Written Evidence – UK Trade Policy Observatory (SCT0015)

The following notes answer specific questions set out in the Terms of Reference for the House of Lords EU Select Committee inquiry into Implications of ending clock changes.

Executive summary

• Seasonal changes of time, as well as time differences between countries due to time zones, can have a variety of implications on scheduling of transport services and working hours, energy consumption, logistics, job performance. This note focuses on the impact on international trade.

• The evidence arising from the academic literature on the effect of time-zones on international trade points towards the desirability of minimizing time differences between trading partners, in particular where these differences are above 1.5-2 hours.

• A time difference of one hour at the border with Ireland should not have a material impact on international trade.

• If the EU proposal of abolishing time changes in the EU is adopted but the UK retains seasonal time changes, the time difference between the UK and EU member states will change on two occasions per year. When the UK is on winter-time, either seasonally or permanently if the it chose not to have seasonal changes and adopted winter time permanently, the time difference with some EU partners will increase to +3 hours While smaller time-differences are likely to have a negligible effect, a three-hours time difference could have a negative impact on trade, mostly for manufacturing sectors, due to higher communication costs and non-overlapping working hours. Services trade could be affected less negatively than manufacturing, as time differences allow service providers located in multiple countries to work around the clock.

• Permanently adopting the UK summer-time appears to be the more favourable scenario. This would decrease time differences with EU countries which adopt their winter-time, and leave time differences unchanged with countries which adopt their summer-time, with respect to the current regime.

• The UK should coordinate with the countries with which there is the largest amount of cross-border activity (trade, FDI) which requires real time interaction.

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About UKTPO

The UK Trade Policy Observatory (UKTPO), a partnership between the University of Sussex and Chatham House, is an independent expert group that: 1) initiates, comments on and analyses trade policy proposals for the UK; and 2) trains British policy-makers, negotiators and other interested parties through tailored training packages.

The UKTPO is committed to engaging with a wide variety of stakeholders to ensure that the UK’s international trading environment is reconstructed in a manner that benefits all in Britain and is fair to Britain, the EU and the world. The University of Sussex has the largest collection of academic expertise on the world trading system in the UK, with specialists on trade policy, trade law and trade politics and European law and economy. The team includes experts in economics, international relations and law.

1. This note summarizes the academic literature on international trade which is of relevance for the call for evidence on “Discontinuing seasonal changes of time” and attempts to answer some of the questions in the call. The economic effects of ending clock changes and permanently adopting either the winter- or the summer-time range from the organization of working hours in firms, job performance, scheduling of transport services and logistics, energy consumption and cross border economic activity, such as trade and foreign direct investment (FDI). This note will analyse the existing evidence on international trade. Throughout this note we assume that the EU adopts its proposal to end seasonal changes of time, which implies that EU countries will choose to permanently adopt either their winter- or their summer-time. There currently are (unavoidable) time differences between the EU countries and the UK, to which we refer as the “current regime”. In order to guide the search for evidence in the academic literature, we begin by outlining the implications of the EU proposal for the UK in terms of time-differences with EU trade partners. At the end of the note, we provide answers to questions 1, 2, 4, 5 and 6 in the call for evidence.

2. The adoption of the EU proposal of abolishing the Daylight Saving Time (DST) regime presents three scenarios to the UK, which, in combination with the three time-zones in the EU (GMT, GMT+1 and GMT+2) and the option for each EU country to permanently adopt either their winter- or summer-time, generate a variety of outcomes in terms of time-differences between the UK and the rest of the EU. [1] Table 1 summarises the outcomes under the three scenarios. 

2.1.                     The UK retains the DST regime and seasonal time changes: this scenario implies that, with respect to the current regime, the UK will have: a) an increase in time-zone difference in the winter, with EU countries that permanently adopt their summer-time; b) a decrease in time-zone difference in the summer, with EU countries that permanently adopt their winter time. In addition, the UK will continue to switch between winter- and summer-time: this will imply a seasonal one-hour change in the same direction with respect to all EU countries, but with changes varying from 0 to -1 (with respect to a country in the Western EU time zone which adopted its winter time – e.g. Portugal), to +3 to +2 (with respect to a country in the Eastern EU time zone which adopted its summer-time – e.g. Finland). Even though these time changes are in the same direction and of the same magnitude, they might have different implications for the trade between the UK and these countries.

2.2.                     The UK abolishes the DST regime and permanently adopts its winter-time: this scenario implies, with respect to the current regime, that the UK will have an increase in time-zone differences with EU countries which permanently adopt their summer-time. This time-difference would be constant throughout the year.

2.3.                     The UK abolishes the DST regime and permanently adopts its summer-time: this scenario implies, with respect to the current regime, that the UK will have a decrease in time-zone differences with EU countries which permanently adopt their winter-time. This time-difference would be constant throughout the year.

3. These three scenarios present two issues for the UK to evaluate:

1. The time differences due to time-zones, currently ranging between 0 and +2, but which could decrease to -1 and increase to +3, under the various outcomes.
2. Switching between winter and summer time, implying changes in the time differences, were the DST regime maintained.

4. Starting from the second issue (ii), there is no academic research, to the best of our knowledge, evaluating directly the impact of DST regimes and seasonal time changes on international trade. There is some partially related evidence on the negative impact on decision making and job performance (mostly concerning the finance industry) coming from weather, biorhythms, beliefs, mood in general (but also sport results and feelings) with a few studies analysing specifically the impact of DST regimes. A prominent study is Kamstra et al. 2000, who find a negative impact on financial market indices in the weekend after the seasonal time change occurs. The time change affects the circadian rhythm, similarly to the effect of jet-lag, causing what is known as sleep desynchronosis. The authors conjecture that this might affect market returns through anxiety, which might itself result from the difficulty in solving problems and reaching rational decisions. Market participants might prefer safer investments and avoid risk following a disturbance in sleep patterns. This finding might be of relevance for the UK economy, heavily influenced by the performance of the finance industry. Avoiding seasonal time changes, therefore, might be useful to avoid changes in biorhythms and sleep patterns, which might influence performance at work.

5. More directly on international trade, there is evidence about the impact of time-differences between trade partners due to time zones. The overall consensus is that time-differences are bad for trade: time differences are barriers to international trade, due to the reduced opportunities of direct interaction and higher communication costs. Reduced overlaps in working hours, furthermore, typically result in increased labour costs. The impact of time-zones differs between manufacturing and services sectors, however: time differences are generally found to be bad for manufacturing trade, due to lack of synchronization of operations – synchronization effect, while time differences could have a positive impact on trade in services, due to the continuity of operations allowed across time-zones – continuity effect (Head et al., 2009).[2] The effect of time differences is non-linear; in other words, time zones have been found to affect trade by more the larger the time difference and to actually matter only for differences of more than 1.5-2 hours. Given that time differences impose communication costs, it is mostly the formation of new trading relationships which is negatively affected by time zones, rather than the volume of trade between existing trade partners. Here below, we detail the findings of some of the more relevant studies on the impact of time differences on international trade.

5.1.                     The seminal study of Stein and Daude (2007) argues that east-west distance has a bigger impact than north-south distance, especially on activities which require a great deal of interaction in real time. For this reason, time-zones have a bigger negative impact on foreign direct investments than on trade. The impact of time zones has increased over the last decades (from the 1980s to the 2000s): this effect is attributed to the development of communication technologies which reduce the importance of north-south distance, but not that of east-west distance.

5.2.                     The study by Egger and Larch (2013) on trade between Canadian provinces and US states finds that time zones affect trade negatively, but only for time differences of 1.5 hours and above. Removing the time-zones in these two countries would be beneficial for trade, especially for peripheral states/provinces.

5.3.                     Tomasik (2013), in a cross-country, confirms that the general time difference effect on exports is negative, but finds evidence of the positive continuity effect for services trade, as opposed to manufacturing trade.

5.4.                     Anderson (2014) also confirms that time differences reduce trade. This study estimates that, on average, each hour of time difference reduces merchandise trade by 2% to 7%, and finds evidence that this negative impact is smaller where travel and communication costs are less important for trade, i.e. where mechanisms of formal contract enforcement are stronger and in presence of co-ethnic networks.

5.5.                     Time differences are found to affect negatively mainly the formation of new trading relationships, rather than the volume of trade in existing trade relationships, according to Bista and Tomasik (2017). Time zone costs are therefore mainly equivalent to a fixed cost of doing business overseas. Furthermore, time zone costs are found to be more important for larger time zone differences. The further away business partners are, the more outside ideal working hours workers might have to be around to communicate, this implying more compensation which might increase a firm’s costs and discourage trade. We conjecture that it might also lead to less productive interactions.

5.6.                     Christen (2017) also finds that services trade is affected negatively by time differences, as some services require real time interaction for delivery. Time zone differences increase transaction costs, and therefore increase incentives to trade through affiliate firms (compared to non-affiliates). Time zone differences of 1 or 2 hours have no impact on affiliate sales, however.

5.7.                     Finally, Wagner (2019) finds that the negative impact of time differences varies across firms of different size (larger effects for smaller exporters) and goods (larger effects for intermediate goods than final goods). There is also evidence of asymmetric effects between East and West trade: the negative impact is detected for exports flowing westward (with a negative time difference) but not flowing eastward.

6. Taken together, the evidence arising from the academic literature points towards the desirability of minimizing time differences between trading partners, in particular where these differences are above 1.5-2 hours. The related evidence from the finance literature would suggest eliminating seasonal time changes. These factors should be considered when evaluating the options under the three scenarios examined above.

Answers to questions in Terms of Reference for the House of Lords EU Select Committee inquiry into Implications of ending clock changes:

1. Q: What would be the implications of UK retaining seasonal changes of time while the EU did not? Would any sectors be particularly affected?

A: The implications would be to have bi-annual changes in time with respect to all the EU partners, with a time-zone difference which can reach +3 hours with countries in the Eastern EU time zone which permanently adopt their summer-time. The implications of the time changes on trade have not been assessed by the academic literature. A three-hours time difference, however, is expected to have a negative impact on trade. The negative trade impact is likely to affect mostly manufacturing sectors, due to higher communication costs and non-overlapping working hours. Also services trade can be affected negatively, as some services require real time interaction for delivery, although services can also benefit from time differences, thanks to the continuity effect. Intermediates goods trade is likely to be more affected than final goods trade.

2. Q: What measures could be adopted to mitigate any disadvantages of non-alignment?

A: The effect of a non-alignment that arises from the choice of winter- or summer-time can be mitigated by minimizing time differences with the most important trade partners.

4. Q: What would be the implications of a time border on the island of Ireland, or between Northern Ireland and Great Britain?

A: A time difference of one hour at the border with Ireland should not have a material impact on international trade. This is too little a time difference, and academic studies on the subject have not found any statistically significant effect of a 1 hour time-difference on international trade.

5. Q: How should the Government approach the choice between permanent winter- and summer-time?

A: This choice can be made by trying to minimize time zone differences with the rest of the EU. Inspection of Table 1 above suggest that the preferred scenario is c), i.e. adoption of the UK summer-time. This would decrease time differences with countries which adopt their winter-time, and leave time differences unchanged with countries which adopt their summer-time, with respect to the current regime. There might be other factors to consider, however, such as the change in time difference with other trade and FDI partners (e.g. the US) and the desirability of permanently adopting the summer-time in the UK during the winter months.

6. Q: Which countries would it be beneficial for the UK to coordinate its preparations and/or choice with?

A: The UK should coordinate with the countries with which there is the largest amount of cross-border activity (trade, FDI) which requires real time interaction.

References:

Anderson, E., 2014. Time differences, communication and trade: longitude matters II. Review of World Economics, 150(2), pp.337-369.

Bista, R. and Tomasik, R., 2017. Time zone effect and the margins of exports. The World Economy, 40(6), pp.1053-1067.

Christen, E., 2017. Time zones matter: The impact of distance and time zones on services trade. The World Economy, 40(3), pp.612-631.

Egger, P.H. and Larch, M., 2013. Time zone differences as trade barriers. Economics Letters, 119(2), pp.172-175.

Head, K., Mayer, T. and Ries, J., 2009. How remote is the offshoring threat?. European Economic Review, 53(4), pp.429-444.

Kamstra, M.J., Kramer, L.A. and Levi, M.D., 2000. Losing sleep at the market: The daylight saving anomaly. American Economic Review, 90(4), pp.1005-1011.

Stein, E. and Daude, C., 2007. Longitude matters: Time zones and the location of foreign direct investment. Journal of International Economics, 71(1), pp.96-112.

Tomasik, R., 2013. Time zone-related continuity and synchronization effects on bilateral trade flows. Review of World Economics, 149(2), pp.321-342.

Wagner, J., 2019. Time zones and German exports: first evidence from firm-product level data. Review of World Economics, 155(1), pp.181-198.

30 August 2019