The Determinants of Trade Policy Preferences in the UK - Case Study Example

The Determinants of Trade Policy Preferences in the UK Introduction What are the factors that determine trade policy This question has become a rising apprehension with changes happening in the trade policy in terms of free trade as well as trade barriers. It is not just sufficient to examine the trade policy as well as its effects on the nation so as to consider whether the trade policy is preferable or not. Such a question is to be answered by eschewing the region or country centered theories & take into consideration the individual preferences towards the trade policy. The study has a focus on two things. One is that, the factor type dominates the sector of service or employment and there by becomes an important determinant throwing light on the positive preference for trade barriers. Secondly, the study also includes the home ownership aspect to the determinants of preferences regarding trade. It indicates that home ownership taken independent of the type of factor has a correlation with trade barrier support in the countries where the manufacturing mix has a concentration in sectors of comparative disadvantage. Here, we see that the preferences have a dependence on the effect of trade policy on the income of factors of production as well as on the economic benefit of the individual. Therefore, the preferences towards trade policy may be as result of not only income of the factors, but also of the ownership of the assets that they possess. However, the assets such as housing do not become a part of the standard theory of trade since it is not employed and nor is it presently produced asset. The study also says that ownership of home is correlated to negative preference for free trade in places having a manufacturing mix that is concentrated in comparative-disadvantage sectors. Sector of Employment and Employee Type Affecting Trade Preferences It is to be noted that when the economy runs on the basis of certain sectors, factors have a direct link in those specific sectors. Hence, it so happens that factors in different sectors show their different preferences i.e. support or negativity. This happens when there is an assumption of immobility of factors between sectors. Here, if the sector is not an exporting one, they prefer protection. However, free trade is the most preferred, if the sector is an exporting one, which means there is negative preference for trade barriers. However, if we assume that factors have mobility, factors who have a higher supply (those factors that are more in number) will have a preference for free trade policy & those which are less in number will have a preference towards protection. The theory on the trade policy indicates that the trade policy is evaluated by individuals in the light of the effect of the same on their incomes. They see whether the effect of the policy is favorable on their income or not and then have a preference towards protection or free trade policy. This does not take into consideration the national welfare. This happens because the income of the factor is affected because of the changes in the relative prices of the products. As seen earlier, we have also taken a view of the mobility of factors of production. The changes in the mobility of factors make an impact on the changes in income and thus influence the decision about trade policy i.e. having a support towards trade barriers or towards free trade. When we talk about the mobility of the factors, we are taking an assumption that the factors can move costlessly amongst sectors. When free trade comes in, not only is product price affected, but there is a change in factor price also. Hence, with the possibility of shifting sectors, the returns rise for the labour. Hence, when this is possible the support towards free trade is higher, since it affects the income positively. This model generally assumes that there is support for protection in the sectors where the factors employed are those which are scarce. The above explanation clearly brings out that the factor type that is abundant will support free trade and the scarce one will support protection. However, when the factors cannot move from one sector to other, there are losses in income for the factors of the sector where prices have a decline. These are called comparative disadvantage industries. In such cases, the sector of employment becomes an important factor in determining the trade preferences. However, to have a case in point, UK is not one such type of economy where the above assumption of the trade policy holds. If we summarize, we can conclude that as per the HO model, the factor type becomes important in having an evaluation of the trade policy preferences while in RV models the industry where the factors are employed becomes important. Also, if we consider any of the trade models with regards to the type of workers, it can be seen that the workers possessing lesser less-skilled workers are expected to gain more from restriction of trade n sectors that have comparative disadvantage and hence they would not show a support for free trade and accept the trade barriers more readily. Nonetheless, there is a caution for those sectors which belong to non-traded industries. The fact is that such industry sectors cannot be granted trade barriers. We also need to see the effect of trade policy on the non traded industry sectors. This is because the national income tends to rise because of free trade. Hence, with an assumption of income elasticity of demand the demand for non traded goods shall be on a rise because of free trade. Hence, keeping in mid the RV model, free trade should be a preference in case of sectors with non traded goods. Application to UK- Sector of employment and Income Levels The above can be applicable to UK taking into consideration the variety of labour force as well as various sectors of trade and business. We can see that UK labour market is a mix of skilled as well as unskilled labour. Moreover, being one of the most developed countries of the world, it is having a good number of skilled labour. However, the proportion of semi-skilled and unskilled labour is a bit higher than the skilled one. Moreover, we can also see that mobility is generally not a constraint in a vast economy with too many job opportunities & increased production over a wide range of sectors. Here by, on the basis of the theory presented above, it can be concluded that individual preferences of the factors shall be towards protection for the unskilled labour, which is abundant and will be towards protection for the skilled ones. Apart from that, the preferences towards economic protection happen to be a function of the benefits that come to the individuals from that. In that case, the labour can move from one sector (from declining sectors) and relocate to other sectors. This is as per Hekscher-Ohlin Model. Britain is a rich developed country. The troubles, which the unskilled labourers have to face in such rich countries, can be decreased with the help of training and education. We can clearly see that the assumptions of the HO Model fit the UK economy much more than the RV model. Several studies have brought it out that UK is blessed with a mix of unskilled as well as skilled labour and though the proportion is slightly tilted higher towards unskilled labour, the skilled labour is on a rise. We have seen above about fitting the HO model on UK and analyzing the trade preferences. Now we will look at how the RV model works on it. As per the RV model, the labour in UK that is employed in sectors where price shall fall due to the trade policy i.e. the sectors that have a comparative disadvantage shall have a preference for protection whereas those who are employed in sectors having comparative-advantage shall have a preference towards free trade. Asset Ownership Affecting Trade Preferences The analysis of individual trade preferences has an assumption that individuals certainly know about the impact that trade policies have on their income as well as on the assets that they hold. This happens to be a common assumption, though not universal. Ina trade model, it is generally assumed that all the income of the factors is spent on daily consumption items. However, in reality, this is not the case. Individuals defer their consumption, accumulate their income and spend on possessing assets. Here, we will try to have an idea of how the asset value is affected by changes in the trade policy making it as one of the important determinants of trade policy preferences. Some of such assets can be taken as machines, tools, equipments as well as office buildings. These are the assets that fit conveniently in the trade models. If these assets have a clear mobility amongst sectors, then they are not very much associated to the changes in prices. It is to be understood that such the assets mentioned above are productive and they get accumulated in the open economy with a period of time. One of such assets also includes automobiles. But, there are certain other kinds of assets, which are neither employed nor are produced. These include residential buildings. These do not forma a part of factors of production. At all the times, the residential buildings are not produced. That indicates the fact that construction does not add too much to the stock of housing due to the longer lead times involved and smaller flows for the same. Though, we say that housing is not directly linked to production. However, it is important to note that it forms a vital part of the total holding of assets of the people. In order to have an understanding of the effect of trade policy on the prices of houses, we need to study the pattern of demand and supply for housing properties. The elasticity of demand for the same also makes a difference. The regional demand also is one of the factors that is important in having an idea about the change in prices of houses. It also takes into consideration, the economic activity that takes place in a particular region. More of economic activity and more employment-oriented area shall have a higher demand of housing. Here, we can see that trade policy does have an impact on the level of economic activity in a specific region. When free trade exists, there is shrinkage in the industries having comparative-disadvantage and expansion in those sectors that enjoy comparative-advantage. In accordance with this, those regions, which have more activity concentration in sectors with a comparative disadvantage, are more susceptible to unfavorable demand in housing as a resultant of free trade. Hence, the economic output of the region is on a decline, labour force moves toward work at other places or face temporary unemployment. So, the demand of housing shows a dip and hence there is decrease in the housing prices too. The above linkage holds true in light of both the trade models. In areas with high activity concentration, the owners of the home shall have a negative preference towards free trade. This is because the welfare of the owners gets lowered due to the decreasing housing demand and there by reducing prices of houses. The above explained linkage amongst the trade policy and the value of asses operates independent of the effect of trade policy on the income. Though the fact stays that the economic welfare of the people depends on income as well as asset holding, the trade policy might have a distinct impact on both the varied factors Application on UK: Now we shall have a idea of how the above theory of asset holding is applicable in the case of asset holding in Britain. In UK, Property finds the prominent place out of the total asset holdings of an average citizen. Hence, we cannot ignore the impact of this on the trade policy preferences. If we consider an example of a home owner in a city of UK, who resides in an area of comparative disadvantage, and belongs to a category of skilled labour, the person with reference to asset holding shall be showing negative preference towards a free trade policy. However, with respect to the income channel, he may show a support towards free trade. The country exposure is also taken care of while valuating the determinants of trade policy. A lot of published data supports that UK has a large share of employment in several sectors. Some of these also are the sectors, which have comparative disadvantage. Hence, in such sectors, homeowners would generally oppose the liberalization of trade since the prices of the houses would decrease having the results of lower economic value for the owners of the property. We have been able to bring the above conclusion by taking into consideration both- the home ownership as well as the region or the country, which we are talking about. This is because neither home ownership alone nor the trade-exposed country/region alone are sufficient for having an impact on the trade policy preferences. The combination of both is very essential. Factor Interest vs. Sectoral Interest Now we go to the next question i.e. whether interests of factors or the sectoral interests have a higher importance in the determination of trade policy preferences. It is noted here, as per the study of Scheve and Slaughter the preferences regarding trade by individuals should be at the centre of any choice that is made for the formational of the policy rationally ad hence, direct data helps. This data can be made available for Britain from the national statistics of UK. Yes, one thing to be agreed is that the data through survey does have limitations. Taking into consideration the HO Model of trade, there are implications of trade on wage inequality, i.e. on Northern wage as well as Southern wage. It may also have implication for convenience with which the integration of European Union is possible with the fast changing Eastern Europe economy. However, the survey data can only give information whether there is consistency in preferences in relation to the assumptions taken in the model chosen. Conclusion Hence, we have looked into both the important aspects of the determinants of the individual trade policy preferences as brought out in the trade models supplemented by the study of Scheve & Slaughter. The above discussion in the light of theory as well as its application to the trade and economy of UK helps us understand that the results hold true n the case of UK. Looking at it, from all different angles lets us have a holistic view of the theory along with the practicalities of the application of he same in UK. References Scheve & Slaughter, "What determines individual trade-policy preferences ", Journal of International Economics 54 (2001). Read More