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The Herald Scotland
12-05-2025
- Business
- The Herald Scotland
Trade discussions jeopardised by simple zero-sum maths
Developments 3,500 miles away in Washington DC have been the dominant factor in shaping a fast-moving set of economic conditions this year. While economists had long warned of the global trade risks from a new Trump administration, the scale of protectionist measures and their chaotic rollout has surprised even seasoned observers. Read more: At the time of writing, significant uncertainty remains about future US and third-country trade policies, even in the short term. This is dragging down growth expectations and fuelling market volatility. Unsurprisingly, the IMF has downgraded its global growth forecasts for this year and next. If fully implemented in July, the effective tariff in the US would rise to around 25%, the highest rate in over a century, and even greater than during the infamous Smoot-Hawley Act at the start of the Great Depression. The UK economy is relatively trade-intensive, with trade (imports plus exports) as a share of GDP around 64%, above the G20 average of 55%. The OBR estimates that a scenario of US tariffs, alongside retaliation from trading partners, could reduce UK growth by around 1% in 2026/27. There would also be higher inflation, increased borrowing costs, and a weaker outlook for the public finances. The idea of the benefits of trade dates back to Adam Smith and David Ricardo. Trade enables countries to specialise in producing goods and services in which they have a comparative advantage, exchanging them for other goods and services they find relatively costly to produce. In contrast, reduced trade intensity tends to weaken productivity and act as a barrier to economies of scale from overseas markets. Read more: Of course, unrestricted free trade is not costless nor desirable. There are legitimate concerns about how the benefits of trade are distributed between and within countries. Important questions also arise with regard to trade and emissions and the environment, and how globalisation interacts with human rights, democracy, and the rule of law. However, these are questions that can be addressed with appropriate measures, not by a blunt fall back into protectionism. The heightened scepticism towards recognising the benefits of trade, not just in the US but globally, reflects a wider trend toward zero-sum thinking within economic policymaking. This view holds that gains for one individual or country must come at the expense of another. As Anton Muscatelli and I have written in a paper for the National Institute for Economic and Social Research, this simplistic framing of economic questions has become prevalent in political discourse, not just in trade, but in immigration, net zero, and public spending too. A zero-sum thinker will argue that trade only brings benefits at the cost of domestic producers and workers displaced by cheaper imports. They will also claim that immigration might boost growth, but at the expense of higher unemployment and falling wages. Read more: Economics can counter these zero-sum arguments. It is entirely possible, for example, to ensure that workers in import-competing industries benefit from international trade through the redistribution of national gains; to implement policies so that immigration boosts productivity and benefits all; and to design progressive fiscal policies that do not hamper growth but still achieve greater equality. Far from providing solutions, zero-sum thinking can make things worse. Complex long-term challenges, like climate change, can become impossible to solve in a zero-sum world with an increasingly divided electorate. The challenge, of course, is that the solutions are not straightforward. Economic theory might be a good guide, but the multiple effects, including gains and losses, are complex, messy, and difficult to track over time. A key lesson for policymakers is that to counter zero-sum thinking, we need to avoid single, de-coupled policy debates. The way in which debates are framed, discussed, and trade-offs understood will be critical in guarding against zero-sum thinking dominating economic policy debates and widening division. Adam Smith warned against "speculative physicians" with simple answers to complex problems. That warning is just as relevant today as it was in the 18th century. Graeme Roy is professor of economics at the University of Glasgow's Adam Smith Business School.
The Independent
12-03-2025
- Business
- The Independent
EMB19:00 Poorest in Britain worse off than Slovenia and Malta after 15 years of stagnant wages, report warns
The poorest households in Britain are now poorer than the least well off in Slovenia after a decade and a half of stagnant income growth, a major report has revealed. Workers in Britain would be £4,300 per year better off had wages grown at the same pace as in the US after the 2009 financial crisis, according to research by the National Institute for Economic and Social Research (NIESR) think tank. And, as Sir Keir Starmer and Rachel Reeves prepare to slash the benefits bill by billions, the think tank warned tax and benefit changes have also exacerbated the decline in British living standards. In one of the report's starkest findings, it said the poorest parts of the UK are now worse off than their counterparts in countries like Slovenia and Malta, with incomes growing in the majority of Europe faster than those in the UK. And, in what will serve as a stark warning to the chancellor, with discussions ongoing to finalise the shape of Labour's planned welfare cuts, NIESR said Britain has one of the least generous welfare systems of any developed country. In a series of recommendations to Ms Reeves, it called on the government to scrap the two-child benefit cap, boost benefits so payments 'always cover the cost of living' and boost public and private investment. Senior economist Max Mosley said NIESR had uncovered the 'uncomfortable truth' that 'economic stagnation over the past decade is now threatening the UK's position as a place for a high standard of living'. 'A combination of weak productivity growth driving near-zero growth in real wages and cuts to welfare has resulted in a situation where we are neither delivering prosperity through high wages nor security through welfare,' he said. Mr Mosley added: 'That the poorest in our country now fare worse than those in nations once considered less affluent is a stark indictment of the UK's economic social model. 'Reversing this decline will likely come to define the government's growth agenda.' Deputy public policy director Professor Adrian Pabst added: 'After more than 15 years of real wage stagnation for millions, working families need to see a tangible improvement in their living standards over the duration of this Parliament.' The report comes after more than a dozen charities warned Ms Reeves against cutting disability benefits by as much as £6 billion as part of her welfare reform plans, saying it would have a "catastrophic impact'. In an open letter, organisations including Disability Rights UK, Citizens Advice, Scope, and Sense urged Reeves to "safeguard" the benefits in her upcoming spring statement. They argued that any cuts would push hundreds of thousands of disabled households into poverty, rather than achieving the government's goal of increased employment. Work and Pensions Secretary Liz Kendall has highlighted the significant number of people out of work due to ill health – 2.8 million – and the fact that one in eight young people are not in education, training, or employment. The financial burden of sickness and disability benefits for working-age individuals has increased by £20 billion since the pandemic, with projections estimating it will reach £70 billion over the next five years. The prime minister this week told a private meeting of Labour MPs the current welfare benefits system was 'unsustainable, indefensible and unfair'. 'We've found ourselves in a worst of all worlds situation – with the wrong incentives – discouraging people from working, the taxpayer funding a spiralling bill, £70bn a year by 2030,' he said, adding 'the people who really need that safety net [are] still not always getting the dignity they deserve.' 'That's unsustainable, it's indefensible and it is unfair, people feel that in their bones. It runs contrary to those deep British values that if you can work, you should. And if you want to work, the government should support you, not stop you,' he said.
