As we have seen in Figure 3.1, there are different degrees of correlation between the growth rate of tradeable goods productivity and the growth rate of the goods import share, and the growth rate of tradeable services productivity and the growth rate of the tradeable services import share, once the one-year time lag is accounted for, with the latter stronger than the former. Therefore, for the analysis conducted here, we outline separately the evolution of UK imports of goods and services from trading partners with dissimilar barriers to trade, and the drivers of changes in the relative price of imports from 2000 to 2015.
Sources of Changes in the UK Import Share for the Goods Sector
In this section we present the evolution of the UK import share from the European Union for goods from 2000 to 2015, and the potential drivers of the changes in the price of imports from China relative to that of imports from the European Union, which led to the increase in UK goods imports from China relative to goods imports from the European Union for this period. China’s accession to the WTO in 2001 and the ensuing period of high relative productivity growth in China compared to the European Union could be the main driving forces leading to a change in the UK import share for goods.
The UK import share from the European Union for goods dropped from 2002 to 2011, as a result of a significant increase in UK imports of goods from China, following China’s accession to the WTO in 20015. Data from the ONS Pink
Book shows that between 2002 and 2011, the proportion of UK imports of goods from China increased by 176%, from 2.9% to 7.9%, while the proportion of UK imports of goods from the European Union declined by 12.9%, from 58.5% to 50.9%. Thus, overall, the ratio of UK goods imports from China to UK goods imports from the European Union increased by 216.8% over this time period, from 4.9% to 15.6%.
Next we present the potential drivers of the change in the relative price of imports from China and the European Union, in order to identify which of them led to the increase in UK goods imports from China relative to goods imports from the European Union: tariff and non-tariff barriers to trade to UK imports from China and the European Union, the relative productivity between China and the European Union, and the relative exchange rate (values of the renminbi and the euro).
Both the tariff and non-tariff barriers to UK imports from China decreased significantly following China’s accession to the WTO in 20016. Thus, the tariff
rates and quotas on UK imports from China dropped considerably leading to a decrease in the relative price of Chinese goods. Next, an examination of World Input-Output Database (WIOD) productivity data7 from 2002 to 2011 shows that the ratio of China’s productivity in tradeable goods to EU tradeable goods productivity increased by 170.3%, from 5.7% to 14.4%. Upward et al. (2013) argue that the official productivity figures in Chinese tradeable goods industries may not accurately reflect the productivity of exporters, and the actual productivity of Chinese firms engaged in exporting is, in fact, much greater due to higher levels of protection from foreign competition. The increase in the relative productivity of Chinese firms would cause Chinese goods to become relatively cheaper.
The ratio of the renminbi-sterling exchange rate to the euro-sterling exchange rate increased by 14.6% over the period 2002-20118. A decrease in the relative value of the Chinese yuan compared with the euro caused Chinese goods to become relatively cheaper compared with goods from the European Union. Changes in relative productivity levels, exchange rates and barriers to imports all contributed to a decrease in the relative price of Chinese goods compared to EU goods. As
6See Edmonds et al. (2008) and https://www.wto.org/english/thewto e/acc e/acc e.htm 7See Timmer et al. (2015) for full details of the World Input-Output Database.
3.2. The Link Between the Import Share and Labour Productivity for
the United Kingdom 53
presented in earlier, if a change in the import share is driven by a change in relative prices, then the effect of the change in the import share on competition and thus productivity is unidentifiable, as such a change in relative prices will also directly affect competition and thus productivity in the importing country. Therefore, given the shift in the import share for goods was driven by changes in the relative price, we would not expect to identify a causal link between productivity growth and the import share growth for tradeable goods. Thus, in our econometric analysis we do not test for causality from the import share to productivity for tradeable goods.
Sources of Changes in the UK Import Share for the Services Sector In this section we present the evolution of the UK import share from the European Union for services from, 2000 to 2015, and the potential drivers of the relative price of imports from the United States and the European Union which led to the increase in UK services imports from the United States relative to services imports from the European Union for this period.
The UK import share from the European Union for services declined from 2004 to 2009. This decline was driven by a large increase in UK imports of services from the United States of America. Data from the ONS Pink Book shows that the proportion of UK imports of services that originated in the United States increased by 9.1% during this period, from 16.2% to 17.6%, while over the same period, the proportion of UK imports of services that originated in the European Union declined by 12.6%, from 55.7% to 48.7%. Thus, overall, between 2004 and 2009, the ratio of UK services imports originating from the United States to UK services imports originating from the European Union increased by 24.8%, from 29.1% to 36.4%.
We next outline the potential drivers of the changes in the relative price of imports from the United States and the European Union, in order to identify which of them led to the increase in UK services imports from the United States relative to services imports from the European Union: tariff and non-tariff barriers to
trade to UK imports from the United States and the European Union, the relative productivity between the United States and the European Union, and the relative exchange rate (values of the US dollar and the euro).
Unlike for UK goods imports from China, there were no significant changes in either tariff or non-tariff barriers for UK services imports from the US over 2004-2009. However, after the Nice treaty in 2001 and the Lisbon treaty in 20079
the non-tariff barriers to trade for imports of services from the European Union decreased. Thus, US services would have become relatively more expensive over this period. As WIOD data shows, from 2004-2009, the ratio of US productivity in tradeable services to EU tradeable services increased by 7.5%, from 73.1% to 78.6%. In a similar manner to the imports of goods, the increase in the relative productivity of the United States would cause US services to become relatively cheaper. The ratio of the dollar-sterling exchange rate to the euro-sterling exchange rate increased by 12.1% over the period 2004-200910. A decrease in the relative
value of the US dollar compared with the euro, would cause US services to become relatively cheaper compared with services from the European Union.
Following a cheapening of the US dollar relative to the euro, US services became cheaper. Alongside this, we have seen an increase in US services productivity. However, given the decrease in non-tariff barriers to imports of services from the European Union and the resultant increase in the relative price of US services, we cannot entirely explain the change in the import share for services. It can therefore be argued that the change in the import share for services was driven, at least in part, by changes in tastes. We would therefore expect to identify a causal link from the import share for services to productivity in tradeable services in our empirical analysis.
9See https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A12001C%2FTXT for
details on the Treaty of Nice and http://www.lisbon-treaty.org/ for details on the Lisbon Treaty.
3.2. The Link Between the Import Share and Labour Productivity for
the United Kingdom 55
Next, we present a breakdown the change in the origin of UK services imports at an industry level, in order to identify the particular industries that drove the changes in the origin of UK services imports. Using data from the World Input Output Database11we can calculate the percentage change in the ratio of UK imports from the USA to UK imports from the EU for each services industry. We then weight each of theses percentages by the proportion of UK imports from each industry in total UK services imports, to derive a measure of the industries that primarily drove the change in UK services import origin. Table 3.1 shows the import weighted change in the USA to EU import ratio, indexed such that the import weighted change in the USA to EU import ratio in Media activities is equal to 1.
As Table 3.1 shows, the main drivers of the changes in the origin of UK services imports are Other Service Activities, Architectural and Engineering Services, Scientific Research and Development, Telecommunications and in particular Media Activities, which accounted for almost the same proportion of the change in import origin as the other four combined. Media activities as an industry are particularly susceptible to changes in consumer tastes, as it is well known that such activities are price invariant across different origin countries. Increasing UK consumer demand for US television and cinema media is likely to have played a significant role in driving the change in the origin of services imports, and is only indirectly linked to changes in competition on the UK market through the change in the import origin. The other four primary drives of the change in the origin of UK services are all industries that are likely to be greater impacted by changes in tastes, much more so than other services industries such as financial or insurance activities. Given that the change in the UK services import share was driven by changes in tastes, which only indirectly affects UK productivity we can consider the change in import share to be exogenous to the change in productivity. Therefore, if we find evidence of Granger causality in the empirical regressions we can conclude that we have identified a causal relationship.
Table 3.1: Industry Level Drivers of the Change in the Origin of UK
Services Imports
WIOD Code Industry Name Import Weighted Change in US/EU Import Ratio
J59t60 Media Activities 1
J61 Telecommunications 0.311
M72 Scientific Research and Development 0.272 M71 Architectural and Engineering Services 0.265
RtS Other Service Activities 0.243
M69t70 Legal and Accounting Activities 0.055
M73 Advertising Services 0.098
O84 Public Administration and Defence 0.049
H51 Air Transport 0.045
H52 Warehousing and Transportation Support 0.028 M74t75 Other Professional Activities 0.027
K65 Insurance Services 0.018
H53 Postal and Courier Activities 0.008
T Household Activities -0.004
K64 Financial Services -0.002
K66 Auxiliary Financial and Insurance Services -0.002 G45 Wholesale Trade of Motor Vehicles -0.009
Q Health and Social Work -0.009
P85 Education -0.022
H49 Land Transport -0.029
F Construction -0.032
G47 Retail Trade (except motor vehicles) -0.037
L68 Real Estate Activities -0.050
H50 Water Transport -0.066
I Accomodation and Food Service -0.081
J62t63 IT Services -0.092
J58 Publishing Activities -0.198
N Administrative Services -0.263
G47 Wholesale Trade (except motor vehicles) -0.296
In this chapter we investigate whether changes in the UK import share from the European Union caused changes in UK labour productivity for tradeable services. Therefore, in the next section we test for Granger causality from the import share for services to productivity in tradeable services. If we find Granger causality, given the exogeneity of the shift in the import share, we will argue that there is a causal relationship from the UK import share to UK labour productivity in the tradeable services sector.