Economic value of English law | Oxera

3.3.3: Reduced transaction costs for UK businesses trading internationally

Published: October 5th 2021
Chapter 3

3.3.3: Reduced transaction costs for UK businesses trading internationally

Finally, UK businesses that trade internationally benefit from the widespread global use of English law through their familiarity with it. The prevalence of English law internationally means that UK businesses are less likely to need to consult lawyers or set up an in-house legal counsel qualified in law other than English law. This reduces the transaction costs of trading internationally, especially for small and medium-sized enterprises, or those that trade in high-volume/low-value products.

Coupled with knowledge spill-overs and productivity increases due to agglomeration, lower transaction costs can increase the international competitiveness of UK businesses. This is likely to increase the level of economic activity that UK businesses can undertake abroad, generating value for the UK.

Box 3.1 Why are transaction costs important?

Transaction costs are the total costs of making a transaction—i.e. the costs associated with buying or selling goods or services, such as the costs of discovering market prices, the costs of bargaining, and the costs of writing and enforcing contracts. These costs make transacting more costly and time-consuming.

For example, when transacting, businesses use contracts to specify the obligations of the transacting parties. While contracts and their enforceability enable transactions as discussed in section 2, there is an associated transaction cost. This includes drawing up the contract under the agreed upon governing law. When businesses are able to transact using a governing law that they are familiar with, and which is widely used, transaction costs will be lower than if this is not the case. Businesses may be able to use standard contracts for the majority of their transactions and may be less likely to need legal services when transacting.

Lower transaction costs mean that more transactions are likely to occur, generating economic value.1

Note: 1 See, for example, Williamson, O.E. (1985), ‘The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting’, Free Press, New York; and North, D.C. (1990), ‘Institutions, Institutional Change and Economic Performance’, Cambridge University Press.

Source: Oxera.

These effects are particularly clear in sectors in which the UK has historically been a global leader and in which English law is commonly used to govern related internationally mobile transactions, such as financial services, maritime, wholesale insurance and reinsurance, and commodity trading. This interaction between the international use of English law, agglomeration effects and international competitiveness continually benefits the UK through a positive feedback loop.

We note that several other factors in addition to the use of English law contribute to the UK’s position as a global centre for professional activities (such as the English language and a favourable time zone). It is difficult to distinguish the separate impacts of these various influences; however, each is individually important in contributing to the value brought to the UK economy. In this report, we have not attempted to disentangle these factors; instead, we highlight that English law in particular is one factor that generates significant economic value for the UK but has received relatively little recognition.

Figure 3.1 provides an illustrative summary of the mechanisms through which the use of English law to govern internationally mobile transactions generates value for the UK.

Figure: The value for the UK from the use of English law to govern internationally mobile transactions
Source: Oxera.

The network effects, agglomeration effects and reduced transaction costs of trading internationally all serve to increase the competitiveness of UK businesses. These effects operate in a cycle, delivering benefits to the UK and continuously promoting the use of English law to govern internationally mobile transactions.