6 international trade
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INTERNATIONAL TRADE
INTER TRADE - definition
The process where countries buy and sell products and services from and to each other
All countries engage in this trade They have to….. Because they cannot
produce everything they need e.g. the UK imports 50% of its food,
Japan imports all of its oil
WHY DO COUNTRIES TRADE?
CLIMATE PROBLEMS LACK OF RESOURCES POOR QUALITY RESOURCES INABILITY TO SWITCH RESOURCES POOR TECHNOLOGY HIGH PRODUCTION COSTS TOO HIGH A DEMAND POLITICAL FACTORS & HISTORY
BENEFITS OF INTER TRADE
TRADE IS ESSENTIAL AND IT PROVIDES MANY BENEFITS
THE MAJOR BENEFIT IS SPECIALISATION this is where a country concentrates on PRODUCING the products and services it is best at producing i.e. it specialises
COUNTRIES WILL SPECIALISE IN THOSE PRODUCTS & SERVICES WHERE THEY ARE EFFICIENT
COMPARATIVE COSTS
THIS IS THE THEORY THAT SHOWS WHY SPECIALISATION RESULTS IN BENEFITS FOR A COUNTRY
TECHNOLOGY (1/2) TEXTILES (1/2)
UK 500 100 CHINA 100 500 TWP = 600 600
COMPARATIVE COSTS
THE UK IS 5x MORE EFFICIENT THAN CHINA IN MAKING TECHNOLOGY
BUT CHINA IS 5x MORE EFFICIENT THAN UK IN MAKING TEXTILES
UK SHOULD THEREFORE SPECIALISE IN MAKING TECHNOLGY
CHINA SHOULD SPECIALISE IN MAKING TEXTILES
COMPARATIVE COSTS
AFTER SPECIALISATION TECHNOLGY (1) TEXTILES(1) UK 1,000 0CHINA 0 1,000 TWP = 1,000 1,000NET GAIN OF IN PRODUCTION OF 400
TECH AND 400 TEXT
COMPARATIVE COSTS
THIS SURPLUS CAN THEN BE SWOPPED (EXCHANGED) BETWEEN THE 2 COUNTRIES
AS A RESULT BOTH OF THEM WILL THEN BE BETTER OFF THAN THEY WERE BEFORE THEY SPECIALISED i.e. THEIR LIVING STANDARDS WILL HAVE IMPROVED
BUT THE SURPLUS MUST BE EXCHANGED FOR THEM BOTH TO BENEFIT
COMPARATIVE COSTS LET US LOOK AT THE SITUATION AFTER
TRADE HAS TAKEN PLACE i.e. after exchange WE HAVE TO ASSUME A RATE OF
EXCHANGE e.g. 1 technology = 2 textiles LETS ASSUME UK SELLS 200 tech TO CHINA UK WILL THEN BE LEFT WITH 800 tech CHINA GETS 2OO tech, BUT MUST GIVE 400
text TO UK UK WILL BE LEFT WITH 400 text
COMPARATIVE COSTS
AFTER TRADE AND EXCHANGE TECHNOLOGY TEXTILES UK 800 (300+) 400 (300+)CHINA 200 (100+) 600 (100+) TWP = 1,000 1,000
THE EXCHANGE RATE FAVOURS THE UK, SO THEY GAIN MORE
COMPARATIVE COSTS - more benefits
COMPARATIVE COSTS - more benefits
THE KEY BENEFITS OF THE LAW OF CC MORE EFFICIENT PRODUCTION - it is
cheaper to produce the products and services e.g China can produce textiles more cheaply than the UK
HIGHER TOTAL PRODUCTION - more goods and services can be produced by each country and in the world as a whole i.e TWP increases
COMPARATIVE COSTS
CONSUMERS HAVE MORE CHOICE & A WIDER VARIETY OF GOODS & SERVICES TO CHOOSE FROM e.g. the UK can buy rice
THE KEY POINT IS THAT THE GAINS ARISE BECAUSE THERE ARE DIFFERENCES IN THE RELATIVE COSTS OF PRODUCTION e.g. the UK can produce technology cheaper than China - on a ratio of 5-1
COMPARATIVE COSTS
THERE ARE GAINS TO BE MADE EVEN IF THE UK WAS BETTER AT BOTH PRODUCTS!!!
TECHNOLOGY(1/2) TEXTILES(1/2)
UK 600 300 CHINA 300 250 TWP: 900 550
COMPARATIVE COSTS
THE UK IS MORE EFFICIENT IN Tech (2:1) AND IN Text ( 1.2 :1) BUT CHINA HAS LESS OF A
DISADVANTAGE IN Textiles i.e. the UK has a relative advantage in Tech
SO, UK SHOULD SPECIALISE IN IN Tech and China should specialise in Text
COMPARATIVE COSTS
AFTER SPECIALISATION TECHNOLOGY TEXTILES UK 1,200 0 CHINA 0 500 TWP: 1,200 (300+) 500 (-
50)
EVEN HERE THERE IS A GAIN, ALTHOUGH SOME LOSS OF TEXTILE PRODUCTION
IF TECHOLOGY IS VALUED MORE HIGHLY IN THE WORLD (e.g. oil, computers, aircraft) THEN THERE HAS BEEN AN OVERALL GAIN
COMPARATIVE COSTS
THERE ARE PROBLEMS WITH THE THEORY OF CC
1. IT IGNORES TRANSPORT COSTS e.g. cost of delivery of products
2. COUNTRIES USE IMPORT CONTROLS e.g. the EU imposes a ban on China textiles
3. IT ASSUMES PERFECT COMPETITION e.g. no one business is powerful and can dictate too the others – a monopoly like Microsoft
COMPARATIVE COSTS - more benefits
THE KEY BENEFITS OF THE LAW OF CC MORE EFFICIENT PRODUCTION - it is
cheaper to produce the products and services e.g China can produce textiles more cheaply than the UK
HIGHER TOTAL PRODUCTION - more goods and services can be produced by each country and in the world as a whole i.e TWP increases
IT - MORE BENEFITS
IT - more benefits
COUNTRIES BENEFIT FROM LARGE-SCALE PRODUCTION - if countries specialise they can produce larger quantities - this results in economies of scale e.g. discounts from bulk buying - as a result costs per unit are lower
COMPETITION INCREASES – more trade means more competition, this encourages businesses to be efficient and encourages businesses to use technology
IT - more benefits
TRADE ENCOURAGES POLITICAL LINKS e.g. the EU and ASEAN
INCREASED TRADE MEANS MORE CONNECTIONS BETWEEN COUNTRIES e.g. people, culture, opinions, attitudes – this encourages formal links between countries
IT - more benefits IT GENERATES VALUABLE FOREIGN
EXCHANGE e.g. dollars and yen COUNTRIES CAN THEN USE THESE
CURRENCIES TO PURCHASE THE IMPORTS THEY NEED
OR USE THE MONEY FOR OVERSEAS INVESTMENT e.g. the US investing in China
IT - more benefits
AS CAN BE SEEN THERE ARE MANY BENEFITS OF IT
BUT FOR THE BENFITS TO BE GAINED THERE MUST BE FREE TRADE
HERE COUNTRIES WILL NOT USE TRADE CONTROLS TO PROTECT THEIR ECONOMIES FROM CHEAPER IMPORTS
HOWEVER, THE PRESSURE TO PROTECT IS INTENSE
WHY & HOW DO COUNTRIES PROTECT THEIR ECONOMIES?
PROTECTION
PREVENT UNEMPLOYMENT - North of UK PROTECT INFANT IDUSTRIES - software ENCOURAGE STRATEGIC GOODS
PRODUCTION - nuclear weapons PROMOTE POLITICAL TIES - EU PROTECT RURAL AREAS -farming areas ALLOW INDUSTRIES TO DECLINE SLOWLY
e.g. shipbuilding
PROTECTION
PREVENT DUMPING - textiles RETALIATE AGAINST OTHER COUNTRIES
WHO USE CONTROLS WHEN UNEMPLOYMENT IS HIGH
GOVERNMENTS ARE UNDER MUCH PRESSURE TO PROTECT e.g. from the media, unions, consumers, the opposition
PROTECTION
REMEMBER: ANY PROTECTION CARRIES A COST :
LOST MARKETS LOST SALES LOWER PROFITS LOWER INCOMES LOWER LIVING STANDARDS RETALIATION
PROTECTION
DESPITE THE BENEFITS OF FREE TRADE COUNTRIES DO PROTECT THEMSELVES e.g. the EU via the common external tariff (cet) - this is a tax imposed on imports into the EU from non EU countries
THE KEY REASON FOR THIS IS POLITICAL - by joining together they are stronger politically and economically e.g. the 27 members of the EU are very powerful
TYPES OF TRADE CONTROLS
CUSTOMS DUTIES (or tariffs) - these are taxes imposed on imports e.g. 5% added to the normal imported price or £200 per tonne
SUBSIDIES - sums of money given to an exporter which enables them to keep their prices lower
QUOTAS - physical limits on the number of goods allowed into the country e.g. 250,000 cars
4. EMBARGOS - a complete ban on exporting or importing goods from certain countries e.g. IRAQ
PROTECTION
BECAUSE OF THE BENEFITS OF IT AND FREE TRADE MANY COUNTRIES ARE IN FAVOUR OF SUCH TRADE
BUT, THESE ARE OFTEN THE RICH AND POWERFUL ONES
THE GATT & THE WTO
“Free trade, one of the greatest blessings which a government can
confer on a people, is in almost every country unpopular”
British historian- Thomas Macaulay (1824)
GATT
ESTABLISHED IN 1948 – The General Agreement on Tariffs and Trade
AIMS – to encourage free trade, to remove trade controls set up in 1930’s, to prevent new trade barriers being set up, to prevent discrimination in IT
OPERATED VIA NEGOTIATING ROUNDS - 8 rounds e.g. Kennedy round 1964-67, Tokyo round 1973-79, Uruguay round 1986- 94
WTO – World Trade Organisation
SET UP 1/1/95 – based in Geneva, Switzerland
REPLACED GATT 148 COUNTRIES – China joined 2001 MEMBERS AGREE TO NON DISCRIMINIATION
IN TRADE – they must sign, to guarantee that they will treat imports fairly and consistently
MEMBERS CAN BRING DISPUTES TO WTO TO BE SOLVED – WTO CAN THEN USE ITS TEETH e.g. allows retaliation
WTO – functions/purpose
Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for
developing countries Cooperation with other international
organizations e.g. World Bank, IMF
WTO – recent agreements
1997 - Telecommunications services (69 countries)
1997 – Tariff free trade in information technology products (40 countries)
1997 – Financial services – banking, insurance (70 countries)
2000 – new talks on agriculture – in 2001 Doha, Qatar – 2014: still talking/negotiating!!
WTO
Doha – e.g. discussed agriculture, anti dumping, subsidies, investment, competition, government procurement, intellectual property
BUT STILL GOING ON!!!
WTO- evaluation SOME KEY BENEFITS Large organisation – 148 members, 191
countries in the world! The rest are observer governments e.g.
Afghanistan, Syria, Iran Has a democratic structure Beneficial aims e.g. to promote free
trade, to remove trade barriers, to prevent trade discrimination
WTO - benefits Focus on developing countries – 2/3 of
members are developing countries – they see trade as a method of growth and economic development – WTO provides training and legal assistance to less developed members
WTO has teeth – if complainant country doesn’t confirm to WTO decision retaliation is allowed
What would happen to free trade principles if there was no WTO?
WTO – problems? Rich countries dominate the WTO -
power of USA, UK etc - can influence smaller members
Power of the large rich nations e.g. they can afford to have large teams of negotiators based in Geneva full time, they can also draft in specialists/experts when needed
Agriculture is HEAVILY SLANTED TOWARDS RICH MEMBERS
WTO – problems?
e.g. OECD countries spend £billions subsidising agriculture e.g. EU and Japan heavily subside their farmers
Large governments have full time teams at WTO and fly in experts on particular issues e.g. the least developed members have few or no representatives in Geneva
WTO – problems?
Bureaucracy - too many meetings often at same time, not enough representatives for poor countries
Objectives often diluted as time goes by
METHODS OF ENTERING INTERNATIONAL MARKETS
Looks at the main methods by which a biz can enter another
country’s market
ENTERING INTERNATIONAL MARKETS
In order to expand and grow businesses will have to find, develop and exploit new markets
Especially if the domestic market has reached or ism nearing saturation (maturity) e.g. MacDonald's in USA
As a result businesses will move into international markets
ENTERING INTERNATIONAL MARKETS
Most companies at some point in their life cycle will have to enter new markets
WHY? This is because their existing markets may be saturated, the products or services may be old, out of fashion or technologically inferior, there may be more sales and profit potential in the new markets….. There are in fact many reasons
ENTERING INTERNATIONAL MARKETS
THE KEY REASONS: if future sales and profit potential is high, where there is limited competition, where the costs of entry are low, where the entry barriers are low
Limited Competition – if there is little competition it will be easier to enter the new market
Entry Costs – if entry costs are low it will be easier to enter e.g. the financial costs of entry
ENTERING INTERNATIONAL MARKETS
Entry Barriers – there may be a number of barriers e.g. market share of the leader, market share of the key market leaders, economies of scale, planning permission, brand or image power, patents, copyright, trademarks, technical knowledge, contrived (collusion), geographical, political, legal (public sector)
ENTERING INTERNATIONAL MARKETS - Aims
Diversification - geographical Sales Profit Market share Resource availability and cost Exploit stage of industrial development Exploit political, economic, cultural, social
and demographic factors
ENTERING INTERNATIONAL MARKETS – Direct Methods
Direct Exporting Biz exports goods directly to the new
market e.g. UK exporting goods to China Biz has complete control……… but…… Key issues – finding the customer,
method of delivery, transport costs, may need large marketing budget to obtain customers e.g. overseas sales team
ENTERING INTERNATIONAL MARKETS - Direct Methods
Overseas Import Agent Person/company, in overseas country, acts
as sales agent, often on an exclusive basis Promotes biz goods to buyers, gets orders,
collects market information, represents biz at trade shows, assists biz employees when they visit, advises about government regulations, commission on value of sales
ENTERING INTERNATIONAL MARKETS - Direct Methods
Key issues – how good is the agent, are they honest/reliable, would need references, visit them, who else do they work for, use for a trial period first
Agent does not have title to the goods Exporter receives order from agent and
ships goods directly to the buyer Exporter has more control than when
selling through a distributor, has control over price
ENTERING INTERNATIONAL MARKETS - Direct Methods
Foreign Distributor (Import Merchant) Located in overseas market, buys goods
from abroad for re-sale in home market Buys goods outright, has risk of reselling
them Given exclusive right to sell the goods Key issues - select with great caution, set
out their rights/duties in a written agreement, less control and profit than with import agent, may be little contact with customers
ENTERING INTERNATIONAL MARKETS – Indirect Methods
Export Merchant A UK trading company, buys the firm's
goods outright and has risk of reselling them profitably abroad
Merchant usually specializes in a particular line of products and/or in a particular geographical market area
Sometime it sells the goods with the original supplier's labels or puts on its own label
ENTERING INTERNATIONAL MARKETS - Indirect Methods
Key issues – little contact with customers, less control, less profit
Export Agent UK company, acts for UK firms,
represents a number of non-competing businesses
Receives commission, doesn’t become owner of goods
ENTERING INTERNATIONAL MARKETS - Indirect Methods
Functions - appraise export potential for UK firms products, advertise them abroad, look for foreign buyers, obtain export orders, advise/arrange doc’s, shipping/insurance
Resident Foreign Buying Agent UK based biz, acts as buying agent for
overseas firms, gets commission on goods bought
Overseas customer asks agent for products, agent finds them, asks for quotes from different local suppliers
ENTERING INTERNATIONAL MARKETS – Other Methods
Licensing and Joint Ventures May be can’t export due to import barriers,
low-price foreign competition, transport costs, high production costs, etc
So, license local firm to manufacture and sell in the overseas country, they pay a royalty to UK biz for each unit manufactured locally
May have a joint venture with a local firm and enter into partnership to manufacture and market the product together
ENTERING INTERNATIONAL MARKETS – Other Methods
These agreements involve use of exporter's trademarks, patents, technical knowledge, specialized equipment, training, local partner's buildings, staff
Key issues - exporter earns some money rather than none, may be difficult to find a suitable local firm, lose control of technical knowledge, local partner may not fulfil their part of the agreement, licensee may become an eventual competitor
ENTERING INTERNATIONAL MARKETS – Other Methods
Direct overseas production Exporter produces in overseas country,
sets up factory, hires staff, gets materials Complete control over production and
sales, but very costly, may be language/culture barriers, currency conversion needed
COUNTRY ANALYSIS
Looks at the key characteristics needed and used by an economy wishing to
engage in international trade
FACTORS OF PRODUCTION
This looks at the key factors (resources) that are needed by businesses in the country in order to produce and supply their products/services
The factors are: land, raw materials, capital (finance), labour (employees), enterprise (management)
FACTORS OF PRODUCTION These factors must be used
effectively/efficiently in order for biz to succeed, be profitable and grow, they are crucial for biz success and biz competitiveness
LAND: what is its quality, must be pollution free, does it need developing/draining, is there enough of it, is it close to customer, is it close to raw materials, is it costly, does it have to be purchased, can it be rented
FACTORS OF PRODUCTION
RAW MATERIALS: are there any, what type, how many, are they bulky to transport, what is their price, what is their quality, are they cheaper elsewhere, what storage space is needed, can they be delivered quickly
CAPITAL: is there any, what type (loans, trade credit, shares, overdraft, retained profits), what does it cost, are banks good, does government help, can profits be removed
FACTORS OF PRODUCTION
LABOUR: is there any, are there enough, what type, when are they needed, what are there skills (admin, technical, practical, scientific), do they need training, what will they cost (depends on their skills), can they be hired quickly
ENTERPRISE (management): are there any, what type, how many, what will they cost, what skills are needed, experience is crucial, promote from within or hire from outside
FACTORS OF PRODUCTION
Factors must be managed effectively/efficiently e.g. buy right land, borrow money when interest rates low, buy raw materials in bulk, buy best quality materials, hire best managers/staff, use them effectively e.g. skilled staff in skilled positions
Factors must be motivated, highly skilled, give good training, reward well, offer promotion, develop as individuals, good team players, committed to biz and its goals
COUNTRY ANALYSIS – Other Characteristics
Climate/Geography/Contiguity Levels of wealth/ Income per head Political situation/Stability/ Human Rights The economy: growth, inflation,
unemployment Willingness to accept trade and inward
investment Infrastructure Culture is crucial and Biz culture Education/Training
COUNTRY ANALYSIS
Government encouragement: host and parent
Impact of neighbouring countries e.g. political
Levels of bureaucracy Levels of corruption Willingness to be “open” and accept change Wage costs per unit Costs per unit in general Laws and regulations
COUNTRY ANALYSIS
Theoretical perspective: Dunning (categories/motives for FDI,
OLI model) Hofstede (culture) Porter (e.g. diamond, clusters)
THE EUROPEAN UNION
Looks at the EU and its impact on businesses
operating inside and outside the EU
THE EUROPEAN UNION
FORMED IN 1957 6 ORIGINAL MEMBERS: BELGIUM, HOLLAND, LUXEMBOURG,
ITALY FRANCE, WEST GERMANY SET UP AS CUSTOMS UNION - free trade
between members, but controls on non-members via common external tariff (cet)
THE EUROPEAN UNION
RAPID ECONOMIC GROWTH IN THE 1960’s
LED TO NEW MEMBERS: UK, DENMARK, IRELAND (1973) GREECE (1991) SPAIN, PORTUGAL (1986) SWEDEN, AUSTRIA, FINLAND (1995)
THE EUROPEAN UNION
2004 – Latvia, Lithuania, Cyprus, Chez Republic, Estonia, Hungary, Malta, Poland, Slovakia, Slovenia (25 members)
Bulgaria, Romania – 2007 (27 members) Croatia (28 members) Future new members? Turkey, Iceland,
Kosovo, Albania, Bosnia/Herzegovina, Serbia, Macedonia
INSTITUTIONS OF THE EU
1. EUROPEAN COMMISSION (KEY BODY) Commissioners from each country
propose new policy and legislation2. COUNCIL OF MINISTERS (27) Take commissions proposals and decide
whether to implement them and turn them into legislation
INSTITUTIONS OF THE EU
3. EUROPEAN PARLIAMENT – 5 years 626 members
UK 77 Latvia 7 Greece 24 vote on commissions proposals
4. THE EUROPEAN COURT OF JUSTICE – Settles issues/disputes between members/individuals
THE SINGLE MARKET
Formation in 1957 assumed there would be free trade between the members
But barriers still existed - As a result the Single European Act was passed in 1987
Objective - Removal of 300 barriers to trade and open and fair competition
Aim: All trade barriers to end
THE SINGLE MARKET Benefits:1. More trade 2. Lower costs of trade 3. More competition 4. Economies of scale………. Problems: Unemployment in some countries. Some
regions suffered. Location impact e.g. centre of gravity theory. Growth of monopoly/oligopoly power. Trade diversion to cheaper production cost areas
THE MAASTRICHT TREATY
Signed December 1991 - took effect: 1/11/93
Aim: to create greater unity between member countries
1. Economic & Monetary Union - common currency, taxes, monetary policy e.g. one interest rate, ECB set up 1998
THE MAASTRICHT TREATY
Euro began: 1/1/99. Current members (18) Austria, Belgium, Cyprus, Estonia,
Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain
Key non-members: UK, Denmark, Sweden Euro began to circulate 1/1/02 Member notes/coins withdrawn 1/7/02
THE MAASTRICHT TREATY
2. THE SOCIAL CHAPTER Aim: To harmonise working conditions in
the EU e.g. right to join a trade union, minimum wage, maximum working week of 48 hours, equal treatment for men and women
UK refused to join in 1993 (Conservative) Finally joined: 1997 (Labour)
EU FUTURE
1. MORE MEMBERS Potentially 30 members by 2020?2. GREATER HARMONISATION e.g.
common taxes, more members join the Euro
3. GREATER POLITICAL UNION e.g. more power to the commission and parliament
BENEFITS OF EU MEMBERSHIP FOR UK
Larger market for businesses – 500m More trade between members Scope for greater economies of scale Lower unit costs – of production Higher levels of competition between
members More job creation, lower unemployment Greater product and service choice Lower prices
BENEFITS OF EU MEMBERSHIP FOR UK
More innovation, entrepreneurship and creativity
More investment within the EU EU support and subsidies to member
countries and member businesses e.g. poorer members and areas, UK Aerospace industry benefits from research & technology grants
Joint cooperation benefits e.g. research
BENEFITS OF EU MEMBERSHIP FOR UK
Economic power - against Japan/USA e.g. competing for contracts with the US
Border controls abolished, cutting costs to business and speeding up physical movement of goods and people across the EU
Standards have been harmonised for products, producing a level playing field for manufacturers across the EU - effect has been to turn the EU into a “domestic” market for all citizens
BENEFITS OF EU MEMBERSHIP FOR UK
Benefits of mergers between member businesses
Consumers better informed about the products they buy and those products are safer - CE marking guarantees that products meet certain minimum standards
Degradable products (food and medicines) are labelled with “best before” dates and carry a list of ingredients, colourings and additives
BENEFITS OF EU MEMBERSHIP FOR UK
More employee rights e.g. workers can’t be asked to work more than 48 hours per week, entitled to a rest break of 11 hours a day, entitled to one day off a week and paid holiday of four weeks per year
Part-time workers entitled to same benefits as those on full time contracts e.g. rates of pay, sickness benefit, company pension schemes
Employees with parental responsibilities have right to statutory leave
PROBLEMS OF EU MEMBERSHIP FOR UK
Costs of being a member - UK pays a major contribution to EU budget due to size of its economy, but receives payouts e.g. to UK farmers
The CAP - system of subsidies represent large % of EU spending – guarantee prices to farmers and direct payments for crops planted
Poorer regions may suffer e.g. competition causes unemployment
PROBLEMS OF EU MEMBERSHIP FOR UK
Power of rich members – Germany & France
Power of large companies e.g. monopoly producers
Import prices higher due to CET – production costs and final prices therefore higher
Keeps out cheaper goods from rest of world e.g. farm goods, raw materials
PROBLEMS OF EU MEMBERSHIP FOR UK
Too many rules/regulations - makes EU inefficient and too bureaucratic
Unaccountable to its Citizens - decisions are taken a long way from the people, making it a poor example of democracy, people have little chance to make their voices heard
Concentration of Power - EU institutions have too much power, taken away right of countries to make their own decisions about economic and political matters
PROBLEMS OF EU MEMBERSHIP FOR UK
Speed of Integration - EU is moving towards more and more integration – even more bureaucracy and loss of individual country control
Loss of UK Sovereignty – UK not free to develop its own policies, make its own laws or control its own economy in response to its own needs
THE EURO – and the UK
UK not yet entered – will be a referendum when time is right
Possibly never join? The Euro is a single currency, members
no longer have their own currency Members no longer have separate
monetary policies e.g. can’t control their own interest rates
THE EURO – and the UK
ECB controls interest rates and the exchange rate
So if UK wanted to cut interest rates to create employment it would not be able to
THE EURO – good if UK was in
Interest rates in EU may be lower than in UK – so borrowing costs would be cheaper
No exchange rate conversion costs No exchange rate uncertainty Pricing transparency No exchange risk on speculation against
the £ Euro will be a strong currency against the
$ and Yen
THE EURO – good if UK was in
ECB will be concerned about EU prosperity and growth as a whole, not individual countries, so all will benefit
More intra EU investment will flow into UK e.g. from France and Germany
Individual country will not be able to devalue its currency against its competitors
UK will have powerful voice in economic decision making
THE EURO – against UK joining
Currency unions in the past have collapsed
No control over domestic monetary policy e.g. can’t control its interest rates – so can’t control its economy
ECB very powerful Lower interest rate policy may not be
suitable if UK has inflation No control over its exchange rate –
control by ECB not by Bank of England
THE EURO – against UK joining
May eventually lead to further harmonisation e.g. taxes
The Euro economies have not fully converged and if interest rates were high it may result in economic change in one part of the EU which is unsuited to another part
Adopting a new currency will involve substantial costs for businesses and banks
THE EURO – against UK joining
Large fiscal (tax) transfers will be needed to aid poorer countries within the EU to reduce structural economic inequalities e.g. a country with high unemployment will need help to come into line with the rest of the members
As a result there will need to be more European Regional Policy, this will cost the UK a lot in taxes as it is a richer member
THE EURO – against UK joining
Key negative concerns the problems ensuing from the Banking crash of 2007-08
Major economic collapse in Euro countries: Spain, Portugal, Greece, Ireland
Eurozone members forced to bale them out If UK had been a member it would have cost
the UK a major transfer of funds to those countries. May have made our recession even worse.