Businesses and consumers in the UK are buying and selling goods and services in ever more diverse and distant markets as globalisation increases. Trade is vital for a country’s prosperity, economic growth and the creation of jobs. This applies equally to poorer developing countries as to wealthy industrialised countries such as the UK.
In the UK and the rest of the European Union (EU) exports now account for more than a quarter of Gross Domestic Product (GDP). Many developing countries are also working to increase and diversify their trade with the rest of the world.
Firms’ competitiveness depends on their ability to source materials, components and services on a global basis. Consumers’ living standards depend on their ability to buy goods and services from the widest possible range of suppliers. If conditions are created so that businesses can compete fairly worldwide, the global economy will flourish. This means they should not face prohibitive tariffs, discriminatory regulations or unnecessarily complicated procedures. It is also important to ensure that expanding trade does not create harmful effects, whether social or environmental.
The FCO, working with other British Government departments, has an important part to play in ensuring that the benefits of globalisation are shared by all. The FCO has a wide network of Embassies, High Commissions and other representative offices. Its staff plays a significant role in ensuring that trade policies adopted by the international community protect the interests of British businesses and the nation’s economy.
Through its Embassies and other missions abroad, the FCO is involved in negotiations – often long and complex – on important agreements which have wide-reaching effects. These effects are felt by British consumers and businesses, as well as people around the world, especially in developing countries. The FCO often works with or on behalf of other Whitehall departments.
This case study focuses on the Foreign & Commonwealth Office's (FCO) involvement in world trade policy.
Between the First and Second World Wars (1918-39) there was a slide towards protectionism. In particular, after the 1929 Wall Street Crash, America’s protectionist policies had global repercussions because of the size and importance of the country and its economy. The resulting world recession led to massive unemployment, with Germany hit worst of all. The effects of the recession were also felt for years in the UK. By 1936 ship-building on the Tyne was still hit by the drop in demand for ships. The famous 1936 Jarrow March was sparked by desperation at the level of unemployment in that region.
Even after World War II, many protectionist trade measures remained. In 1948, 23 of the world’s largest trading countries decided that global trade needed to be liberalised. This would boost prosperity around the world – which in turn would improve global stability. The UK was one of the leaders in the talks which led to the signing of the General Agreement on Tariffs and Trade (GATT).
The GATT was a set of multilaterally agreed rules on world trade. The original members were soon joined by many others, all of whom committed themselves to:
- lowering tariffs and other barriers to trade in goods
- offering concessions granted to one country to all other GATT members
- not differentiating between imported and domestically produced goods when applying taxes and regulations.
The result was a step-by-step liberalisation of world trade. GATT’s work in reducing trade barriers took place mainly through a series of ‘Rounds’ of trade negotiations, many of them stretching over several years. The last of these, the Uruguay Round, took place from 1986 to 1994. At the final meeting of the Uruguay Round the Trade Ministers of the member countries agreed to replace the GATT with the World Trade Organisation (WTO).
The WTO came with a large ‘built-in’ agenda agreed during the Uruguay Round. It covers a much wider range of topics than the GATT. As well as trade in goods, it also deals with services (such as financial services and telecommunications), agriculture, investment and much more. Unlike GATT, which could only advise on trade disputes between member countries, the WTO has the power to enforce rules and agreements through a dispute Settlement Body.
The UK's work in the WTO is conducted primarily through the European Community (one of the three ‘pillars’ of the EU). The Community has ‘exclusive competence’ in trade in goods. The EU is the world’s largest trading body and exporter of services (accounting for around 20 per cent of the world’s trade in goods). This means it has far greater influence in negotiations than the UK acting alone.
The UK is a very active member of the WTO. Ministers and officials from the FCO and other Whitehall departments, especially the Department for Trade and Industry, play an important part in its various meetings and negotiations. Among other things, it is working to:
- reduce the burden placed on businesses by unnecessary industrial standards and technical regulations
- simplify import and export procedures
- liberalise rules for international investment.
At the same time, the Government aims to ensure that the interests of developing countries – especially the least developed – are taken fully into account in WTO negotiations. The WTO is also concerned with possible negative effects of trade on the environment. In 1999 it produced a long report, Trade and Environment.
An important technical agreement on ‘safe harbours’ for data protection purposes between the EU and the United States was achieved in July 2000. This will help to boost transatlantic trade. It will ensure that data on individuals which is transferred electronically to the US – for instance by airlines and tour operators – will be better protected. At the same time it will make transfers simpler for businesses on both sides of the Atlantic. British and other EU businesses can therefore continue trading electronically, and take advantage of future opportunities for expanding Internet trading (e-commerce) with the US.
How ‘safe harbours’ evolved
Under the EC Data Protection Directive, personal data flows to other countries can be blocked if they do not provide ‘adequate’ data protection.
The US does not have such comprehensive data protection or privacy laws as Europe. It was feared that these laws might not be considered ‘adequate’ by the EU. As a result data transfers to the US could be barred, unless special arrangements could be made.
A ‘safe harbour’ consists of an agreed set of enforceable data protection rules. US companies wishing to receive personal data from the EU can voluntarily sign up. These companies would then meet the ‘adequacy’ requirement, and personal data could be transferred freely.
Without the ‘safe harbours’ agreement, British companies could have been prevented from trading electronically with the US. This would have meant losing a huge amount of current and future business.
Negotiations leading up to the agreement lasted two years. In negotiations of this type, the FCO is involved not only through the UK representative office to the EU, but often also bilaterally with a number of other governments. For instance:
- FCO staff working in Embassies in other individual EU member states might discuss the matter with the governments of those countries in order to agree a negotiating position.
- Staff at the British Embassy in Washington would also take part in talks with the US Government.
Back in the UK, the Home Office is the Government department responsible for data protection issues. During the negotiations it:
- would consult with technical experts and companies with experience of this type of trade. These are companies which already transmit personal data electronically to overseas recipients, or which plan to do so in the future
- would then liaise with FCO representatives involved in the negotiations.
Many consumers and companies, as well as governments, are concerned about ethical issues in trading with some overseas countries. These issues may involve:
- poor labour standards, such as where goods imported by British companies are produced in ‘sweatshops’. These often use children working in very poor conditions for very low wages (for example, in the clothing industry)
- environmental consequences of trading, such as where tropical hardwood forests are suffering from excessive logging
- goods produced by a country which has been condemned internationally for its behaviour. Countries such as Burma, because of its undemocratic and repressive military regime, fall into this category.
There have been calls for the boycott of goods produced by child labour, in order to dissuade employers in the countries concerned from exploiting children. However, as Clare Short, the Secretary of State for International Development, has said:
‘…Trade measures only impact on the export sector, which is small in the countries employing most child workers…and the boycott does nothing to address the reasons why children work…We need trade policies which help the poorest countries achieve economic growth...’
There was a case in Bangladesh where, in response to a boycott by Western companies, employers in the clothing industry sacked all their child workers. These children then went into other employment outside the export sector –such as on building sites – where conditions were far worse.
However, British companies, which are large and important customers of overseas suppliers, may well have some influence. If a foreign supplier, anxious to win a lucrative contract, knows that the British customer would favour a firm that provided good working conditions and wages, he may consider it worthwhile to make improvements.
The FCO and its missions overseas are also involved, with the Department for International Development, in a number of projects. These endeavour to curb child labour and provide affordable educational opportunities, with the aim of breaking the cycle of poverty. Once poverty is tackled, child labour is likely to die out.
Despite supporting the principle of free trade, there are some occasions when the British Government aims to stop British companies trading overseas. In some countries, senior members of a repressive regime make huge personal profits from owning or running commercial operations involving, for instance, diamond-mining, logging or oil-drilling. In such cases, the FCO would try to dissuade British companies from doing business with those countries.
In the case of countries like Iraq or the Federal Republic of Yugoslavia (FRY), sanctions are sometimes imposed by international agreement in the United Nations or other groupings. The sanctions on Iraq are because of its development of ‘weapons of mass destruction’ (e.g. nuclear and chemical weapons) and other issues resulting from its invasion of Kuwait in 1990, and those on the FRY are because of its violent repression of Kosovo in 1999.
As one of the five permanent members of the UN Security Council, Britain has a key role in such issues. (The UK Mission to the UN is staffed mainly by FCO personnel.) The aim of legally binding UN sanctions is to persuade the target country to alter its behaviour, bringing it into line with international standards.
Businesses that trade overseas need to be aware of major political issues around the world. As well as promoting their own prosperity and contributing to the economy of the UK they can – to a smaller or larger extent – spread the benefits of free trade widely throughout the world.