. This is distinguished from portfolio investment, which is carried out just for profit. There is import and export credit associated with sales of goods and services. Then there is what is referred to as ‘hot money’, namely, the short-term international lending or borrowing that may involve speculation on the value of the currency or exchange rates. Finally there is the central bank’s intervention in the market, that is, the Bank of England’s net sale of foreign exchange to support the price of sterling in terms of other currencies and vice versa.

The sum of these transactions should be zero. However, there is generally a discrepancy, the net errors and omissions term, which is called the balancing item.

EARLY POSTWAR PERIOD

First, let us consider the changes in the macroeconomic environment in which Britain has been operating, although this is not the subject of this book. Britain emerged from the Second World War having had to sell off most of her foreign assets, the interest and dividends from which had paid prewar for a quarter of her imports. US finance in the form of Lend-Lease was stopped immediately the war ended in 1945. Britain desperately needed additional foreign exchange—in particular, dollars—to rebuild her war-battered economy, but found it very difficult to increase her supply of manufactures from factories in which there had been scarcely any investment in civilian production in the previous six years and, in some cases, for very much longer. In negotiating a loan with the US she had to accept a condition of convertibility for current account transactions. As a result of introducing this in 1947 she lost £50m of her foreign exchange reserves in a month before abandoning it (Pollard 1969:360). This eventually led to a UK devaluation in 1949 from $4 to $2.8 to £1.

The US was the only large economy to be unscathed by the Second World War and was the source of investment goods badly needed for the rebuilding of war-devastated Europe. The US eventually realized how difficult it was for the Western European countries to earn enough foreign exchange to purchase such goods and in 1948 instituted the Marshall Plan. This Marshall Aid was allocated in accordance with the anticipated deficits of individual European countries, and was conditional on them extending aid to each other. The distribution of aid under this plan was carried out by the Organization for European Economic Co-operation (OEEC), which insisted that the European countries removed trade barriers between themselves as a condition of receiving aid.

From 1946 to 1958 US aid and government loans to Europe amounted to $25 billion (Maddison 1965:162). The US also agreed to, and indeed encouraged European countries to discriminate against US goods in favour of imports from each other, as an additional means of alleviating the ‘dollar shortage’. In the initial postwar period this is how Western European countries identified their balance of payments problems, that is, an inability to earn enough dollars to re-equip themselves.

THE BRETTON WOODS SYSTEM OF FIXED EXCHANGE RATES

This situation must be seen in the context of the system of fixed exchange rates which had been agreed at the conference at Bretton Woods in 1944. The conference had set up two financial institutions, the World Bank for Reconstruction and Development concerned with long-run loans for...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• TABLES
• FIGURES
• PREFACE
• ABBREVIATIONS
• 1: INTRODUCTION
• 2: BRITAIN’S COMPARATIVE POSITION
• 3: THE THEORY OF TRADE, PROTECTION, AND DISCRIMINATION
• 4: UK TRADE POLICY AND AGREEMENTS THAT HAVE AFFECTED TRADE
• 5: MOVES TOWARDS MONETARY INTEGRATION
• 6: Other EU policies affecting trade
• 7: THE IMPACT OF PREFERENTIAL TRADING AREAS AND INTERNATIONAL DIRECT INVESTMENT ON THE DEVELOPMENT OF UK TRADE
• 8: THE ENERGY SECTOR AND THE DEVELOPMENT OF NORTH SEA OIL
• 9: THE COMMON AGRICULTURAL POLICY AND ITS EFFECT ON UK AGRICULTURAL PRODUCTION, TRADE AND CONSUMPTION
• 10: TRADE AND PRODUCTION OF MOTOR VEHICLES1
• 11: TEXTILES AND CLOTHING
• 12: HIGH-TECHNOLOGY INDUSTRIES AND RESEARCH AND DEVELOPMENT
• 13: TRADE IN SERVICES: LIBERALIZATION AND GROWTH
• 14: REGIONAL POLICY AND TAXATION
• 15: CONCLUSION