- Imports and Exports
- What is a good?
- What is a service?
- What are imports?
- What are exports?
- Lets have a look at what the UK imported and exported in 2023…
- 🌍 Who are the UK’s main import and export partners?
- We know what types of goods and services the UK trades, but who did they trade it with in 2023? Lets have a look 👀
- The UK’s main trading partners often vary year-on-year for several different reasons. Here’s a few recent changes in trading relationships the UK is involved in:
- Recent trends in UK imports and exports
- ⚖️ Trade deficit, surplus or balance?
- What is globalisation?
- Advantages and Disadvantages of Globalisation
- ⛔ Suez Canal Blockage ⛔
- Having explored the various pros and cons of globalisation, it’s important to understand why countries engage in international trade in the first place.
- Two important economic theories explain why countries specialise in producing certain goods or services: absolute advantage and comparative advantage.
- What is absolute advantage?
- What is comparative advantage?
- 🇬🇧 Does the UK have absolute and/or comparative advantage?
- Common types of trade barriers
- 🚧 Reasons for and against trade barriers
- Trade Protection - ‘America First’ 🇺🇸
- 💨 Trump shows no signs of wanting to slow down
- 🥊 Has any country retaliated to America’s tariffs?
- 🛫 Trade dispute - Boeing vs Bombardier
- 🙏🏻 It’s not all negative… countries do work together for a common goal
- Trade Agreements
- 🤝🏻 Different types of trading agreements
- These are the most common types of trading agreements.
- European Union
- ✅ Trade and Cooperation Agreement (TCA)
- ASEAN
- 🆓 Advantages and disadvantages of trading freely
- ⛔ Advantages and disadvantages of being in a trading blocs
- Knowledge Checkpoint
Imports and Exports
What is a good?
What is a service?
What are imports?
What are exports?
Both imports and exports are the oldest methods of economic exchange and together make up international trade.
Lets have a look at what the UK imported and exported in 2023…
- maybe expand on the different service types
🌍 Who are the UK’s main import and export partners?
We know what types of goods and services the UK trades, but who did they trade it with in 2023? Lets have a look 👀
The UK’s main trading partners often vary year-on-year for several different reasons. Here’s a few recent changes in trading relationships the UK is involved in:
By country, the US and UK are each other’s main foreign investors.
In June 2023, the ‘Atlantic Declaration’ was signed between Rishi Sunak and Joe Biden, introducing a renewed partnership agreement between the UK and the US. Some of the main agreements are:
We will look at these sanctions and the impact of them in more detail in the “Trade Barriers” chapter. Use this link for later on chapter about russia!
Trade with non-EU countries declined by 6.2% in 2023 compared to 2022 (UKICE). A couple of other main factors are China and Norway.
After Brexit, the UK wanted to trade more with China to strengthen non-EU relationships, however, concerns about security and pressure from allies led the UK to reduce its economic ties with China.
Specifically:
This statistic could be attributed not the fact that the UK and EU has had a strong growth of trade, but instead because of a large drop in non-EU trade.
We talk about the impact of Brexit in more detail below ⬇️
Recent trends in UK imports and exports
The Brexit Referendum in 2016 was widely talked about around the world and for years after. Brexit led to the UK leaving the EU single market and customs union (these will be discussed in the global trade section). Lets discuss how it impacted the UK imports and exports:
At first glance, it looks as if Brexit had no real impact on the UK imports and exports, however this isn’t necessarily the case.
COVID-19 Pandemic
The Fraser of Allander Institute investigates the effects of both Brexit and COVID on Scottish businesses and economy. Take a look:
⚖️ Trade deficit, surplus or balance?
So, we’ve observed the UK sells fewer goods than it buys (deficit in goods) but it sells more services than it buys (surplus in services). The goods deficit is larger than the services surplus, leading to an overall trade deficit.
Several other countries around the world also operate in a trade deficit. For example, the United States has run a trade deficit since 1975 and in 2019 stood at $576.9 billion according to the US Census Bureau (BEA).
What is globalisation?
Expanding into foreign markets continues to be one the most popular way to grow a business.
Globalisation has changed the various aspects of daily life and the way consumers shop. Harvard Business School estimates that 70% of Americans now shop online.
Additionally, globalisation has made post-pandemic remote working conditions possible for so many businesses.
Advantages and Disadvantages of Globalisation
⛔ Suez Canal Blockage ⛔
Between the 23rd-29th of March, ‘When the Ever Given’ one of the largest container ships ever built and nearly as long as the Empire State Building is tall, got stuck in the Suez Canal.
The global supply chain was thrown into chaos. About 12% of worldwide trade, around one million barrels of oil and roughly 8% of liquefied natural gas pass through that canal each day (BBC).
It froze almost $10 billion of trade a day. That’s roughly $400m and 3.3 million tonnes of cargo an hour, or $6.7m a minute! (BBC). Additionally, the backlog of crude oil drove the gas prices in the US up by $0.40 on the day of the accident.
Due to the blockage, other ships decided to change their route to avoid the canal. This shows just how important this canal was for world trade.
This event highlighted the vulnerability of global supply chains and the UK’s dependence on efficient international shipping routes. It demonstrated how a single incident across the world can rapidly affect prices, product availability, and business operations around the world.
Having explored the various pros and cons of globalisation, it’s important to understand why countries engage in international trade in the first place.
Two important economic theories explain why countries specialise in producing certain goods or services: absolute advantage and comparative advantage.
What is absolute advantage?
Let’s look at two countries who both produce coffee:
Country A has an absolute advantage in coffee production because it can produce more coffee (100 bags) with the same number of workers as Country B (80 bags).
What is comparative advantage?
Let’s look at two countries who both produce coffee and rice:
Even though both can produce 50 bags of coffee, Country A has a comparative advantage in coffee production. Why? Because to make 100 bags of coffee, Country A gives up 60 bags of rice and Country B gives up 100 bags of rice. Country A sacrifices less to produce the same amount of coffee, thus has comparative advantage.
🇬🇧 Does the UK have absolute and/or comparative advantage?
In services:
In goods:
The UK’s position is enhanced by factors like its top universities, the global dominance of the English language, and London’s role as a financial center.
The comparative advantage of the UK’s goods and services have remained similar over the last 30 years.
Revealed Comparative Advantage (RCA) is a transparent measure for examining the competitiveness of a country in exporting a good, relative to the rest of the world. A RCA greater than 1 would indicate that Scotland proportionally exports more in this particular sector than other countries in the world.
The table below provides a selection of sectors where Scotland is currently thought to have such an advantage. So, the RCA of 23.4 for Scotland’s beverages means that Scotland proportionally exports 23.4 times more beverages than other countries do. While petroleum and petroleum products are easily Scotland’s most exported product group, it ranks 4th in revealed comparative advantage.
To see the Fraser of Allander’s full report, follow this link ⬇️
Common types of trade barriers
- Make imported products more expensive compared to domestic ones
- Protect local industries from foreign competition
- Generate revenue for the government
To understand the full impact of tariffs on trade and the economy, it’s important to examine how they directly influence the prices consumers pay for goods.
This graph illustrates international trade without tariffs. It shows domestic supply (DS) and domestic demand (DD) curves. The equilibrium price in the domestic market is P, while the world price is lower at P*.
At the lower world price P*, domestic consumers increase their demand to Qw. However, domestic producers can only supply Qd at this price. This creates a gap between what consumers want and what local producers can supply.
To meet this excess demand, the country imports the difference (Qw - Qd). This import quantity represents the amount of goods brought in from other countries to satisfy domestic consumption at the lower world price.
The tariff raises the price from the world price P* to a new, higher price P1. This is shown in the upward shift on the price axis. At this higher price, domestic producers find it more profitable to make the good. This is illustrated by Qd moving to the right, indicating increased domestic production.
The higher price leads to a decrease in overall demand. We see this as Qw shifts to the left, showing that consumers buy less at the higher price. The gap between Qw and Qd narrows. This represents a decrease in imports, as more of the demand is met by domestic production.
- Protect domestic industries by directly limiting foreign competition
- Can lead to higher prices for consumers
- Reduced product choices.
While tariffs increase prices through taxes, quotas limit supply directly.
- The government decides which products need licenses
- Only businesses with licenses can import those products
- This limits the number of companies that can import, reducing the total amount of imports.
With licenses in place it means there’s less competition among imports, potentially higher prices for consumers and greater control for the government over what’s imported.
- A government decides to punish or pressure another country for political reasons
- It bans its own citizens and businesses from trading with that country
- This can involve stopping all trade or just specific types of business
Sanctions can harm the economy of the targeted country and are used to try change a country’s behaviour without using military force. Sanctions are different from other trade barriers because they are mainly used for political reasons, not economic ones.
- For example - The United States put sanctions on Russia because of the conflict with Ukraine. This means American companies can’t do business with certain Russian banks (this will explained in more detail in a moment).
Governments do this to support local businesses and jobs and to develop certain industries in their country.
It can increase the costs for companies and higher prices for consumers but it helps grow and sustain local industries.
🚧 Reasons for and against trade barriers
We have just touched on some of the reasons why countries will impose different trade barriers, but lets quickly outline all of them in more detail.
- Domestic Growth Opportunities - Trade barriers can promote domestic industry growth
- Helps protect new industries, as new domestic companies can grow without facing tough global competition right away
- Helps support existing industries as by making foreign goods more expensive, companies can invest more in their production and become more competitive
- Declining industries are given additional government support by the government to help reduce any sudden economic shocks if they did close
- Strategic Industries - Trade barriers can help safeguard industries that are crucial for a country’s security and self-reliance. These industries typically include energy, defence and agriculture. This helps a country stay more self-sufficient and less vulnerable to international pressures or disruptions.
- Current Account Deficit - Trade barriers can help address a trade deficit by making imports more expensive or less available. This encourages people to buy more domestic goods and increase exports.
- Labour / Environmental Regulations - Trade barriers can be used to address unfair advantages some countries gain from weak labour and environmental regulations. By making goods from these countries more expensive, trade barriers aim to encourage better global standards, protect domestic workers, and promote more responsible international trade practices.
- More Jobs - Trade barriers can protect and create domestic jobs.
- Stagnant Technological Advancements - Trade barriers can reduce the incentive for domestic companies to innovate. Without foreign competition, local firms may become complacent, investing less in research and development. This can lead to the country falling behind global standards.
- Limited Consumer Choice - By limiting access to foreign products, it reduces the available options for consumers.
- Increased Prices - By limiting foreign competition, domestic companies face less pressure to keep prices low and so consumers may end up paying more for goods without seeing any improvement in quality.
- Increased Costs - Trade barriers can increase production costs for domestic manufacturers who rely on imported raw materials or components.
- Isolation and Retaliation - When a country imposes protectionist measures, it may face political and economic isolation. Other nations often respond with their own trade restrictions, creating a cycle of retaliation or a ‘trade war’. We will look at some examples of them below.
Trade Protection - ‘America First’ 🇺🇸
- He introduced tariffs on imported solar panels and washing machines
- For washing machines, a 20% tariffs was applied to the first 1.2 million units imported, with a higher 50% tariff on additional imports in the following year (New York Times).
These measures aimed to protect domestic manufacturing jobs but also led to increased prices for American consumers.
But what was his reasoning for this? He largely wanted to address the trade deficit with China. He also consistently accused China of unfair trade practices, arguing these harmed US manufacturing.
Joe Biden has also adopted an aggressive economic approach towards China and has continued to expand many trade restrictions:
- Tariffs - Maintained about $360 billion worth of tariffs on Chinese goods that were imposed by Trump. He also increased tariffs on specific products, tripling those on steel an aluminium, and quadrupling them on Chinese-made electric vehicles.
- Technology Controls - Introduced strict export controls to limit China’s access to advanced technology, particularly in areas like semiconductors and artificial intelligence.
- TikTok - Taken steps that could lead to banning TikTok, the popular Chinese-owned social media app, due to national security concerns about data privacy.
- Targeted Sanctions - Maintained sanctions on Chinese individuals and entities associated with human rights issues in place like Xinjiang and Hong Kong.
To learn about the relationship in more detail, check out these links ⬇️
💨 Trump shows no signs of wanting to slow down
We know that a tariff is essentially an additional tax on the good or service, which will fall on American consumers, a concern after two years of surging inflation. According to the Center for American Progress Action Fund, middle-income U.S. households would pay roughly $1,500 more in taxes per year the tariff is in place.
Additionally, during a campaign event in March 2024 Trump pledged to impose a 100% tariff on all imported cars and warned of a “bloodbath” for the American auto industry if he doesn’t get re-elected.
🥊 Has any country retaliated to America’s tariffs?
Trump’s reasoning being to protect US national security, however this was called “ludicrous” by Canada’s Deputy Prime Minister Chrystia Freeland and criticised for hurting the economic recovery of both countries during the pandemic.
The EU soon responded by placing retaliatory tariffs on Harley-Davidson motorcycles, jeans, and bourbon whiskey. After this spirit exports to Europe declined by 20%.
Since, President Biden has been generally supportive of the tariffs, although he has made some adjustments. In 2022, he allowed “limited volumes” of EU metals into the US without tariffs. He also replaced some tariffs with a quota system, meaning EU steel and aluminium can enter tariff-free up to a certain amount, but anything over that quota still faces tariffs.
In response to these changes, the EU suspended its retaliatory measures until December 31 2023, as a goodwill gesture to continue negotiations.
🛫 Trade dispute - Boeing vs Bombardier
This led to the U.S. Commerce Department recommending a hefty 299.45% tariff on Bombardier’s planes. In a retaliation, Bombardier then accused Boeing of manipulating trade laws to stifle competition.
However, the U.S. International Trade Commission rejected the proposed tariffs in January 2018, effectively ending the dispute and allowing Bombardier’s deal with Delta to proceed without punitive measures.
This case highlights tensions with protectionism in the aerospace industry, a sector often supported by government subsidies globally.
🙏🏻 It’s not all negative… countries do work together for a common goal
- Subsidies to boost domestic production of green technology
- Tax credits for consumers buying eco-friendly products and
- Tariffs on goods produced with high carbon emissions
The goals are to accelerate the transition to renewable energy, reduce dependence on foreign suppliers (especially China) for critical green tech components, and encourage less polluting manufacturing methods globally.
Trade Agreements
Many countries will form trade agreements between themselves, otherwise known as a trading bloc. There are several different types of agreements countries come to, each having different rules and regulations all members must adhere to.
🤝🏻 Different types of trading agreements
These are the most common types of trading agreements.
All these agreements are similar to the one before, apart from small changes between each, however, these are important details.
European Union
The European Union is an example of a Custom’s Union.
These are the 27 countries that currently members of the EU.
Watch this video for some more information on the European Union ⬇️
The United Kingdom officially withdrew from the European Union at the beginning of 2020, in a move we all know as Brexit.
✅ Trade and Cooperation Agreement (TCA)
- allows for zero tariffs and quotas on all qualifying goods trade between the UK and the EU
- ‘Qualifying goods’ are goods that are inline with the rules of origin defined in the agreement, for which there’s a length list of rules.
- The ‘origin’ of a good is where the last significant processing was undertaken, not where it was shipped from.
- A joint UK-EU council oversees the agreement. Disputes are settled by an independent specialist court, not EU courts.
- If one side thinks the other is changing rules in a way that gives their businesses an unfair advantage, they can take action. this might include putting tariffs on certain products, however, before doing this they need to prove their case to an independent judge.
- The TCA is reviewed every 5 years and can be terminated by either side with 12 months’ notice.
These videos better explains all aspect of the TCA in more detail:
ASEAN
- Indonesia
- Malaysia
- The Philippines
- Singapore
- Thailand
- Brunei
- Cambodia
- Laos
- Myanmar
- Vietnam
It was originally formed to ease regional tensions and counter communism, but since ASEAN’s focus has evolved. It now prioritises economic integration, having established a free trade agreement that has significantly boosted intra-regional trade. With a combined population of over 660 million and a total GDP of around $3 trillion as of 2020, ASEAN represents a significant economic bloc.
The group faces challenges in balancing relationships with global powers like China and the United States, while also addressing internal issues such as trade disputes and political differences among its meber
🆓 Advantages and disadvantages of trading freely
- Competition - Free trade exposes businesses and workers to global market demands. These adjustments are critical to remaining competitive, and competition is what fuels long-term growth.
- Growth - Free trade has been a catalyst for rapid economic growth in many countries. By leveraging their comparative advantages in exports and resources, nations have attracted foreign investment and created higher-paying local jobs. Since USMCA, (United States-Mexico-Canada Agreement), they’ve seen an increase in trade, helping these 3 countries collectively amount nearly 1/3 of global GDP, according to the Brooking Institution.
- Efficiency and innovation - Free trade promotes competition, which shifts industries to be more productive. This environment encourages the development of new skills and technologies, ultimately benefitting the economy through increased efficiency and resilience.
- Lower government spending - When trade agreements reduce or eliminate subsidies to local industries, governments can reallocate those funds to other areas.
- Fairness - Free trade agreements help create a level playing field for all participants by establishing common rules. This system reduces the chances of favouritism, where certain companies or industries might get unfair advantages through political connections.
- Crowding out domestic industries - When markets open up, local businesses, especially small-scale operations, may struggle to compete with larger, more efficient foreign companies. This is more common in mixed agreements (developed and developing countries) compared to agreements between countries with similar economies.
- Less tax revenue - Many smaller countries struggle to replace revenue lost from import tariffs and fees.
- Political considerations and negotiations - Free trade agreements often involves balancing diverse interests, including sensitive domestic sectors and national priorities, which can lead to lengthy negotiations and require significant compromises.
- Theft of intellectual property - In markets where imports flow freely, local producers may copy and sell foreign products as knock-offs, often without legal consequences. Therefore, unless the FTA includes intellectual property laws and enforcement mechanisms, there are no protections for exporting companies.
- Poor working conditions - Free trade can lead to multinational companies moving jobs to countries with less strict labour laws. This outsourcing can result in exploitative working conditions, particularly affecting vulnerable groups like women and children.
⛔ Advantages and disadvantages of being in a trading blocs
The advantages of being in a trading blocs are essentially the same as with free trade so you will be familiar with these, however there are a couple more specific advantages with trading blocs worth mentioning:
- Catch-up effects - When less developed countries join trade agreements with more advanced economies, they can experience “catch-up” growth. This occurs through increased foreign investment and expanded trade opportunities. For example, Eastern European countries have significantly narrowed the income gap with Western Europe after joining the European Union.
- Smaller countries get a greater say in global trade agreements.
- Increased interdependence - Economic challenges in one country can more easily spread to others within the trading bloc. For example, a recession in one part of the Eurozone can affect all member countries.
- Loss of sovereignty and independence - Member nations may need to adhere to collective policies that don’t always align with their individual preferences or national interests.
- Trade diversion - Trading blocs can lead to trade diversion, where countries prioritise trade with bloc members over potentially more efficient producers outside the bloc. As a result this could reduce overall economic efficiency and limits the benefits of international specialisation.
- Difficult to leave - Once in the trading bloc, it can be really hard for a country to leave.