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TITLE: UNITED KINGDOM ECONOMIC POLICY AND TRADE PRACTICES
DATE: FEBRUARY 1994
AUTHOR: U.S. DEPARTMENT OF STATE
THE UNITED KINGDOM
Key Economic Indicators
(Billions of pounds sterling (PS) unless otherwise noted)
1991 1992 1993 1/
Real GDP (1990 prices) 2/ 538.7 536.2 545.9
Real GDP Growth (pct.) -2.2 -0.5 1.8
GDP (at current prices) 2/ 518.5 539.6 549.4
Agriculture 9.2 9.3 9.0
Energy and Water 23.3 23.7 24.3
Manufacturing 113.8 116.1 120.3
Construction 32.9 31.8 30.3
Rents 33.5 37.1 38.1
Financial Services 79.6 84.6 87.0
Other Services 143.8 147.9 150.1
and Education 82.4 89.1 90.3
Net Exports of
Goods and Services -6.6 -9.3 -7.3
Real Per Capita GDP (90 PS) 9,352.4 9,276.8 9,412.0
Labor Force (millions) 28.3 28.1 27.8
Unemployment Rate (pct.) 8.1 9.5 10.4
Money and Prices
(Annual Percentage Growth)
M2 Money Supply (bil. PS) 502.1 519.3 540.0
Base Interest Rate 3/ 10.5 7.0 6.0
Personal Saving Rate (DI) 9.8 11.3 10.3
Retail Inflation (CPI in pct.) 5.8 3.7 1.8
Wholesale Inflation (pct.) 5.6 3.7 3.9
Exchange Rate (US$/PS) 1.77 1.78 1.48
Balance of Payments and Trade
(billion U.S. dollars)
Total Exports (FOB)4/ 185.6 192.7 175.4
Exports to U.S. 20.0 21.7 21.9
Total Imports (CIF)4/ 210.2 223.9 193.9
Imports from U.S. 24.2 24.3 24.7
Trade Balance 4/ -24.6 -31.2 -18.5
Balance with U.S. -4.2 -2.6 -2.8
Foreign Exchange Reserves 37.9 41.7 43.2
(1) Annualized 1993 figures are all estimates based on
available quarterly data through July, 1993.
(2) GDP at factor cost.
(3) Figures are actual, average annual interest rates, not
changes in them.
(4) Merchandise trade does not include services.
Source: U.K. Central Statistical Office
1. General Policy Framework
The United Kingdom has a free market economy and an open
financial services environment which encourage open
competition. Most formerly government-owned industries have
been privatized. Among the few remaining barriers to
international trade and investment are preferential treatment
for UK firms in telecommunications, electrical equipment, and
the oil and gas industries.
The economy has been slowly emerging from recession for
more than a year. The government refocused its economic policy
after leaving the EU Exchange Rate Mechanism (ERM). Although
low inflation remains a priority, growth is now the primary
goal. Inflation has fallen substantially in 1993 and is
expected to be 1.8 percent for the year. Interest rates have
been reduced four percentage points, resulting in a cheaper
pound and enhanced international competitiveness.
Real GDP fell by 2.2 percent in 1991 and a further 0.5
percent in 1992. Current forecasts predict positive GDP growth
in 1993 of 1.8 percent. Unemployment is currently estimated at
Fiscal Policy: From 1987 through 1990, tight control on
expenditures, proceeds from privatization, and increased tax
revenues generated by rising GDP produced central government
and public sector surpluses. In 1990, the public sector
surplus was five billion pounds. However, in 1991, the public
sector produced a ten billion pound deficit which grew to 28.9
billion in 1992. The deficit will continue to grow to between
42 and 45 billion pounds in calender 1993.
The Conservative government retains its goal of reducing
the basic personal income tax rate to 20 percent as soon as
possible. Current tax rates are 20, 25 and 40 percent. For
tax purposes, capital gains are adjusted for inflation. The
first five thousand pounds in capital gains are tax free, and
the remainder is generally taxed at regular income tax rates.
Gains from the sale of a primary home are exempt. For
companies, the full corporate tax rate of 33 percent applies to
those with profits in excess of 1.25 million pounds sterling.
Partial tax relief is available to firms with profits of less
than 250,000 pounds, bringing their effective tax rate to 25
percent. Profits between these limits are taxed on a formula
basis which results in a total corporate tax rate between 25
and 33 percent.
The highly unpopular Community Charge, or poll tax, was
replaced by the Council Tax on April 1, 1993. This is a hybrid
tax calculated on both property values and capitation, a
uniform per capita component of the tax.
Since leaving the ERM, the British government has tried to
reestablish confidence in the financial markets by projecting
an image of fiscal responsibility. A spending cap of 243.8
billion pounds is in place for the 1993/94 budget. However,
increased unemployment could push spending over this level.
Monetary Policy: The United Kingdom manages monetary
policy through open market operations by buying and selling in
the markets for overnight funds and commercial paper. There
are no explicit reserve requirements.
2. Exchange Rate Policy
Britain reduced interest rates from ten to six percent in
January, 1993, taking advantage of its withdrawal from the ERM
in September, 1992. Many analysts believe that sterling's
two-year membership in the ERM extended the country's recession.
High real interest rates required by ERM obligations and
the ensuing loss of economic output and demand were successful
at lowering Britain's rates of inflation during and after ERM
membership to thirty-year lows. Under its new independent
monetary policy, UK Treasury adopted a system of "monitoring"
narrow and broad money growth, asset prices, and the exchange
rate as an inflation gauge. Sterling's trade-weighted exchange
rate index initially fell from 92 in 1992 to 76 in early 1993
and has hovered at around 80 for most of 1993. Some currency
dealers believe that sterling will continue depreciating
against the dollar if dollar interest rates move upward while
sterling will continue appreciating against the Deutschemark as
German interest rates fall. This may leave the trade-weighted
index of sterling unchanged.
While the rate of inflation has begun increasing, most
analysts believe that it will remain low well into 1994. The
only indicator of inflationary pressure is narrow money growth,
which is expanding above its one to four percent "monitoring"
range. The assumption is that monetary policy will change only
when a set of factors indicate inflationary pressure. The
Prime Minister as well as both the previous and the current
Chancellors of the Exchequer have publicly disavowed any return
to the ERM in the foreseeable future. Most analysts believe
that to mean that sterling will not reenter the ERM until at
least 1996, near the end of the current Parliament's
anticipated term of office.
3. Structural Policies
In the past twelve years, Conservative governments pursued
growth and increased efficiency through structural reform. The
financial services and transportation industries were
deregulated. Mortgage regulations were relaxed, and much of
the public housing stock privatized. The automotive,
aeronautic, electrical power, and water industries were also
privatized. The coal, rail and bus transportation industries
are in the process of being privatized now. Subsidies were cut
substantially, and capital controls lifted. Employment
legislation increased market flexibility, democratized unions,
and increased union accountability for the industrial acts of
Although there has been great progress, some challenges
remain. Recent reports on the general education system raised
concerns regarding basic education and testing procedures. In
addition, social welfare programs and the business community
are still adjusting to job losses and changes in the business
climate resulting from privatization.
4. Debt Management Policies
The United Kingdom has no meaningful external public debt.
London is one of the foremost international financial centers
of the world, and British financial institutions are major
intermediaries of credit flows to the developing countries.
The British government is an active but cautious participant in
the development of a coordinated debt strategy. British banks
are prominent members of bank advisory committees on LDC debt.
They recognize a need in many countries for debt and debt
service relief, but generally object to mixing new money with
5. Significant Barriers to U.S. Exports
Although structural reforms have made it easier for U.S.
exporters to enter UK markets, some barriers still remain in
telecommunications, the energy industry, and potentially in
utilities procurement. Problem areas and specific regulations
resulting in trade barriers in these areas are profiled below.
Broadcasting and Telecommunications: The 1990 Broadcasting
Act, which implements the 1989 European Union Broadcast
Directive, requires that "a suitable proportion" of television
programs broadcast in the UK be produced locally and that a
"proper proportion" be of European origin. Prior to the Act,
the UK operated under an informal policy of an 86 percent
UK-EU/14 percent foreign program content quota. The practical
effect of the Act relaxed these limits, given that the EU
directive calls for a majority (50 percent) of EU content
The British government opened the UK domestic telephony
market for competition in 1991 when it ended the British
Telecom/Mercury duopoly policy. However, some market barriers
remain, including the high cost and difficulty of negotiating
interconnection agreements with British Telecom, number
portability (ability to keep phone number when changing service
provider), and other equal access issues. The UK
telecommunications regulatory agency, OFTEL, is in the process
of reviewing these issues and expects to announce new policies
on interconnection and number portability early in 1994. OFTEL
states that equal access issues will take somewhat longer to
resolve. The UK government has yet to make the equivalency
determination required before declaring the U.S. market open
for international simple resale (leasing international circuits
in bulk and reselling the capacity to consumers). It states
that it is unlikely to permit new entrants to operate
international long distance services using their own facilities
in the near term.
Offshore Oilfield Contracts: In 1985, the Offshore
Supplies Office (OSO) of the UK Department of Trade and
Industry officially encouraged oil companies to award contracts
involving new offshore technology to firms with majority
British ownership. The OSO has stated this policy is no longer
in force, although contractors are encouraged to give a "fair
chance" to UK-based firms, including UK subsidiaries of U.S.
In response to repeated U.S. government high-level
questions based on U.S. oil industry anecdotal allegations,
senior British officials now claim to promote "a level playing
field". British officials have consistently offered to
investigate any specific complaints from the U.S. government or
Utilities Procurement: The UK implemented the EU Utilities
Directive in 1992 by instituting a series of regulations based
on the Directive. The regulations allow government-owned and
private utilities to favor EU over foreign suppliers.
6. Export Subsidies Policies
The Conservative government opposes subsidies as a general
principle, and UK trade-financing mechanisms do not
significantly distort trade. The Export Credits Guarantee
Department (ECGD), an institution similar to the Export-Import
Bank of the United States, was partially privatized in 1991.
Although much of ECGD's business is conducted at market
rates of interest, it does provide some concessional lending in
cooperation with the Overseas Development Administration (ODA,
the British equivalent of our own Agency for International
Development) for projects in developing countries.
Occasionally the United States objects to financing offered for
The UK's development assistance (aid) program also has
certain "tied aid" characteristics. To minimize the distortive
effects of such programs, particularly when used in conjunction
with ECGD-type credits through the Aid and Trade Provision
(ATP), the United States negotiated the 1987 "Arrangements on
Officially Supported Export Credits" with the UK and other
developed countries. It appears that Britain has adhered to
7. Protection of U. S. Intellectual Property
UK intellectual property laws are strict, comprehensive and
rigorously enforced. The UK is a signatory to all relevant
international conventions, including the Convention
Establishing the World Intellectual Property Organization
(WIPO), the Paris Convention for the Protection of Industrial
Property, the Bern Convention for the Protection of Literary
and Artistic Works, the Patent Cooperation Treaty, the Geneva
Phonograms Convention and the Universal Copyright Convention.
New copyright legislation simplified the British process
and permitted the UK to join the most recent text of the Berne
Convention. The United Kingdom's positions in international
fora are very similar to the U.S. positions.
8. Worker Rights
a. Right of Association
Unionization of the work force in Britain is prohibited
only in the armed forces, public sector security services, and
b. Right to Organize and Bargain Collectively
Over 10 million workers, about 38 percent of the work
force, are organized. Employers are not legally required to
bargain with union representatives. However, they are legally
barred from discriminating based on union membership (except in
the armed forces, police force, or security services where
union membership is prohibited). The 1993 Trade Union Reform
and Employment Rights Act limited that prohibition under
certain special circumstances in matters short of dismissal.
The 1990 Employment Act made unions responsible for
members' industrial actions, including unofficial strikes,
unless union officials repudiate the action in writing.
Unofficial strikers can be legally dismissed, and voluntary
work stoppage is considered a breach of contract.
During the 1980s, Parliament eliminated immunity from
prosecution in secondary strikes and in actions with suspected
political motivations. Actions against subsidiaries of
companies engaged in bargaining disputes are banned if the
subsidiary is not the employer of record. Unions encouraging
such actions are subject to fines and seizure of their assets.
Many unions claim that workers are not protected from employer
secondary action such as work transfers within the corporate
c. Prohibition of Forced or Compulsory Labor
Forced or compulsory labor is unknown in the UK.
d. Minimum Age for Employment of Children
Children under the age of 16 may work in an industrial
enterprise only as part of an educational course. Local
education authorities can limit employment of children under 16
years old if working will interfere with a child's education.
e. Acceptable Conditions of Work
With the exception of wages in agriculture, the setting of
minimum wages in the UK was abolished by the Trade Union Reform
and Employment Rights Act of 1993. Daily and weekly working
hours are not limited by law.
Hazardous working conditions are banned by the Health and
Safety at Work Act of 1974. A health and safety commission
submits regulatory proposals, appoints investigative
committees, does research and trains workers. The Health and
Safety Executive (HSE) enforces health and safety regulations
and may initiate criminal proceedings. This system is
efficient and fully involves workers' representatives.
f. Rights in Sectors with U.S. Investment
All U.S. corporations operating within the UK are obliged
to obey legislation relating to worker rights.
Extent of U.S. Investment in Selected Industries
U.S. Direct Investment Position Abroad
on an Historical Cost Basis - 1992
(Millions of U.S. dollars)
Total Manufacturing 20,328
Food & Kindred Products 2,273
Chemicals and Allied Products 3,517
Metals, Primary & Fabricated 1,285
Machinery, except Electrical 3,443
Electric & Electronic Equipment 2,003
Transportation Equipment 1,833
Other Manufacturing 5,974
Wholesale Trade 3,922
Finance and Insurance 32,013
Other Industries 2,055
TOTAL ALL INDUSTRIES 77,842
Source: U.S. Department of Commerce, Bureau of Economic
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