Free Economics Essays - Economic influences from abroad including international trade have a powerful effect on the UK economy.
In this essay we will analysis the effect of trade, which is one of the two broad channels that link open economies. The trade linkage arises from the fact that some of a country’s production is exported to foreign countries, while some goods that are consumed at home are produced abroad and imported.
The effect of international trade can cause balance of payment (BOP) problems. The BOP is the record of the transactions of the residents of a country with the rest of the world. A current account records transactions arising from trade in good and services, net income accruing to residents of one country from another and from transfers. The goods and services account is called trade account and the balance, the balance of visible trade. Payments for goods imported from other countries into the UK are debit items, and payments received for exports are credits.
The UK BOP is a deficit, however a deficit on trade, for example is not necessarily bad. Even if a country imports more goods than it produces, an offsetting surplus on invisibles (services) is simply a reflection on the structure of the economy, i.e. it is relatively service-orientated. However, problems may arise when the current account suddenly swings into deficit or an existing deficit widens sharply. AT such times, financing the current account can become difficult and is often accompanied by withdrawal of capital as foreign investors envisage depreciation of the currency and hence a loss in the value of their holdings. The UK government then will have to raise interest rates to retain capital.
So what effects to BOP problems affect UK business financial decisions? Organisations are likely to be affected by UK having a BOP crisis. There are problems both prior to government intervention and also problems following intervention. BOP problems are mainly due to lack of UK competitiveness resulting in declining exports and rising imports. The UK firms are then likely to encounter rising domestic costs, falling demand for their products and services rising interest rates, increased costs of stockholding and higher replacement cost of stocks.
The UK government has various other tariff and non-tariff barriers, which they can enforce to prevent this situation and control excessive imports by UK consumers. ‘Tariffs make imports more expensive and, under normal circumstances, should discourage them. A tariff is a tax on imported goods, designed either to raise revenue for the host government or to protect local industry from more efficient foreign competition’ (ACCA Paper 3.7). Quotas physically limit the volume of imports. Both types of action would be expected to reduce the UK’s import. However, the UK cannot place controls on EU-produced goods due to treaty obligations.
Other ways of helping the current account are to reduce the domestic rate of inflation to below the level of UK’s competitors, and to restructure UK industry so that it produces more of the goods the world requires, substituting home produced goods for imports. The UK government may also give export subsidy to make UK firm more competitive. Other non-tariff barriers in form of bureaucratic controls imposing considerable difficulties on importers.
Also Exchange controls could also be introduced, limiting the amount of money that could be spent abroad by UK consumers. Voluntary export restraints are similar to import quota. This is where the exporting country restricts the number of products in sends to the UK. The exporter receives a rent for this restriction. Legal discrimination by UK against other exporting countries is unlawful under the UK’s World Trade Organisation membership. Therefore, it is not a valid barrier to international trade prevention. Finally, the UK government can provide procurement bias towards home companies to make them more competitive.
What are the likely effect of trade barriers on UK consumers, employees and private public sector organisations? The UK consumers will loss freedom of choice, as the government will restrict the import of goods from outside. Also the consumers will in effect pay higher prices, as the UK companies may not be as efficient and competitive as the foreign exporting countries. Therefore, it will raise the cost of living protection will probably raise prices and so domestic consumers will have to pay higher prices for the taxed, imported goods or for the protected, home produced goods. The various non-trade tariffs will involve government expenditure in terms of subsidy, which will in effect be paid for by the UK consumer in terms of higher taxes.
Both the public and private sectors will benefit from the increase trade protection again foreign imports. The public sector will also benefit from government procurement bias towards them. The employees will have increase job security as the tariff and non-tariff barriers will offer protection to the organisations they work for. For example, the recent case of MG Rover illustrates this effect and also shows the negative effect foreign exports and organisations can have on the UK based companies.
However, the use of tariffs are regarded as harmful to economic welfare as they will stop consumers from enjoying sometimes higher quality goods offered by foreign organisations, hence, German VW Golf, Japanese Honda cars over the UK based cars such as Rover and MG Rover makes. Tariffs also push up business cost if applied to raw materials and parts. Finally, tariffs and non-tariff protection by UK may lead to retaliation by other countries. They may take similar action and this will reduce the volume of world trade. This is in direct contra diction to the European framework for the creation of a single market. The free movement of goods is a key principle of the European Union (EU).
It is the believe of EU that the single market will benefit the economy of each member country, and that the elimination of trade barriers will lead to a reduction in business costs as well as increasing competition and stimulating efficiency, benefiting consumers and promoting the creation of jobs and wealth.
Reference and Bibliography
1. Stanlake G.F, (2000) Macroeconomics: An Introduction, Longman Group UK
2. Greenaway, David; Shaw, G.K., Macroeconomics Theory and Policy in the UK Second Edition (1991), Basil Blackwell.
3. Dornbusch, Rudiger; Fischer, Stanley, Macroeconomics Fifth Edition (1990) McGraw-Hill International Editions
4. ACCA Paper 3.7 (2001) Strategic Financial Management, The Financial Training Company
