Trade policy, regional disparities, and inclusive growth
Published 2 September 2022
Places matter to people. For many people, the place where they grow up will become the place where they live and work. Many countries experience regional disparities in economic performance that are profound and persistent.
These disparities provide the context for and directly influence the decisions that people take and the life they will live. This is the reason why CITP will have to grapple with questions about the role trade policy plays in explaining these disparities and the implications for thinking about inclusive trade policy.
What can the Centre learn from the available research on the causes and consequences of spatial disparities? I would highlight two key messages – one about the role of specific trade policy and the other about the importance of putting people front and centre, even when thinking about spatial disparities.
Technological change and overall openness matter more for spatial disparities than specific trade policy decisions
For many countries in many contexts, globalisation, technological change and decisions about openness and the implications of these for the structure of the economy are likely to matter more for spatial disparities than specific trade policy decisions.
As an example, consider what we know about the spatial impacts of the changes to tariff and non-tariff barriers as Brexit Britain leaves the EU Single Market and implements the EU-UK Trade and Cooperation Agreement.
A recent report for the Economy 2030 project, predicts that despite significant impacts for some sectors the new trading relationship with the EU will not drive a large or swift labour market adjustment when we consider the UK economy as a whole. And the spatial implications of these adjustments are highly uncertain. While predicted falls in productivity have the potential to lower disparities (by levelling down rather than up) evidence suggests that a narrowing of disparities is unlikely.
For example, while the impact on London is uncertain, the North East, one of the poorest regions in the UK, is predicted to be one of the hardest-hit areas thus increasing existing (and large) productivity and income gaps.
The Economy 2030 report also provides evidence that more productive London-based firms are already responding more successfully to the new trade barriers with the EU by exploiting export opportunities outside the EU. The report also suggests it is unlikely that Brexit will cause large structural shifts back to a more manufacturing-intensive economy and the smaller spatial disparities that might imply. Regardless, the spatial implications of all these changes are small.
Contrast this with the role that the UK’s broad specialisation in tradable services (i.e. services such as insurance and consulting, that can be traded across regions and exported abroad) plays in shaping spatial disparities, as described in another recent report for the Economy 2030 project.
The UK’s economic geography has been fundamentally shaped by de-industrialisation and the rise of a services-led economy. The UK’s specialisation in tradable services is an important determinant of its spatial disparities because tradable services benefit strongly from agglomeration economies. As a result of these agglomeration economies, highly productive economic activity is more spatially concentrated in economies that specialise in high-skilled tradable services. The transition from manufacturing to services made it inevitable that we would see productivity gaps open up between areas, and this is what we see in the UK and similarly services-oriented economies such as France.
Four key factors help explain differences across the UK in area-level productivity: the size of the local economy (as measured by employment), levels of human capital (as measured by graduate share), and levels of physical and intangible capital. These factors account for up to 55 per cent of the spatial variation in productivity observed at the end of the 2010s. As the UK’s specialism in high-value tradable services has grown so too has the importance of size and skills and the role of intangibles (such as research and development capital) and information and communications technologies (ICT) equipment. These changes are consistent with what we might expect given recent technological change favouring higher-skilled workers in an economy that is highly specialised in services.
To reiterate, what I take from this is that globalisation, technological change, and trade policy decisions about openness in general, and the implications of these for the structure of the economy, are likely to matter more for spatial disparities than trade policy decisions on specific tariff and non-tariff barriers. And when we are thinking about those specific policies, it is decisions around services that are likely to matter more than those around agriculture or manufacturing for overall spatial disparities – even if decisions on the latter might be highly important for specific places.
Pay attention to the effects of policy on people, more than places
My second key message concerns the way in which we think about spatial disparities from an inclusive policy perspective – pay attention to people, more than places. Let me first consider this from the perspective of a strategy that aims to narrow spatial disparities before coming back to spell out some of the implications for inclusive trade policy.
Given the scale of investment needed to narrow spatial disparities, any economic strategy seeking to address them will need to choose places to invest in most aggressively (since constraints mean not all places can be prioritised simultaneously). London’s economic advantages stem from its concentration of human, physical and intangible capital and from its economic size, and these factors are self-reinforcing. London’s economic strength also spills over to benefit towns and cities across the wider South-East region. The large investments required to close regional productivity gaps will need to be spatially targeted at cities to generate the high returns that arise from the self-reinforcing feedback loops that explain London’s big productivity advantage.
The alternative is to spread investments around. These investments could improve productivity in any area. However, there are many small towns, investment in infrastructure and innovation is costly, and for towns, the self-reinforcing effects of size, skills and capital are limited by the scale of the local economy. Of course, there will still be many projects that are worth pursuing outside our major cities, but a strategy that focuses too much on towns, rather than our major cities, will not scale up to produce large productivity improvements across lots of areas for lots of workers.
The Government’s recent Levelling Up White Paper suggests that the Government recognises the arguments for spatial concentration, with an explicit focus on globally-competitive cities. But the small amounts of investment committed, the suggestion of a global city in each region and the political pressure to spread spending around, mean that the strategy is a long way from fully embracing this reality.
In addition to grappling with this trade-off, an economic strategy aimed at narrowing productivity disparities must consider who gains from the strategy – that is, it must think about the extent to which the policy generates inclusive growth. A more equal spread of investment and of graduates – and globally-competitive cities outside of London and the South East – may help reduce spatial disparities and improve productivity in those cities and the surrounding areas, but it is no simple fix for improving outcomes for poorer households. To do this, complementary investments must make sure that poorer households can access the opportunities generated.
In short, focusing on the disparities between places can mean we lose sight of the implications for individuals and households. One might argue that much of the discussion about trade policy – with its focus on overall growth, industrial sectors and foreign investment sometimes suffers from the same problem. Inclusive Trade Policy aims to put these considerations about individuals and households front and centre by focusing on the distributional consequences of trade policy - who are the winners and losers?
The link between individual and spatial disparities is complicated by the fact that, while many people stay close to where they grow up, many others move around. This matters for thinking about what spatial disparities can tell us about important policy issues.
For example, the geography of the Brexit vote was highly uneven. One explanation is that the Leave vote reflects the ‘revenge’ of ‘left-behind’ places – that is, it is a story not about individuals, but about shared anger by those living in places left behind by technological change and globalisation. The alternative is to think of this as a story about individuals, losing in different ways from globalisation, and where they live.
The first way of thinking about this appears to be driving the current policy response. But the second is perhaps a more useful way of understanding why wealthy Sevenoaks and struggling Sunderland both voted Leave. Different kinds of people, with very different concerns about the EU and living in different places – but agreeing on the same solution.
Individual mobility also matters because it means that policies – such as trade policy - that have different effects on different places do not necessarily end up affecting the people that currently live in those different places. For example, trade policy that leads to growth in industries currently concentrated in a poorer area does not necessarily end up benefiting poorer families if improvements in labour market outcomes are small but increases in house prices and rents are large. This is a specific example of a more general problem – policies that target different places are a blunt tool for changing individual outcomes. For many policies, using an area-based approach to think through the impacts of policy will fail to consider within-area disparities or the effect on individual inequalities. As shown in the Deaton report on spatial inequalities – these are much bigger than the between-area disparities that are often the main lens through which people think about the impacts of these policies. And sometimes policies that could address individual inequality – including spatially-focused investments to generate opportunities and spending to help disadvantaged families access them – may have the opposite effect on spatial disparities.
Spatial disparities in the UK are profound and persistent. Understanding the role trade policy plays in explaining these disparities is important. But from an inclusive policy perspective, the impact of these policies should be judged on the extent to which they improve individual opportunities and on who benefits, rather than on whether they narrow the gap between places.
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