Trade Policy and Comparative Advantage in UK

The assignment discusses trade in the UK in relation to Ricardian theory of comparative advantage. It highlights the country's service sector as a comparative advantage, with significant exports in financial services, business services, travel and transport, royalties and license, insurance, and others. The major trade partners are identified as the United States, Germany, China, Netherlands, France, and Ireland. The UK has a liberal trade policy with standard tariff rates, and the external sector plays a crucial role in its economy, contributing to GDP.

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
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Table of Contents
Introduction......................................................................................................................................2
Theory of Comparative advantage...................................................................................................2
Trade Overview in United Kingdom...............................................................................................3
Export and import partners of United Kingdom..............................................................................4
Pattern of Trade in UK....................................................................................................................5
Export profile of UK........................................................................................................................7
Import Profile of UK.......................................................................................................................8
Comparative advantage of UK........................................................................................................9
Balance of trade.............................................................................................................................11
Trade policy in UK........................................................................................................................12
Conclusion.....................................................................................................................................13
Reference list.................................................................................................................................14

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Introduction
In today’s globalized world, countries are interconnected by establishing trade relation
with each other. Countries export goods that it can produce efficiently and import goods that
involve high production cost or not supported by the countries abundant factor of production.
Different trade theories have been developed to indicate the direction of trade. Three widely used
trade theories are the theory of absolute advantage, theory of comparative advantage and
Heckscher-Ohlin model of trade. The pioneering theory of trade is the model of absolute
advantage. Absolute advantage is defined in terms of country’s efficiency in producing a good in
a better way than others produce. The efficiency is determined in terms of absolute production
cost. Comparative advantage on the other hand defines relative efficiency in terms of opportunity
cost of production. In the Heckscher-Ohlin model, specialization depends on the abundant factor
of production. The paper discusses trade theory and trade policy of United Kingdom giving
reference to Ricardian theory of comparative advantage.
Theory of Comparative advantage
In 1817, David Ricardo refined the fundamental trade theory of absolute advantage
possessed by Adam Smith. The theory developed by David Ricardo is known as the principle of
comparative advantage. The theory states that trade would take place when ratio of opportunity
cost differs between countries and each country specializes in goods in which it enjoys a
comparative advantage. The Ricardian trade model includes technological difference between
nations. Ricardo suggests that every country benefits from trade resulting in a higher welfare for
the world as a whole (Levchenko and Zhang 2016). The problem with absolute cost advantage is
that often nations have absolute cost advantage over all goods. The direction of trade then needs
to be determined by considering the opportunity cost of production. The country with a lower

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opportunity cost export the particular goods while country faced with a higher opportunity cost
import that good. It has been observed that when countries specialize based on their comparative
advantages the resources are allocated efficiently benefitting the nations participating in trade.
Trade Overview in United Kingdom
United Kingdom ranks fifth in terms of international trade. The economy of UK is very
much dependent on the international trade. This encourages small and medium sized enterprises
to participate in trade and enjoys significant benefits. The main imports of UK include metals
such as copper, lead, zinc, hides and skins, ferrous metals and other raw materials. UK imports
one third of its food. UK’s heavy reliance on imports reflects its comparative disadvantage in
producing these items (Salvatore 2014). The main import sectors of UK are machinery,
Industrial supplies, consumer goods, Transportation, Food and fuels. The major export sectors in
UK are financial services, Business services, Transport, and Travel.
Table 1: Summary of total import and export in 2016
UK's trade summary in
2016
Export (million US
$)
4,11,4
63
No of Products 4501
No of Partners 230
Import (million US
$)
63636
8
No of Products 4539
No of Partners 226
(Source: wits.worldbank.org 2018)
As per the statistics obtained in 2016, UK’s total export of goods and services worth
around 411463 US $ million. Total number of exported items are 4501. UK’s export market has

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expanded to 230 nations. As against the export statistics the worth of import is 636368 million
US $. Globally 226 nations export 4539 items to UK.
Export and import partners of United Kingdom
34%
24%
15%
14%
13%
Trade share of export partners
United States
Germany
France
Netherlands
Ireland
Figure 1: Top five export partners of UK
(Source: stat.wto.org 2018)
The top five export partners of UK are United States, Germany, France, Netherlands and
Ireland. The largest share in the export market is capture by United States with the share being
34%. In terms of export share Germany, France, Netherland and Ireland followed United States.

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31%
21%
20%
16%
12%
Trade share of import partners
Germany
China
United States
Netherlands
France
Figure 2: Top five import partners of UK
(Source: stat.wto.org 2018)
Top five import partners of UK are Germany, China, United States, Netherlands and
France. Among the top five nations, Germany has the largest share followed by China, United
States, Netherland and France.
Pattern of Trade in UK
UK participates in international trade both in terms of visible and invisible trade. The
visible trade implies trade of commodities or goods while invisible trade refers to trade of
services.

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20012002200320042005200620072008 2009 2010201120122013201420152016
0
500
1000
Export and Import Volume (in billion)
Import Volume Export Volume
Year
Volume (in billion)
Figure 3: Export and import volume in last few years
(Source: data.worldbank.org 2018)
The above figure shows the volume of export and import in UK in the last fifteen years.
In every year, the export volume exceeds that of import volume. This implies the nation in the
last few years export a larger volume of goods as compared to its import (Stay and Kulkarni
2016). However, an interesting trade pattern in obtained when export and imports are seen as a
percentage of gross domestic product.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.00
40.00
Export and Import Percenatge
Export Import
Year
Pecentage in GDP
Figure 4: Export and import as percentage of GDP
(Source: data.worldbank.org 2018)

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In terms of percentage share, import constitutes a larger percentage of GDP than export.
This shows the importance of imported items in UK’s GDP. The nation often exports the same
goods, which it imports. Thus. Import has a higher share in GDP than export.
Export profile of UK
Export composition of a country shows comparative advantage of a nation. The three
major export categories of UK are Machinery and transport equipment, manufactured articles
and Chemicals (Gibson and Thirlwall 2016). Export share of these three groups are 39.2 percent,
14.0 percent and 16.6 percent. In the transport group, the country exports motor cars and motor
vehicles. United States, Germany and Switzerland are the three main export destination having
respective trade shares of 14.1 percent, 10.3 percent and 6.4 percent.
0.0
15000.0
30000.0
45000.0
Values of top ten export
2014 2015 2016
Commodity
V a l u e s i n m i l l i o n U S D
Figure 5: Top exported goods in last three years
(Source: comtrade.un.org 2018)
The export of Motor cars has remained more or less same in the three years. The Gold
export has declined recently.

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Import Profile of UK
The largest commodity group in the imported category is Machinery and transport
equipment followed by miscellaneous manufactured article and Chemicals. The trade share in
these three categories are 35.9%, 15.0% and 11.3% respectively. In the imported group Motor
cars and motor vehicles holds the most important position. Top three import partners of UK are
Germany, China and United States. The respective trade shares of these three nations are 14.4%,
9.5% and 8.5% percent respectively.
0.0
20000.0
40000.0
60000.0
Values of top ten imports
2014 2015 2016
Commodity
V a lu e s in m il li o n U S D
Figure 6: Top imported goods in UK in past three years
(Source: comtrade.un.org 2018)
The import of motor cars and motor vehicle remain same as like export. However, gold
import in recent years has increased. This is due to decline in Gold production in UK as reflected
from the falling export of gold.

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Comparative advantage of UK
The financial service sector is one of the key areas of comparative advantage for United
Kingdom. There are several reasons that explains the comparative advantage of UK in financial
service. There are several factors responsible for UK’s rising comparative advantage (Cobham,
Janský and Meinzer 2015). In order to have comparative advantage in service sector countries
need to have highly qualified labor force, efficient training program, strong English base and
availability of capitals to support such programs. In UK, English is the native tongue (Gilbert
and Muchová 2018). The labor force in UK has great academic base. The efficient labor-training
program contributes to increasing skills of laborers. Moreover, the extensive levels of trading
and steady flows of capital build the base for financial service in UK. The favorable condition
for financial sectors makes UK an attractive place for institutional banks globally. The
composition of service export in UK is given as follows
25.0%
27.0%
28.0%
6.8%
5.1% 8.1%
Composition of Service Export
Travel &
Transport
Business
Services
Financial
Services
Insurance
Figure 7: UK’s service export with respective share

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(Source: comtrade.un.org 2018)
The financial service constitutes the largest share in total service export with the share
being 28%. After financial services, business services are in next important place. Travel and
transport service constitutes 25% in total service export. The other groups of service exports are
Insurance, Royalties and fees and others (Francois, Manchin and Tomberger 2015).
Balance of trade
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.00
20.00
40.00
60.00
Trade share in GDP
Year
Percent
Figure 8: Share of trade in GDP
(Source: data.worldbank.org 2018)
As shown from the figure, trade in UK constitutes a significant share in GDP. In 2016,
trade share in GDP was 58.03%.

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-15
-10
-5
0
5
10 Goods, Service and Total Trade Balance
Servic
es
balan
ce
Month
Trade Balance
Figure 9: External balance in goods, service and in overall trade
(Source: wits.worldbank.org 2018)
For commodity trade, UK run with a negative trade balance. However, for the service
sector the trade balance is positive. This supports the Ricardian theory of comparative advantage
that shows when countries export goods in which it has a comparative advantage. In case of UK,
the comparative advantage is in service sector (Sturmey 2017). Therefore, from the service
sector UK gains a trade surplus.
Trade policy in UK
Owing to heavy reliance on import, UK has liberalized all the import barriers. The import
tariff in UK has declined gradually and remained flat around 1-2 percent.

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2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
0.5
1
1.5
2
2.5
3
3.5
Import Tariff in UK
Year
Rate of tariff
Figure 10: Trend in tariff rate in UK
(Source: data.worldbank.org 2018)
Conclusion
The paper discusses trade in UK in reference to Ricrdian theory of comparative
advantage. UK involves in trading goods and services across the world. UK has a comparative
advantage in its service sector. The services that UK export worldwide include financial services,
business services, travel and transport, Royalties and license, Insurance and others. The major
trade partners of UK are United States, Germany, China, Netherland, France and Ireland. UK
gains significantly from its service trade and enjoys a surplus. The country has followed a liberal
trade policy with setting the tariff rate at a standard level. The external sector in UK plays an
important role in UK economy with its considerable contribution in nation’s GDP.

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Reference list
Cobham, A., Janský, P. and Meinzer, M., 2015. The financial secrecy index: Shedding new light
on the geography of secrecy. Economic geography, 91(3), pp.281-303.
Comtrade.un.org. (2018). UN Comtrade | International Trade Statistics Database. [online]
Available at: https://comtrade.un.org/ [Accessed 8 Mar. 2018].
Data.worldbank.org. (2018). Exports of goods and services (% of GDP) | Data. [online]
Available at: https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?locations=GB [Accessed 8
Mar. 2018].
Francois, J., Manchin, M. and Tomberger, P., 2015. Services linkages and the value added
content of trade. The World Economy, 38(11), pp.1631-1649.
Gibson, H.D. and Thirlwall, A.P., 2016. Balance-of-payments theory and the United Kingdom
experience. Springer.
Gilbert, J. and Muchová, E., 2018. Export competitiveness of Central and Eastern Europe since
the enlargement of the EU. International Review of Economics & Finance.
Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement
and welfare implications. Journal of Monetary Economics, 78, pp.96-111.
Salvatore, D. ed., 2014. National Trade Policies. Elsevier.
Stat.wto.org. (2018). Trade Profiles. [online] Available at:
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=GB&Language=S
[Accessed 8 Mar. 2018].

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Stay, K. and Kulkarni, K.G., 2016. The Gravity Model of International Trade, a Case Study: The
United Kingdom and Her Trading Partners. Amity Global Business Review, 11.
Sturmey, S.G., 2017. British shipping and world competition. Oxford University Press.
Wits.worldbank.org. (2018). United Kingdom Trade Statistics | WITS. [online] Available at:
https://wits.worldbank.org/CountryProfile/en/GBR [Accessed 8 Mar. 2018].