The External Trade Constraint

The second important set of behavioural relationships determined imports relative to domestic demand and exports relative to world demand as measured by estimates of world trade. For example, with world trade growing at an average rate of 9% per year and the UK share falling by 4% per year, UK exports would grow by around 5% per annum, and with import penetration rising 3% per annum relative to domestic demand, the latter would have to grow by not more than 2% per year to maintain a zero trade balance; and if productive potential were rising by 3% per year, then the UK faced a major medium-term problem. Failure to find a solution implied ongoing deindustrialization and rising unemployment.

Behind trends of exports and import penetration, there were cyclical aspects such as the fluctuation of imports with stock building (inventories) and of the terms of trade for primary commodities with the volume of world trade. This relationship offered some compensation to the UK as an exporter of industrial products and importer of food, raw materials, and, later, oil. Kaldor was very aware of the interdependence of world markets and stressed the need to counteract the Prebisch effect (declining terms of trade for primary products) by increasing the elasticity of world commodity markets which would help to sustain growth of world trade when increases in supply of raw materials run ahead of world demand.

Two more significant and longer-term issues were (i) changes in the commodity composition of UK imports as imports of manufactures started to dominate imports of food and raw materials, pushing up the aggregate rate of import penetration without significant compensation on the export side; and (ii) the effect on imports and exports of real (inflation-adjusted) exchange rate changes on which Godley’s and CEPG’s views were fairly conventional.