Evaluate the significance for the UK balance of payments on the current account of increased use of protectionist policies around the world. (25 Marks)
Protectionist policies are used to prevent the number of imports, and encourage people to purchase domestic goods/services, these include tariffs and quotas. These policies are used to help reduce the deficit a country may have-the UK has a trading deficit, mostly due to the fact it imports more than it exports. They protect domestic industries in several ways; a tariff is a tax places on imported goods and a quota limits the number of imports brought into the country. Protectionist policies also include non-tariff barriers such as rules and regulations with regard to health and safety. The balance of payments on current account is made up of four components; 1) trade in goods 2) trade in services 3) investment income 4) balance transfers.
Currently the UK has a deficit in the trade of goods (imports-exports). This could be made further if there was an increase in protectionist policies around the world. Exports from the UK is already minimal, if protection policies such as tariffs were put in place it could reduce the number of them even further. This is because the price of UK exports would increase. This means people abroad would no longer buy UK goods and would put domestic businesses that rely on exports at risk.
However, it is likely the UK would retaliate by placing tariffs on imports coming into the UK. Therefore if the UK was to became more efficient in producing goods, sales would increase heavily domestically. The tariff will also depend on the type of good, if it is inelastic it is unlikely to have any effect e.g. oil. Therefore tariffs may have little effect on the UK's balance of trade.
By placing quotas on exports, the UK would have limit the amount of goods/services exported. Due to the restricted number, it is likely the price for the exported good would increase, which could possibly lead to decreased demand. The UK have a surplus in their trade in services. By limiting the amount, this surplus could deteriorate as less banks for example could set up abroad. This would heavily effect the UK's balance of payments.
However, as previously said the number of UK exports is already low, therefore quotas may not have a significant impact on the trade of goods. This is because the UK has a deficit as is, and this is NOT due to protectionist policies. This suggests that if protectionist policies were put in place, the UK balance of payments would be mildly effected as they are a predominantly importing country.
Non-tariff barriers such as administration costs will also effect the UK balance of payments. This will make it difficult for the UK to export goods due to regulations such as health and safety. This could increase there trade deficit as they will be restricted on the amount of exports. The UK will most likely enforce similar laws to imports, this will make trade all together more difficult. If the UK is limited to the number of exports, domestic industries will suffer as they can no longer sell their goods abroad and the only market they access to are the domestic markets. Therefore the trade deficit will worsen.
However non-tariff barriers wont be significant in limiting the number of exports. It is unlikely administration will reduce the amount of exports to have a significant impact on the balance of trade. The Uk is also part of the EU which is their main trading bloc, this means that if other countries use protection policies the UK wont be heavily effected as they will maintain their relationship with the EU.
Overall, if protectionist policies around the world were to increase it could worsen the UK deficit. This is due to a fall in the level of exports and the inability to set up businesses abroad. However it would depend on how strong the protectionism policies were and if the EU were involved. The fact that the UK doesn't export large amounts suggests that it might a very limited effect on the UK balance of payments of current account.
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