UK IMPORT ANALYSIS

UK Import and GDP Growth Analysis

UK Import and GDP Growth Analysis

Introduction

Recent data on the UK balance of payments suggest that the deficit is deteriorating, and this may lead to downward pressure on the exchange rate. Of course some of the recent deterioration is due to temporary factors, such as the need for expensive gas imports and the inclusion of the estimated payment of insurance claims by Lloyd's of London due to Hurricane Katrina. However, there are some structural factors to look at. In this note I explore the effects of globalisation on UK trade and draw some conclusions for the UK economy.

I first discuss European integration and its possible effects on trade, after which I look at changes in the world trading environment, both in terms of regulations and also in relation to technology. I then turn to estimating relationships for exports and imports. The level of exports and the degree of import penetration in the economy depend upon the level of world activity, the nature of the goods produced in the UK as compared to those demanded by consumers, the price competitiveness of UK products and the general trading environment facing the economy.

Globalisation and UK trade

The changing world environment has altered the prospects for UK trade, and I have investigated these factors in evaluating export and import developments. Globalisation is a general term that appears to cover at least three overlapping processes. The nature of goods has been changing, and computer-based technologies have both lightened goods and made dispersed production more possible. Hence imports and exports can cover longer distances from origin to destination, and production can be disaggregated across countries depending upon the relative costs and advantages to putting a particular part of the production process in a specific location.

The changes in production and trade that these developments induce are hard to distinguish from those brought about by European integration and world trade liberalisation, as both change the relative advantage of different countries, and affect the pattern of employment and production in the UK. European integration has been a continuing process affecting UK trade for at least three decades, with barriers to trade being removed and competition increased. Duties within the European Union were gradually reduced and have been absent for more than a decade, raising both UK exports and imports.

Competition and trade were also specifically enhanced by the European Single Market programme (ESM) in the late 1980s and early 1990s when many barriers to trade and competition were removed. European integration has been overlain by increasing integration on a global scale as barriers to trade have been removed. Some of these barriers, such as the Multi-Fibre Agreement and the deregulation of trade by the Chinese Government, were unrelated to price incentives, whilst others, such as high levels of duties, restricted trade indirectly. The Chinese decision to liberalise output and trade in the late 1970s was a major factor behind its gain in world trade share and the consequent loss by others including the ...