Select Committee on Treasury Written Evidence


Memorandum submitted by the TUC

THE NATURE OF GLOBALISATION AND ITS OVERALL IMPACT ON THE UK ECONOMY

The meaning of globalisation

  1.  The most widely accepted economic definition of globalisation is increased flows in trade in goods and services and capital across national boundaries. There is also a case for adding flows of labour, as falling transport costs and persistent economic imbalances encourage large-scale migration. Globalisation and the UK, a major Treasury report published at the end of 2005, speaks of "fundamental changes in trading patterns and in the use of technology, and bringing radical changes to economies across the world".[103]

Is this a new phenomenon?

  2.  Flows of trade in goods and services across national boundaries have been taking place for hundreds of years, but trade has grown substantially in recent years. The International Monetary Fund calculates that world trade grew by an average of 7% per annum between 1988 and 1997, and is heading for an average of 6.4% for 1998-2007.[104]

  3.  The drivers are trade liberalisation, rapidly falling transport and communications costs, higher productivity in tradable sectors and an acceleration in specialisation between high labour cost and low labour cost economies. A major underlying driver has been the internationalisation of production processes. Multinationals are increasingly locating different stages of the production process in different parts of the world. Indeed, some estimates suggest up to 50% of world trade in manufactured goods now consists of movements within companies.

  4.  Much of the international trade that appears in commonly quoted statistics has not travelled very far. If we treat the EU as a single trading block, the average of imports and exports from outside that block, expressed as a share of GDP in 2003 was under 10%, and we get similar proportions for the USA and Japan:

TRADE AS A PERCENTAGE OF GDP, 2003[105]


EU25
9.3%
Japan
10.0%
USA
9.3%


India and China

  5.  China and India are playing a fundamental role in the globalisation of the 21st century. Both countries are investing heavily in skills. China now educates around two million graduates each year (compared to 250,000 in the UK) and more than 200,000 Chinese postgraduate students are expected to graduate in 2005.[106] India now produces 260,000 engineers a year. The Chancellor, Gordon Brown, told the TUC's 2005 Congress that China now produces 30% of the world's TVs, 50% of the world's cameras and 70% of the world's photocopiers—and consumes 10% of the world's oil. Furthermore, rapidly developing emerging economies such as China and India are increasingly investing in technology and Research and Development. For example, the Chinese Government aims to develop China into a major player in biotechnology.

The impact on UK and global macroeconomic stability

  6.  Globalisation does not seem to be harming macroeconomic stability in the UK. The Treasury likes to quote the OECD's description of the UK economy in its 2005 report, in which it described UK macroeconomic performance over the last decade as "a paragon of stability."[107] However, whether the wider economy is enjoying the full benefits of globalisation requires a fuller discussion. For example, other major European economies have been far more successful in exploiting Chinese export markets than the UK. Germany, in particular, has nearly doubled exports to China by value since 2000. This is the key reason why the trade balance with China has worsened for the UK, but improved for Germany, France and Italy between 2000 and 2003.

  7.  The most obvious UK challenge posed by globalisation is developing a response to the loss of relatively low-cost, low-skill, low-value jobs, some of which may go to Eastern Europe and others to parts of Asia. The main opportunity is a refocused UK economy, built on areas of industrial strength. The Treasury argues for a response that "allows policymakers to look back at past industrial development trends and, as emerging economies grow and technologies change, to develop an informed view about where the UK's future comparative advantage may lie."[108]

BUSINESSES

Business investment

  8.  Earlier this year, the TUC published An Industrial Strategy for the United Kingdom. This called for recognition of strategic sectors in the UK, which include aerospace, defence, motorcars and motor components, and pharmaceuticals. Looking to the future, our strength in pharmaceuticals should enable a positive development into environmental technology. The TUC strategy called for a focus on companies and sectors which provide high value to the UK economy, provide capabilities that, if lost, would be difficult to recreate in the future, and make a major impact locally, providing a high number of quality UK jobs which benefit a local or regional economy. However, it is also important to remember that globalisation can increase income and social disparities within countries. As part of the UK's response, the TUC document calls for community development funds, administered regionally, to be available to ensure that all employees are assisted through the process of economic restructuring.

  9.  The TUC's industrial strategy sets out an approach for Government in taking forward a UK response to globalisation. However, in many areas, whilst the Government must put the framework in place, it is the duty of business to respond. If we are to meet the challenge of globalisation, our companies must be competitive in relation to other high-skill, high-value economies, yet a considerable productivity gap remains between the UK and other G7 countries, especially the United States. If that gap is to be tackled, investment in skills, innovation, and Research and Development, is fundamental.

Innovation

  10.  The Government has put in place a system of R&D tax credits, which are designed to encourage business to undertaken innovation. Furthermore, whilst the UK science base is performing strongly, the challenge is to turn this into rising levels of business R&D and innovation. The Treasury accepts that we currently lag behind the US, France and Germany in this regard. On skills, as the Treasury also acknowledges, the UK is constrained by a large stock of low-skilled adults and a relatively poor international position on intermediate skills.

  11.  The UK has a number of world-class companies and the TUC applauds their contribution to skills, innovation and R&D. However, too many companies make insufficient investment and too many more undertake no skills or other investment at all. The Government has placed its faith in tax incentives to promote best practice, but has shied away from compulsion, yet the time has come to question whether this approach is working. For this reason, the TUC has called for an inquiry into the failure of voluntarism in the UK, to investigate this problem and to recommend solutions.

The revised Lisbon Agenda for Europe

  12.  In 2004 the European Council decided to commission a progress report on the Lisbon strategy from a "high level group", chaired by Wim Kok. The group's report, published in November of that year, left no doubt that globalisation (together with demographic change and EU expansion) was a significant challenge: "Europe has no option but radically to improve its knowledge economy and underlying economic performance if it is to respond to the challenges of Asia and the US."[109]

  13.  The TUC agreed with most of the analysis and recommendations, and in particular with the take on flexibility and de-regulation:

    "The call for more reform is too frequently seen as no more than code for more flexibility which in turn is seen as code for weakening worker rights and protections: this is wrong. The HLG understands that flexibility is about agility, adaptability and employability for which the key is the ability of workers constantly to acquire and renew skills, and for a combination of active labour market policies, training and social support to make moving from jobs to job as easy as possible"[110]

  14.  Unfortunately, the "spin battle" that took place after the publication of the report led to its being presented as a call for deregulation. When, in March 2005 the Lisbon strategy was re-launched, the objective of growth and employment was singled out; the social and environmental objectives, which had previously had equal emphasis, were downgraded. In common with trade unionists across Europe and nearly all European social and environmental NGOs, the TUC is concerned that the re-launch has unbalanced the Lisbon strategy.

Outsourcing

  15.  "Outsourcing" refers to a shift in control of production through the contracting out of existing or new activities to non-affiliate firms. This is distinct from "offshoring", which occurs when a firm moves new or existing economic activities abroad. Both occur in the context of globalisation. Of course, in a free market, they cannot be "opposed", since this would result in protectionism.

  16.  In fact, the impact of these phenomena has been exaggerated. Decisions to outsource depend on levels of wages, training costs, transport, available infrastructure and regulatory barriers, along with whether employees with the required skills are available, in those countries to which an employer might consider outsourcing. It is often assumed that employers will wish to outsource some production from higher wage EU15 countries to lower wage EU10 ones. In fact, Eurostat figures show that foreign direct investment from the EU15 to the EU10 amounted to 6.7 billion euros in 2003, but between the EU15 it was 183.7 billion euros.[111]

  17.  That is not to say, of course, that outsourcing is not difficult for those experiencing it. Furthermore, some employers use the threat of outsourcing to keep down wages and conditions of employees. In order to protect economic and social cohesion in communities where jobs might be under threat, we recommend a positive recognition of the role of trade unions as social partners. Specifically, the role of Information and Consultation, so that the costs and benefits of outsourcing can be properly explored, is vital.

Business taxation

  18.  It is sometimes claimed that globalisation forces OECD economies to moderate public spending as a share of GDP in order to provide a more conducive low tax business environment for footloose multi-national business. The OECD rejects this view:

  19.  "International economic integration is compatible with a large public sector, since public spending exceeds 50% of GDP in a number of OECD economies that are very open to international trade. There even appears to be some tendency for government spending to be higher in the OECD countries where trade is largest relative to GDP."[112]

  20.  A Congressional study of America's tax competitiveness showed that, of the large advanced economies quoted in the study, only Germany and some Canadian provinces had a lower rate of corporation tax:[113]

RATES OF CORPORATION TAX IN LARGE ADVANCED ECONOMIES, 2003, MAIN RATES


Country
Rate

USA
35% (plus state rates, varying from 0% to 12%)
Spain
35%
France
34.33%
Italy
34%
Australia
30%
Japan
30%
UK
30%
Germany
27.9575%
Canada
24.6-38.6% (includes provincial rates)

HOUSEHOLDS

Employment

  21.  The UK is a major nation when considering globalisation in terms of international investment, but much less so when it comes to trade. The latest edition of UNCTAD's World Investment Report[114] reports that developing countries did receive 36% of world FDI inflows, but the number one recipient was the USA, followed by the UK; China, to some people's surprise, came third. The UK is also a major supplier of FDI—almost half of all FDI came from the USA, UK and Luxembourg, in that order.

  22.  It is quite a different picture when we come to trade. In recent years UK trade in services has grown very strongly, but trade in goods has actually declined in importance to the UK economy (this is unusual):

UK TRADE AS A PERCENTAGE OF GDP, 1990-2004[115]


Merchandise trade
Trade in services
(% GDP)
(% GDP)

1990
2004
1990
2004
41.2
38.1
10.6
15.4


  23.  What these figures mean is that it is unlikely that globalisation of trade in goods is to blame for more than a small proportion of the jobs being lost in UK manufacturing (currently shrinking at a rate of more than 100,000 jobs a year)[116] or the increasing inequality of original incomes. Numerous studies reinforce this lesson; the 2005 edition of the OECD's Employment Outlook has concluded that the balance of the research evidence suggests that "trade made a relatively modest contribution to the declining labour market position of low-skilled workers and have pointed to skill-biased technological change as being a more important factor. Nonetheless, it is very difficult to disentangle the causal impacts of these (and other) factors."[117] Employment Outlook studies manufacturing in 15 industrialised countries during the years 1970-2000, and finds that employment declined 27% in high-international-competition-industries, compared with 16% in manufacturing overall. This is significant, but the authors add that high-international-competition-industries only accounted for 4% of employment in these countries, and "aggregate employment performance does not appear to have suffered in the OECD countries that are most open to trade or where trade openness has increased most rapidly."[118]

  24.  It is also true that, in a country where international investment is important, UK workers are particularly exposed to relocation decisions, as UK laws allow employers to make British workers redundant far more easily than would be the case in most other EU countries. Mass layoffs are often announced because employers plan to make savings by switching production elsewhere; if they had to share these savings with the workers, British sites would be on something like a level playing field with the rest of Europe, and, when firms decided to go ahead, the money could be used to invest in a future for the individual workers concerned.

Support for those disadvantaged by globalisation

  25.  Of course, it is little consolation to someone who has lost their job to tell them that, on average, we are better off. Recently the Work Foundation published an important follow-up study of what happened to the workers at MG Rover who lost their jobs. Eight months later a third were still unemployed; over half were now employed full-time, but on average their new jobs paid them £3,523 a year less than MG Rover, and almost half thought their new jobs were worse.[119]

  26.  The pattern of who gains and who loses is desperately unfair. Jobseeker's Allowance (£57.45 a week for a single grown-up with no children) is not fair recompense for facing all the downside risks of globalisation while the rest of us accept the benefits. The TUC has been attracted to a suggested alternative that has emerged from the American debate—a scheme of earnings insurance: "...for as little as 4 to 5% of the savings companies realized from offshoring, they could insure all full-time workers who lost jobs as a result. The programme would compensate those workers for 70% of the difference between the wage rate they received on the job they lost and the wage rate they received on the new job, as well as offer health care subsidies for up to two years."[120]

Migration

  27.  Migration and globalisation are separate but linked issues—it is significant that the first age of mass migration (from the mid 19th century to the first world war) coincided with the first era of globalisation. Where migrant workers have skills in short supply among UK workers, their effect should be to allow the economy to grow faster than it would do otherwise; the Treasury has suggested that 0.4 percentage points of 2.75% growth are due to migration into the UK, and the Home Office has estimated that a 1% increase in the population through migration would produce a 1.25-1.5% increase in GDP.[121]

  28.  Many people assume that, because migration is holding down inflation and pleasing employers, it must undercut pay and job prospects for UK-born workers. But it is hard to find substantial evidence to back this up: links between immigration and unemployment are weak, and higher immigration seems to be linked to higher wages for the UK-born workforce (which is what we should expect if immigration is associated with higher growth). An important report for the Home Office[122] found:

    "The main result of the empirical analysis is that there is no strong evidence of large adverse effects of immigration on employment or wages of existing workers. In this respect our findings are consistent with empirical results from international research. There is some weak evidence of negative effects on employment but these are small and for most groups of the population it is impossible to reject the absence of any effect with the data used here. Insofar as there is evidence of any effect on wages, it suggests that immigration enhances wage growth."[123]

  29.  More recently, a DWP paper, which focused on the arrival of workers from the new East European member states of the EU,[124] found that the impact was very modest. Districts with large numbers of registered workers were very slightly more likely to see unemployment rise, "it explains close to zero of the variation in the claimant count,"[125] and there has been no discernable impact on nominal wage growth.[126]

Training and skills

  30.  The Treasury's analysis has led it to conclude that securing the "right skills profile for the global economy" is one of the six key policy challenges facing developed countries such as the UK. Globalisation and the UK recommended that "the first area where there is a particular need for further progress is therefore to raise the UK skills profile and ensure the workforce has the skills and flexibility to take advantages of changes in technology and new opportunities offered by globalisation."[127]

  31.  The Leitch Review of Skills, whose interim report argues that without a step-change in skills acquisition, "firms may increasingly choose to locate high value-added activities outside the UK, leaving UK workers with low-paid jobs in low value-added activities", supports this view.[128] One area of weakness is among the existing workforce, more than a third of adult employees do not have the equivalent of a basic school leaving qualification, and intermediate and technical skills lag countries such as France and Germany.

  32.  The TUC has agreed with most of this analysis, but we do not believe it is possible to act on it without a genuine post-voluntary framework for skills policy. It should be possible to develop a consensus that employers have an obligation to train their employees to meet the requirements of their present job. When it comes to the wider needs of the workforce, employers, employees and government should be seen as having a joint responsibility.

RESOURCES

The supply and pricing of energy

  33.  Two recent events—energy prices shocks for both domestic and industrial consumers, and recent increases in our CO2 emissions[129]—have marked a fundamental shift in UK energy policy. A new energy paradigm is emerging,[130] following two decades of energy market liberalisation. Since 1999, oil prices have risen from previous low levels; more recently, with the UK becoming a net importer of gas from 2004, we have suffered the unwelcome impact of high and volatile gas and electricity prices.

  34.  This problem cannot be ignored. The International Energy Agency (IEA) forecasts a 1.7% annual increase in consumption, and a 60% growth in worlds primary energy demand by 2030 has been forecast.[131] Among developed countries there has been an increasing recognition of the risks of fossil fuel import dependency, and the TUC has argued that heightened concerns over security of supply and climate change require the redesign of energy policy. Energy self-reliance, based on indigenous, often renewable, energy, makes sense, as does a policy shift towards investment in low- and carbon-free energy sources, such as clean coal.

The environment

  35.  The UK remains committed to the goal of a 60% cut in carbon emissions by 2050, which is believed to be consistent with stopping global temperatures rising more than two degrees above pre-industrial levels. Performance so far is mixed: the Government appears not to be on track to cut our CO2 emissions by 20% by 2010, but we are closer to targets in our overall greenhouse gas reductions.

  36.  While the exact path for future emissions will depend on many factors, the overall trends show that globally, greenhouse gases will continue to rise for some time. Without concerted policy action, concentrations may have doubled by mid-century, with the most rapid growth from developing countries. As the first report from the Stern Review[132] has acknowledged, "Stabilisation will require far more significant reductions in greenhouse gas emissions even compared to global levels in 1990", the base year for Kyoto Treaty targets.

  37.  That is why the TUC strongly supports the UK Governments efforts for the next stage of the Kyoto Treaty, with the inclusion of a new energy strategy, as well as international aviation and shipping within its scope. The EU Emissions Trading Scheme, emerging as the hub of a global scheme to cap and trade carbon emissions, has the potential to drive up energy efficiency and stimulate low- and carbon free energy. The inclusion of aviation emissions of flights to, from and within the EU initially is a crucial next step.

May 2006









103   Globalisation and the UK-strength and opportunity to meet the economic challenge, HMT, December 2005, p 7. Back

104   World Economic Outlook, IMF, 2006, table 20. Back

105   Calculated from Basic Structural Statistics, OECD, 2005, for USA and Japan, and European Economy, European Commission, 2004, tables 39 and 43. Back

106   Globalisation and the UK-strength and opportunity to meet the economic challenge, HMT, December 2005, p 11. Back

107   Economic Survey of the UK, OECD, 2005, quoted in Globalisation and the UK - strength and opportunity to meet the economic challenge, HMT, December 2005, p 15. Back

108   Globalisation and the UK-strength and opportunity to meet the economic challenge, HMT, December 2005, p 21. Back

109   Facing the Challenge: report from the High Level Group chaired by Wim Kok, CEC, 2004, p 12. Back

110   Facing the Challenge: report from the High Level Group chaired by Wim Kok, CEC, 2004, p 31. Back

111   Relocation: Challenges for European Trade Unions, Bela Galgoczi, Maarten Keune and Andrew Watt, European Trade Union Institute, 2005, p 2.  Back

112   "Trade-adjustment Costs in OECD Labour Markets: A Mountain or a Molehill?", Employment Outlook, OECD, 2005, p 48. Back

113   How Competitive Is The US Tax System?, Joint Economic Committee, US Congress, 2004, table 1. Back

114   World Investment Report, UNCTAD, 2005, p 4. Back

115   World Development indicators 2006, World Bank, table 6.1. Back

116   Labour Market Statistics, May 2006, table 6. Back

117   Trade-Adjustment Costs in OECD Labour Markets: a Mountain or a Molehill?, Employment Outlook, OECD, 2005, p 28. Back

118   Trade-Adjustment Costs in OECD Labour Markets: a Mountain or a Molehill?, Employment Outlook, OECD, 2005, p 30. Back

119   Life after MG Rover, Kathy Armstrong, Work Foundation, 2006, passim. Back

120   Exploding the Myths About Offshoring, Martin N. Baily and Diana Farrell, McKinsey Global Institute, 2004, pp 8-9. Back

121   Quoted in Liberalisation and Globalisation: maximising the benefits of international trade and investment, DTI Economics Paper 10, 2004, para 2.80. Back

122   The Local Labour Market Effects of Immigration in the UK, Christian Dustmann, Francesca Fabbri, Ian Preston, Jonathan Wadsworth, Home Office Online Report 06/03, 2003. Back

123   Dustmann et al, p 49. Back

124   The Impact of Free Movement of Workers from Central and Eastern Europe on the UK Labour Market, Nicola Gilpin, Matthew Henty, Sara Lemos, Jonathan Portes and Chris Bullen, DWP Working Paper 29, 2006. Back

125   Gilpin et al, p 25. Back

126   Gilpin et al, p 29. Back

127   Globalisation and the UK-strength and opportunity to meet the economic challenge, HMT, December 2005, p 4. Back

128   Skills in the UK: the long-term challenge, HMT, 2005, p 28. Back

129   Statistical Release, DEFRA, 23 January 2006. Back

130   "The Assessment: The new energy paradigm", Dieter Helm, Oxford Review of Economic Policy, Vol 21, Spring 2005. Back

131   "The investment implications of global energy trends", Faith Birol, Oxford Review of Economic Policy, Vol 21, Spring 2005. Back

132   What is the economics of climate change?, Stern Review, January 2006. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 16 October 2007