1. General Policy Framework

The economy of the United Kingdom is based on free enterprise and open competition. Throughout the 1980's, it has undertaken a methodical privatization of government-owned enterprises and has eliminated virtually all controls on the flow of capital into and out of the country. It has an open financial services environment. The few barriers to international trade and investment which do exist include preferential treatment for U.K. firms in oil and gas, telecommunications and electrical equipment.

Economic policy in 1990 and 1991 has been dominated by continuing efforts to reduce inflation and new concerns over the recession that began in the last half of 1990. Core inflation (as measured by producer prices and the GDP deflator) still remains around six percent, even though the headline, retail price indicator of inflation has dropped from 10.9 percent in October 1990 to 4.1 percent in September 1991. With core inflation still high, and given the discipline of the European Monetary System Exchange Rate Mechanism (ERM), interest rates have only been reduced in a very cautious, step-by-step fashion since the advent of the recession. As of October 1991 the base interest rate was 10.5 percent, high by G-7 standards, though well down on the 15 percent of a year earlier.

In the meantime, GDP fell by 3 percent from peak to trough. The forecast for 1991 GDP is for a fall of about 1.9 percent from the full 1990 calendar year. With the current recession and prospects for weak growth in 1992, the unemployment rate has risen from 5.6 percent in early 1990 to 8.7 percent in September 1991. It is projected to approach 10 percent in late 1992.

Fiscal Policy: With strongly rising GDP producing handsome increases in tax revenue, a tight fist on expenditures, and big proceeds from privatization, the central government and public sector ran surpluses from 1987 through 1990. In 1989 the public sector surplus was 7 billion pounds, or about 1.5 percent of GDP. In 1990 the surplus fell 2 billion pounds, and in 1991 it has shifted toward a deficit of 10 billion pounds. In 1992 the deficit is likely to approach 20 billion pounds, or 3 percent of GDP.

Personal income taxes have been simplified, with just two rates of 25 and 40 percent. The Conservative government has a long-term goal of reducing the basic rate on personal incomes to 20 percent "as and when prudent to do so". If the Labor Party wins the next election, due sometime before July 1992, the top rate would go to 50 percent. Capital gains are adjusted for inflation and are generally taxed at regular income tax rates. Gains from the sale of a primary home are exempt. Corporate tax rates are 25 percent for smaller companies and 35 percent for larger ones (with incomes over 200,000 pounds).

As the government has kept a tight lid on public sector outlays, real public expenditures have grown more slowly than gross domestic product. They declined to 37.5 percent of GDP in financial year 1988, and have hovered in that region since. With the slowdown in the economy, it is likely that this figure is now closer to 40 percent.

The privatization (sell-off) of government enterprises has strongly affected budget balances. Privatization has not only provided revenue from asset sales, it has also reduced the drain in the form of subsidies.

Monetary Policy: The U.K. 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. For the past two years, broad money has ceased to be targeted, although the monetary base (circulating cash, coin and reserves in the Bank of England) has been targeted at 1 to 4 percent growth.

The two main indicators of monetary policy for the past few years have been the exchange rate and the base interest rate. The Bank of England controls the base rate indirectly by establishing the cost of short-term funds in the money market. For one year, from October 5, 1989, the Bank of England maintained a base rate of 15 percent. On October 5, 1990, it cut the rate to 14 percent, and the U.K. simultaneously entered the ERM. The high interest rate regime clearly cooled domestic demand, so much so that the economy shifted to recession.

Because of the Gulf War, no further cuts in the interest rate were made until February 1991. Since then, cuts have been made on a month by month basis, and rates are expected to drop to 10 percent at the end of 1991. It will be difficult to cut base interest rates much below 10 percent. First, core inflation is still running close to 6 percent. Second, wage settlements exceed 6 percent. Third, the pound is at the bottom of the ERM ladder, so the U.K. can hardly cut interest rates before others in the system do so.

2. Exchange Rate Policy

Until October 5, 1990, when the U.K. joined the ERM, the British pound was officially floating. Now it is pegged to the European Currency Unit (ECU) at a central rate of 0.6969 pounds per ECU, which is equivalent to a rate of 2.95 Deutsche marks per pound. Like the Spanish peseta, the pound may float 6 percent above or below its central rate as long as it does not appreciate or depreciate more than 6 percent against any other currency in the ERM. (Other ERM members are limited to fluctuations of 2.25 percent either side of their central rates.) U.K. authorities have made it very clear that they intend to defend their peg in the ERM vigorously, even if that means having to increase the base interest rate again.

3. Structural Policies

Over the past 12 years, Conservative governments have promoted structural reform to increase the efficiency and growth potential of the British economy. They have deregulated financial services, telecommunications, and transportation. They have also ended capital controls. Mortgage regulations have been liberalized and much of the public housing stock has been privatized. They have privatized producers of motor vehicles, aircraft and steel, the water utilities, and electrical power. Electric power generators and distribution companies in Wales, England and Scotland were privatized. The electric company in Northern Ireland may be sold before summer 1991.

Subsidies designed to give British firms dominance in the market, and therefore, to keep out imports, have been slashed. In the past eight years, the government has passed four employment bills to increase labor market flexibility, democratize unions, and make unions accountable for the industrial acts of their members. These fundamental structural reforms have stimulated investment, employment, economic growth, and demand for domestic and foreign goods alike.

There still remain structural problems that impede the U.K.'s capacity to grow and consequent ability to trade. Clogged roads push up operating costs. An educational system which allows more than half of its students to leave school at age 16 amd which provides a relatively weak technical training program inhibits growth in high technology areas. And the fact that most privatized enterprises are just now beginning to feel the winds of real competition means that they still have many inefficient habits that will take time to correct.

Her Majesty's Government is aware of most of these shortcomings and is intent on eliminating them. As a consequence, the medium and longer-term future of the British economy is relatively bright, though an economic downturn has occurred in 1990-91. U.S. exports to Britain should soon resume steady growth.

4. Debt Management Policies

As a government, the U.K. has no meaningful external public debt. Because London is one of the foremost international financial centers of the world, British financial institutions have been major intermediaries of credit flows to the developing countries.

5. Significant Barriers to U.S. Exports

Offshore Oilfield Contracts: From the mid-1970s, the United Kingdom provided preferential treatment to British-based firms (including joint ventures with U.S. firms or British subsidiaries of U.S. firms) that provide offshore oilfield supplies and equipment services. This is done through the operation of the U.K. Department of Energy Offshore Supplies Office (OSO), which had an aggressive policy of providing a "full and fair opportunity" for British-based firms to compete for and win North Sea contracts. The cooperation of oil companies with OSO's goals is one factor among others used in awarding future exploration rights in the U.K. sector of the North Sea. In January 1985 the U.K. made this policy more discriminatory by officially encouraging oil companies to award contracts involving new offshore technology to firms with majority British ownership.

Since 1989, OSO claims its focus has shifted more toward export promotion and promotion of research and commercialization. The operation of the OSO has been raised by senior U.S. Government officials with senior British officials. British officials have stated repeatedly that they wish to see "a level playing field", and have offered to investigate any specific complaints the United States government or U.S. industry may have. This offer has been repeated a number of times.

In the twelfth and fourteenth licensing rounds announced in June, 1991, U.S. firms received over 40 percent of the acreage awarded. British sourcing was one of the factors considered. Most U.S. energy firms will consider the large number of competitive U.K. contractors for bids and will tend to place contracts in the U.K. on a competitive basis. When U.K. yards are filled, and/or suppliers have a waiting list, orders will be placed overseas. In the years ahead, EC procurement regulations that contain an "EC preference" clause may be the biggest barrier to U.S. oilfield goods exports to the U.K.

Government Support for Commercial Aircraft: The United Kingdom is providing 450 million pounds ($900 million at the current rate of exchange) to support the launch of the Airbus A330 and A340 commercial transport aircraft programs. The new models and existing aircraft, also developed with significant government support, compete directly against Boeing and McDonnell Douglas aircraft. The United States case against Airbus in the GATT is pending the outcome of negotiations scheduled for January-March 1992 aimed at disciplining subsidies for aircraft.

Large Electrical Equipment: Previously all electricity in England and Wales was generated by the Central Electricity Generating Board (CEGB), a government-owned corporation. In Scotland, energy was generated by two government-owned utilities. No large steam turbine generator units or large power transformers in the system or any of their major parts used in the United Kingdom were imported by any of the government entities. However, in 1989 Her Majesty's Government introduced legislation to privatize the electricity industry in England and Wales.

As a prelude to privatization, National Power and Powergen, two power generating companies were created as corporate successors to the CEGB. National Power and Powergen sell power to regional distribution companies. A privatized industry offers much better sales prospects for U.S. equipment, fuel and technology (particularly "clean coal"). National Power and Powergen officials have met with U.S. firms and vendors, and prospects for U.S. sales look good, particularly for U.S. steam coal, after existing contracts with British Coal expire in March, 1993.

The twelve regional electricity companies in England and Wales were privatized in November, 1990. National Power, Powergen and the two Scottish utilities were privatized by July 1991. The Ulster utility may be sold in a "trade sale" before July, 1992. The Conservative Party has promised to privatize British Coal after the next general election. Labor opposes this.

Broadcasting and Telecommunications: The 1990 Broadcasting Bill requires that "a suitable proportion" of television programs broadcast in the United Kingdom be produced locally and that a "proper proportion" be of European origin. This formalizes an existing practice of limiting the number of non-European programs on British television in accordance with an informal 86/14 percent quota agreement. Its practical effect may be to relax those limits somewhat, given the EC's "where practicable" 50 percent quota. However, it does, for the first time, formally impose legal quotas.

Since 1984, telecommunications services in the U.K. had been provided by two carriers operating as a regulated duopoly. In March 1991, the Office of Telecommunications published its "duopoly review", formally ending the restriction on the issuance of new telecommunications carrier licenses. Legislation is now in place to enable the establishment of new carriers.

6. Export Subsidies Policies

The current government strongly dislikes subsidies, and U.K. trade-financing mechanisms are not generally seen as significantly distortive of trade. Britain does have the Export Credits Guarantee Department (ECGD), an institution similar to the Export-Import Bank of the United States. The British government is in the process of privatizing the short-term insurance part of its business. The private Dutch export credit insurance company, NCM, will buy this portion of the business, although the sale is controversial.

Although much of ECGD 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 the U.S. Agency for International Development--AID) for projects in developing countries. Occasionally the United States objects to financing offered to specific projects.

The U.K.'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 with the U.K. and other developed countries the 1987 "Arrangement on Officially Supported Export Credits.

7. Protection of U.S. Intellectual Property

U.K. intellectual property laws are strict, comprehensive and rigorously enforced. The U.K. 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 Berne Convention for the Protection of Literary and Artistic Works, the Patent Cooperation Treaty, the Geneva Phonograms Convention and the Universal Copyright Convention.

A new copyright law is designed to make copyrighting a more simplified, user-friendly procedure and permitted the U.K. to join the most recent text of the Berne Convention. The United Kingdom's positions in international fora, such as WIPO and GATT negotiations, are very similar to U.S. positions.

8. Worker Rights

a. The Right of Association

Unionization of the workforce in Britain is not restricted, except in the security services. There is no statutory right to strike and legal immunities protecting unions engaged in lawful actions were narrowed in the 1980s. Secondary strikes and politically motivated strikes are prohibited. In 1991 the International Labor Organization (ILO) upheld complaints against government bans on unions disciplining members and antiunion discrimination, but government policy remains unchanged.

b. The Right to Organize and Bargain Collectively

The right to organize and bargain collectively is deeply rooted in common law. there is no legal obligation for employers to bargain with workers' representatives nor have collective bargaining agreements histroically been legally binding or enforceable in the courts, but collective bargaining is extensive, involving over 10.2 million workers, or approximately 40 percent of the workforce. It is illegal to deny a worker employment on the grounds that he or she is or is not a union member, except in the case of the armed forces, the police, or the security services.

c. Prohibition of Forced or Compulsory Labor

Forced or compulsory labor is unknown in the U.K.

d. Minimum Age for Employment of Children

School attendance until the age of 16 is compulsory. Children under that age are not permitted to work in an industrial enterprise except as part of an educational course.

e. Acceptable Conditions of Work

There is no legislated minimum wage. In some low-wage industries employing approximately 2 million workers, wage councils of employers and trade union members establish minimum hourly wages and overtime rates for adult workers. Provisions are legally enforced by a team of inspectors. Minimum wage rates vary from industry to industry. The U.K. does not have a law limiting daily or weekly working hours.

The Health and Safety at Work Act of 1974 requires that the health and safety of employees not be placed at risk. A Health and Safety Executive (HSE) enforces health and safety regulations and may initiate criminial proceedings. In 1990, following a number of accidents, responsibility for railway safety was transferred to the HSE. A health and safety commission submits regulatory proposals to the Government, appoints investigatory committees, and encourages research and training. The U.K. system of occupational health and safety is viewed as efficiently managed and operates with the full involvement of workers' representatives.

f. Rights in Sectors with U.S. Investment

All U.S corporations operating within the United Kingdom are obliged to obey legislation relating to workers' rights.

Source: National Trade Data Bank, Agency: U.S. Department of State