Category: Economics 10e

Each week, BBC Radio 4 broadcasts readings from a book serialised in five 15-minute episodes. In the week beginning 18 January 2021, the readings were from English Pastoral: An Inheritance by James Rebanks, a farmer from the Cumbrian fells. His farm is relatively small, covering 185 acres. He has attempted to make it much more sustainable and less intensive, with a mixture of cows and sheep rather than just sheep, a greater sub-division of fields, and more natural scrubland and trees.

Apart from being an autobiography of his time as a farmer and his attempt to move towards more traditional methods, the book examines broader issues of agricultural sustainability. It looks at the pressures of consumers wanting cheap food, the market power of supermarkets and wholesalers, the cost pressures on farmers pushing them towards monoculture to achieve economies of scale, and the role of the agrichemicals industry promoting fertilisers, feeds and pesticides which bring short-term financial gains to farmers, but which cause longer-term damage to the land and to biodiversity.

Rebanks has gained quite a lot of media attention after the publication of his first book, The Shepherd’s Life, including being one of the guests on Desert Island Discs and the subject of an episode of The Food Programme.

Listen to the Food Programme podcast and try answering the questions, which are all based on the podcast in the order of the points made in the interview.

Podcast

Reviews

Questions

  1. What are the incentives of an unregulated market for food that result in monoculture and a loss of biodiversity?
  2. To what extent are consumers responsible for changes in farming methods?
  3. Have the changes helped the urban poor?
  4. How is the monopsony power of supermarkets and food wholesalers impacting on food production and the pattern of agriculture?
  5. There are various (private) economies of scale in food production, but these often involve substantial external costs and long-term private costs too. How does this impact on land use?
  6. What are some of the limits of technology in increasing crop, meat and dairy yields?
  7. Will more recent changes in the pattern of food consumption help to increase mixed farming and biodiversity?
  8. Is it ‘rational’ for many farmers to continue with intensive farming with high levels of artificial fertilisers and pesticides?
  9. Is diversity in farming across farms within a local area a public good? If so, how could such diversity be achieved?
  10. How can farmers be encouraged to think and act holistically?
  11. Is there a trade-off between food output and biodiversity?
  12. What are the dangers in the UK reaching an agricultural trade deal with the USA?
  13. What are the benefits and costs of encouraging local food markets?

Back in November, when Joe Biden had just been elected, we considered some of his proposed policies to tackle climate change (see A new era for climate change policy?). On 20th January, the day of his inauguration, he signed 17 executive orders overturning a range of policies of the Trump presidency. Further executive orders followed. Some of these related directly to climate change.

The first was to cancel the Keystone XL oil pipeline project. If it had gone ahead, it would have transported 830 000 barrels of oil per day from the Alberta tar sands in Canada to refineries on the Gulf Coast of Texas. It would have involved building a new pipeline from Alberta to Nebraska, where it would have linked to an existing pipeline to Texas. Extracting oil from tar sands is a particularly dirty process, involves cutting down large areas of forest (a carbon sink) and total emissions are around 20% greater per barrel than from conventional crude.

The pipeline would have cut across First Nations land and any spills would have been highly toxic to the local environment. In terms of profitability, returns on tar sands oil extraction and transportation are very low. This is likely to remain the case as oil prices are likely to remain low, with greater global energy efficiency and the switch to renewables.

Critics of Biden’s decision argue that the pipeline project would have created some 5000 to 6000 temporary jobs in the USA during the two-year construction phase. Also they claim that it would have contributed to greater energy security for the USA.

The second executive order was to rejoin the Paris Climate Agreement, a process that will take 30 days. Rejoining will involve commitments to cut greenhouse gas emissions and the adoption of various measures to bring this about. During the election campaign, Biden pledged to achieve economy-wide net-zero emissions no later than 2050. As we saw in the previous blog, under Biden the USA will play a leading role in the November 2021 UN COP26 climate change conference in Glasgow.

At present, the Paris agreement is for countries to aim to reach a peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century. Many countries have have made commitments about when they aim to achieve carbon neutrality, although concrete action is much more limited. It is hoped that the COP26 conference will lead to stronger commitments and actions and that the USA under Biden will play a leading part in driving this forward.

In addition, to cancelling the Keystone XL pipeline and rejoining the Paris Agreement, the executive orders reversed more than 100 other decisions with negative environmental effects taken by the Trump administration – many overturning environmental measures introduced by previous administrations, especially the Obama administration.

These orders included reversing the easing of vehicle emissions standards; stopping reductions in the area of two major national monuments (parks) in Utah; enforcing a temporary moratorium on oil and natural gas leases in Alaska’s Arctic National Wildlife Refuge; and re-establishing a working group on the social costs of greenhouse gasses.

Then there will be new measures, such as adopting strict fuel economy standards and investment in clean public transport. But it remains to be seen how far and fast the Biden administration can move to green the US economy. With the desire for bipartisanship and seeking an end to the divisive policies of Trump, there may be limits to what the new President can achieve in terms of new legislation, especially with a Senate divided 50:50 and only the casting vote of the chair (Kamala Harris as Vice-President) being in Democrat hands.

The articles below consider the various green policies and how likely they are to succeed in their objectives.

Articles

Questions

  1. Find out what other environmental policies are being pursued by President Biden and assess their likely effectiveness in achieving their environmental objectives.
  2. Would policies to reduce carbon emissions necessarily be desirable? How would you assess their desirability?
  3. When is it best to use the ‘precautionary principle’ when devising environmental policies?
  4. To what extent is game theory relevant in understanding the difficulties and opportunities of developing internationally agreed policies on carbon reduction?
  5. If the objective is to tackle global warming, is it better to seek international agreement on limiting the extent of global warming or international agreement on carbon reduction? Explain.

According to the Brexit trade agreement (the Trade and Cooperation Agreement (TCA)), trade between the EU and the UK will remain quota and tariff free. ‘Quota free’ means that trade will not be restricted in quantity by the authorities on either side. ‘Tariff free’ means that customs duties will not be collected by the UK authorities on imports from the EU nor by the EU authorities on imports from the UK.

Article ‘GOODS .5: Prohibition of customs duties’ on page 20 of the agreement states that:

Except as otherwise provided for in this Agreement, customs duties on all goods originating in the other Party shall be prohibited.

This free-trade agreement was taken by many people to mean that trade would be unhindered, with no duties being payable. In fact, as many importers and exporters are finding, trade is not as ‘free’ as it was before January 2021. There are four sources of ‘friction’.

Tariffs on goods finished in the UK

This has become a major area of concern for many UK companies. When a good is imported into the UK from outside the EU and then has value added to it by processing, packaging, cleaning, remixing, preserving, refashioning, etc., under ‘rules of origin’ regulations, it can only count as a UK good if sufficient value or weight is added. The proportions vary by product, but generally goods must have approximately 50% UK content (or 80% of the weight of foodstuffs) to qualify for tariff-free access to the EU. For example, for a petrol car, 55% of its value must have been created in either the EU or UK. Thus cars manufactured in the UK which use many parts imported from Japan, China or elsewhere, may not qualify for tariff-free access to the EU.

In other cases, it is simply the question of whether the processing is deemed ‘sufficient’, rather than the imported inputs having a specific weight or value. For example, the grinding of pepper is regarded as a sufficient process and thus ground pepper can be exported from the UK to the EU tariff free. Another example is that of coal briquettes:

The process to transform coal into briquettes (including applying intense pressure) goes beyond the processes listed in ‘insufficient processing’ and so the briquettes can be considered ‘UK originating’ regardless of the originating status of the coal used to produce the briquettes.

In the case of many garments produced in the UK and then sold in retail chains, many of which have branches in both the UK and EU, generally both the weaving and cutting of fabric to make garments, as well as the sewing, must take place in the UK/EU for the garments to be tariff free when exported from the UK to the EU and vice versa.

Precise details of rules of origin are given in the document, The Trade and Cooperation Agreement (TCA): detailed guidance on the rules of origin.

Many UK firms exporting to the EU and EU firms exporting to the UK are finding that their products are now subject to tariffs because of insufficient processing being done in the UK/EU. Indeed, with complex international supply chains, this is a major problem for many importing and exporting companies.

Documentation

Rules of origin require that firms provide documentation itemising what parts of their goods come from outside the UK/EU. Then it has to be determined whether tariffs will be necessary on the finished product. This is time consuming and is an example of the increase in ‘red tape’ about which many firms are complaining. As the Evening Standard article states:

Exporters have to be able to provide evidence to prove the origin of their products’ ingredients. Next year, they will also have to provide suppliers’ declarations too, and EU officials may demand those retrospectively, so exporters need to have them now.

The increased paperwork and checks add to the costs of trade. Some EU companies are stating that they will no longer export to the UK and some UK companies that they will no longer export to the EU, or will have to set up manufacturing plants or distribution hubs in the EU to handle trade within the EU.

Other companies are adding charges to their products to cover the costs. As the Guardian article states:

“We bought a €47 [£42] shelf from Next for our bathroom,” said Thom Basely, who lives in Marseille. “On the morning it was supposed to be delivered we received an ‘import duty/tax’ demand for over €30, like a ransom note. It came as a complete surprise.”

In evidence given to the Treasury Select Committee (Q640) in May 2018, Sir Jon Thompson, then Chief Executive of HMRC, predicted that leaving the single market would involve approximately 200 million extra customs declarations on each side of the UK/EU border at a cost of £32.50 for each one, giving a total extra cost of approximately £6.5bn on each side of the border for companies trading with Europe. Although this was only an estimate, the extra ‘paperwork’ will represent a substantial cost.

VAT

Previously, goods could be imported into the UK without paying VAT in the UK on value added up to that point as VAT had already been collected in the EU. Similarly, goods exported to the EU would already have had VAT paid and hence would only be subject to the tax on additional value added. The UK was part of the EU VAT system and did not have to register for VAT in each EU country.

Now, VAT has to be paid on the goods as they are imported or released from a customs warehouse – similar to a customs duty. This is therefore likely to involve additional administration costs – the same as those with non-EU imports.

Services

The UK is a major exporter of services, including legal, financial, accounting, IT and engineering. It has a positive trade in services balance with the EU, unlike its negative trade in goods balance. Yet, the Brexit deal does not include free trade in services. Some of the barriers to other non-EU countries have been reduced for the UK in the TCA, but UK service providers will still face new barriers which will impose costs. For example, some EU countries will limit the time that businesspeople providing services can stay in their countries to six months in any twelve. Some will not recognise UK qualifications, unlike when the UK was a member of the single market.

The financial services supplied by City of London firms are a major source of export revenue, with about 40% of these revenues coming from the EU. Now outside the single market, these firms have lost their ‘passporting rights’. These allowed such firms to sell their services into the EU without the need for additional regulatory clearance. The alternative now is for such firms to be granted ‘equivalence’ by the EU. This has not yet been negotiated and even if it were, does not cover the full range of financial services. It excludes, for example, banking services such as lending and deposit taking.

Conclusions

Leaving the single market has introduced a range of frictions in trade. These are causing severe problems to some importers and exporters in the short term. Some EU goods are now unavailable in the UK or only so at significantly higher prices. Some exporters are finding that the frictions are too great to make their exports profitable. However, it remains to be seen how quickly accounting and logistical systems can adjust to improve trade flows between the UK and the EU.

But some of these frictions, as itemised above, will remain. According to the law of comparative advantage, these restrictions on trade will lead to a loss of GDP. And these losses will not be spread evenly throughout the UK economy: firms and their employees which rely heavily on UK–EU trade will be particularly hard hit.

Articles

Official documents

Questions

  1. Explain what is meant by ‘rules of origin’.
  2. If something is imported to the UK from outside the UK and then is refashioned in the UK and exported to the EU but, according to the rules of origin has insufficient value added in the UK, does this mean that such as good will be subject to tariffs twice? Explain.
  3. Are tariffs exactly the same as customs duties? Is the distinction made in the Guardian article a correct one?
  4. Is it in the nature of a free-trade deal that it is not the same as a single-market arrangement?
  5. Find out what arrangement Switzerland has with the EU. How does it differ from the UK/EU trade deal?
  6. What are the advantages and disadvantages of the Swiss/EU agreement over the UK/EU one?
  7. Are the frictions in UK–EU trade likely to diminish over time? Explain.
  8. Find out what barriers to trade in services now exist between the UK and EU. How damaging are they to UK services exports?

In a series of five podcasts, broadcast on BBC Radio 4 in the first week of January 2021, Amol Rajan and guests examine different aspects of inequality and consider the concept of fairness.

As the notes to the programme state:

The pandemic brought renewed focus on how we value those who have kept shelves stacked, transport running and the old and sick cared for. So is now the time to bring about a fundamental shift in how our society and economy work?

The first podcast, linked below, examines the distribution of wealth in the UK and how it has changed over time. It looks at how rising property and share prices and a lightly taxed inheritance system have widened inequality of wealth.

It also examines rising inequality of incomes, a problem made worse by rising wealth inequality, the move to zero-hour contracts, gig working and short-term contracts, the lack of social mobility, austerity following the financial crisis of 2007–9 and the lockdowns and restrictions to contain the coronavirus pandemic, with layoffs, people put on furlough and more and more having to turn to food banks.

Is this rising inequality fair? Should fairness be considered entirely in monetary terms, or should it be considered more broadly in social terms? These are issues discussed by the guests. They also look at what policies can be pursued. If the pay of health and care workers, for example, don’t reflect their value to our society, what can be done to increase their pay? If wealth is very unequally distributed, should it be redistributed and how?

The questions below are based directly on the issues covered in the podcast in the order they are discussed.

Podcast

Questions

  1. In what ways has Covid-19 been the great ‘unequaliser’?
  2. What scarring/hysteresis effects are there likely to be from the pandemic?
  3. To what extent is it true that ‘the more your job benefits other people, the less you get paid’?
  4. How has the pandemic affected inter-generational inequality?
  5. How have changes in house prices skewed wealth in the UK over the past decade?
  6. How have changes in the pension system contributed to inter-generational inequality?
  7. How has quantitative easing affected the distribution of wealth?
  8. Why is care work so poorly paid and how can the problem be addressed?
  9. How desirable is the pursuit of wealth?
  10. How would you set about defining ‘fairness’?
  11. Is a mix of taxation and benefits the best means of tackling economic unfairness?
  12. How would you set about deciding an optimum rate of inheritance tax?
  13. How do you account for the growth of in-work poverty?
  14. In what ways could wealth be taxed? What are the advantages and disadvantages of such taxes?

At 23:00 on 31 December 2020, the UK withdrew from the European single market. This ended the transition period which followed the UK’s departure from the EU on 31 January 2020. But, with the Trade and Cooperation Agreement (‘the deal’) signed on 30 December, it was agreed that there would be no tariffs or quotas on trade in goods between the UK and the EU.

So what are the new economic relations between the EU and the UK and how will they impact on the UK economy? What new restrictions are there on trade in goods and on the movement of labour and capital? How is trade in services, including financial services, affected? What new agreements, such as on fishing, will replace previous agreements?

What will happen to trade between Northern Ireland and the Republic of Ireland? What will happen to trade between Great Britain and Northern Ireland?

What will happen to regulations over standards of traded products and their production? Will the UK government be able to provide subsidies or other types of support for goods or services exported to the EU? How will disputes about standards and support to companies be resolved?

How will trade with non-EU countries change? If the EU has trade agreements with such countries, do these agreements now apply to trade between the UK and such countries? How free is the UK now to negotiate new trade agreements with non-EU countries? How will the UK’s negotiating strength be affected by its withdrawal from the EU?

Rather than listing the changes here, follow the links below to the articles and assess the nature of the changes and then attempt the questions. The articles represent a balance of views.

What is clear is that these are all big issues and are likely to have a significant impact on the UK economy. Most economists argue that the net effect will be negative on trade and economic growth, but there is huge uncertainty about the magnitude of the effects. Much will depend on how arrangements between the UK and the EU develop over the coming months and years.

Articles

UK and EU documents

Questions

  1. Summarise the main features of the Trade and Cooperation Agreement and how the UK’s new relationship with the EU differs from being a member.
  2. What are the potential economic benefits from being outside the EU?
  3. What are the economic drawbacks for the UK from having left the EU, albeit with the new Trade and Cooperation Agreement?
  4. On balance, do you think that the UK will gain or lose economically from having left the EU? Explain your answer.