The WTO & Brexit

The World Trade Organisation has not featured  frequently in UK newspapers since its foundation in 1994. However since the Brexit vote, there has been increased interest in its role in regulating world trade  since, if no agreement is reached, the UK might be falling back on WTO trade rules following departure from the EU. Its aim, when it replaced its predecessor, the General Agreement on Tariffs and Trade (GATT), was to act as a forum for negotiations to reduce tariff barriers,  resolve trade disputes between members and provide technical assistance for developing countries.

GATT was established after the Second World War to ensure that there was no return to the protectionism which  took place in the 1930s as countries tried to protect their economies from the effects of the Great Depression. The WTO replaced GATT because of  developments in international trade since the Second World War, namely the rise of intra-firm trade where a company manufactures components in one country, assembles in a second and sells in a third, increased globalisation and the rise of trade blocs, such as the  EU, and NAFTA. It can authorise sanctions if a country breaks its rules. For example, in 2015 it ruled that the USA had acted illegally in insisting that all beef and pork sold in the USA should have the country of origin labelled. Canada, which sells much meat in the USA, applied to the WTO to impose retaliatory tariffs which will hit many different parts of the US economy in order to persuade the USA to reverse its requirement.

As well as regulating international trade, the WTO attempts to promote free trade since it believes that freer trade provides benefits in the form of greater choice and lower prices, stimulates economic growth, raises incomes and promotes world peace. It does this  via a series of meetings (or rounds) lasting many years, the latest being the Doha Round, which started in 2001, lapsed at the end of July, 2008 as trade fell due to recession, and has now been revived. But its success in reaching agreement is limited and has moved towards agreements covering specific products e.g. removing tariffs on high-end semi conductors rather than wide-ranging agreements which have been difficult to reach.

Anyone wishing to join must agree to accept all its rules, particularly the  ‘Most Favoured Nation’ agreement whereby countries  must apply the same tariff to similar goods, irrespective of the exporting country, unless there is a free trade agreement between the importing and exporting countries. Thus if we leave the EU without an agreement, the EU will apply the same 10% tariff on UK car exports into the EU as it does to those coming in from Malaysia.

Another concern is that WTO rules do not reduce regulatory barriers. At present, because of the Single Market, a UK car manufacturer can sell products as easily in Rome as Romford. This will cease if there is no agreement with the EU and therefore we would expect our lorries to be stopped when entering the EU and inspected, in the same way that British goods entering  Japan are currently examined. This has the potential to hinder  trade as lorries are inspected and goods checked to ensure that they meet EU standards. This might not seem a major problem but exporters fear that these delays will be significant, delaying drivers and lorries and therefore increasing costs.

A third concern is that WTO rules do not currently provide as much freedom for trade in services as they do for trade in goods. At present, for example, UK banks provide services for individuals, businesses and other banks across the EU without needing to duplicate all of their physical locations overseas. Leaving the EU will make trade in services, which make up 80% of the UK’s GDP, far more difficult and might require UK financial consultants, bankers, accountants, etc to  have more physical locations overseas and also to re-qualify in the countries they export to.

It is difficult to predict what the effects on our trade will be until the Brexit agreement is reached. As part of the EU, we currently benefit from free trade treaties between the EU and other countries and we do not know whether we will be able to negotiate to keep these agreements. Equally, or possibly more importantly, we do not know what tariff and non-tariff arrangements will be in place between ourselves and the EU when we leave. Will UK consumers lose out because of  higher priced imports  from the EU or will these be outweighed by new trade deals negotiated by the UK with non-EU countries and will UK businesses see exports rise because of these new agreements or fall because of less trade with the EU?





Technology and unemployment

For many years people have worried about the rise of the robots and artificial intelligence. Science fiction writers have envisaged situations where robots gradually gain more intelligence and power until they are able to take over the world and whichever other planets feature in the story. Less exciting, but more immediately relevant, economists and politicians have also concerned themselves with the impact of the robots on society and particularly on the demand for labour. During eras of major technological change, it was predicted that the rise, firstly of steam, then electricity and more recently the computer, would lead to massive unemployment. Keynes, writing before the Second World War, predicted that new technology would drastically reduce the working week and we would have to tackle the problem of how to occupy our time with a 25-hour working week. In 1979 Fiat produced a now-famous advert for their new Strada ( ) under the slogan “handbuilt by robots” which showed the construction of the car in a spotless factory without humans, with everything done by robots.

A recent report, “The Future of Skills: Employment in 2030” by NESTA, an innovation charity, paints a relatively attractive future. They suggest that while 20% of the labour force is currently working in occupations which are likely to shrink, about 10% are in occupations that are likely to grow as a percentage of the workforce. Re-training will be necessary for the former, either to cope with the way their existing job has changed or to allow them to join the latter group. These industries include those working in teaching and education, hospitality, leisure, health care, and other jobs which require workers to deal with people, such as care for the elderly. Another group which will do well are those working in occupations which require higher-order cognitive skills such as psychologists. Those possessing creativity and communication and problem-solving skills will do well while those in jobs which can be more easily adapted to robots and artificial intelligence, such as those involving routine calculations and basic manufacturing skills will be lost. If you are seeking advice as to how to invest your portfolio, it is already possible to put all the necessary information such as your attitude to risk, how much you have available to invest and for how long and a computer algorithm will devise your optimal portfolio.

The Return of the UK’s Productivity Problem

Last week the ONS reported a fall of 0.1% in UK productivity over the three months from April to June. This follows a fall of 0.5% for the three months from January to March and an overall fall and a fall of 0.3% compared to last year. While the numbers are small, they should be compared both to historical data for productivity growth and to other countries. Historically, some commentators have suggested that if productivity had grown since the financial crash at the rate it was growing before, we would be 20% more productive than we are today. When looking at other countries, German workers produce 36% more per hour while the French and the Americans are 30% more productive. Ed Conway, writing in The Times last week, noted that there are only three regions in the UK out of 168 which have higher productivity than the German average. A recent paper by Richard Davies, Anna Valero and Sandra Bernick for The Centre for Economic Performance (  note that productivity varies significantly by area with mid Wales at the bottom and, at the top,

“there are three high-productivity hubs: the oil industry around Aberdeen, the area around Greater Manchester and a band of productivity in the South. Contrary to popular belief the high productivity of London does not spread into the South East but rather spreads west along the M4 towards commuter towns like Reading and Slough which have their own high productivity companies.” (Page 3)

They also identify key sectors:

“The highest productivity sectors—real estate, mining and utilities—are small employers and so play little role in aggregate performance. Of the high employment sectors that drive national productivity the leading sectors are finance, information and communications, construction and manufacturing. Professional, scientific and technical services vary within and across regions–this sector houses some very high productivity firms together with much weaker ones. However, it is important to consider high employment sectors with weak productivity, such as retail and wholesale trade, administrative services and accommodation and food services. Raising average productivity in these sectors could have a large aggregate effect due to their high employment shares.” Pages 3 and 4

While not as exciting as Brexit or the Tory leadership, low productivity is a significant issue. If we have lower productivity then our workers are not producing as much as those in other countries and will consequently receive lower wages. Furthermore firms profits will be lower, hence meaning less funding available for investment, hence lower productivity growth and we find ourselves in a downward spiral relative to our competitors. Hopefully the Chancellor will address the problem in his budget next month but, if not, we face a slow decline in UK living standards and relative prosperity compared to our European neighbours.



Pub smoking ban: 10 charts that show the impact – BBC News

It’s 10 years since smoking in enclosed public spaces was banned in England. What has the impact been?

Source: Pub smoking ban: 10 charts that show the impact – BBC News

This is an excellent article, written by an old uni friend of mine, exploring the impact of restrictions on where people can smoke. Cigarettes are considered by economists as a demerit good, one that generates negative externalities through consumption. These externalities, costs to a third party, can occur in many ways, for example, the adverse effects on the health of bar workers. The ban has helped to reduce the number of people smoking in the UK, although it still remains predominantly a habit of the poor. However, it is important to note that changes to packaging legislation and increased duties may have helped to reduce the number too. A reduction in the number of smokers helps to reduce the pressure on the NHS of treating tobacco-related illness, although, of course, if people live longer then other, perhaps more expensive treamtents, need to be paid for. An unintended consequence has been the impact on pubs, a number are closing creating unemployment in the process. Again, however, other factors, such as a general reduction in alcohol consumption and cheaper substitutes, i.e. buying beer from a supermarket, will have had an effect.

This is a nice example of how a number of government interventions can be used to correct the market failure associated with a demerit good.


What’s going on in the UK economy?

Trying to understand what is going on in an economy can be difficult. Running the economy has been described as similar to trying to drive a car while only being able to look in the rear-view mirror. You know where you have been but cannot see what is ahead. Economic forecasters today probably look back to the period before the financial crash when the UK was in the NICE decade (non-inflationary, continuous expansion) as a golden period. Today life is more complex and one cannot help but feel sorry for the Chancellor busy preparing his November budget and the Monetary Policy Committee of the Bank of England when they meet in November and have to decide whether to increase interest rates.

On the one hand, implying  a rate rise is not yet needed, the Office for National Statistics has just announced that GDP growth has fallen from 1.8% for the first quarter of 2017 to 1.5% for the period April to June which is below expectations and the weakest figure for four years. This is partly down to a fall in services of 0.2% which comprise 80% of GDP inflation. Furthermore discretionary income (what you have left to spend after tax and spending on essential items such as food, energy and transport, has fallen and 60% of households are worse off than they were a year ago as a result of wages rising at 2.1% while inflation is currently 2.9%. Another piece of evidence is that a survey published over the weekend by the Nationwide  reported that house prices dropped in London by 0.6% between July and September compared with the same period last year. This is the first such fall for eight years. 

However the high rate of inflation combined with the fall in unemployment  to 4.3% would suggest it is now time  to reduce the level of aggregate demand by raising interest rates.

Just to make the whole picture more confusing , there is the danger of depressing demand at a time when the economy is fragile because of uncertainty regarding Brexit and one does not want to do anything to discourage business investment which is supposed to be weak because of low confidence. Yet business investment actually rose by 0.5% in the second quarter of 2017! Furthermore, although the current account deficit rose to £23.2bn in the second quarter from £22.3bn in the first quarter, exports of goods and services actually rose by 1.7% while imports increased by 0.4%. Finally, just when you might think you have taken account of all the main variables – what about oil prices which have a significant impact on inflation and discretionary income. OPEC’s decision to curb production is intended to keep prices high and, although this looked to be failing earlier in the year, the combination of hurricanes damaging US oil refineries and the OPEC production curbs have started to have an effect on fuel prices.