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Thursday, 13 October 2016
The currency effects of Brexit
Sterling is falling. Predictably, the financial press describe its slide as a "pounding" and gleefully tell us that sterling is the worst-performing currency after the Argentinian peso.
But some people are cheering. Falling sterling is good for exports, isn't it? So if the pound keeps falling, the UK's large trade deficit will start to shrink, reducing the UK's dependence on external financing and hence its vulnerability to a "sudden stop".
Sadly, it's not that simple. Falling sterling is not an unalloyed good for exporters. The real effect is considerably more nuanced, and over the longer term, not necessarily positive.
As an exporter myself, I am certainly enjoying the pound's fall. These days, most of my income is in US dollars. This is how GBRUSD has performed this year:
Since my income is in dollars but my outgoings are in sterling, I've had a pretty substantial pay rise.
But my chickens will come home to roost shortly. The price of petrol is about to rise by 5p a litre because of sterling's fall. That is a real cost which I cannot avoid, since my singing teaching requires use of a car. My income is still rising, but my profits will be diminished by rising costs. When the fall in sterling affects other business costs too, such as air fares, train fares, hotels and subsistence, I might be looking at a rather substantial rise in my costs.
Business costs are already rising for exporters whose business inputs are raw materials and intermediate goods. And all of us face higher energy and transport costs, because the UK is dependent on imports of oil and natural gas, and those are priced in dollars and euros.
This chart from Reuters shows that producer price inflation is already rising fast:
The net gain for exporters is still positive, but energy price rises have yet to bite. Exactly how much of the income improvement due to currency effects will be wiped out by rising input costs remains to be seen. For some exporters - especially in the UK's fragile manufacturing sector - it could even be a wash.
And that is before we get to the effect of inflation on labour costs. I face rising prices for food, clothes and other consumer goods. As a sole trader, my profits are my income, so I will shortly face a reduction in my disposable income as inflation eats into my profits. But businesses with employees are likely to face demands for wage increases. The businesses most affected will be those that have skill shortages, powerful unions and/or need seasonal labour that could now be hard to come by, because the weak pound makes temporary migration from overseas less attractive.
The fact is that the UK is an import-dependent economy, and sterling's fall makes imports more expensive. For businesses, this means higher costs. For households, this means lower living standards, at least in the short term. As Paul Krugman says, sterling's depreciation makes Britain poorer.
Over the longer term, we might find that higher import prices encourage the growth of domestic industries producing goods and services that can substitute for expensive imports. But there are two obstacles to this.
The first is the UK's dependence on imports for energy. High energy prices due to sterling's weakness will put downward pressure on domestic demand, simply because people will prioritise heating, lighting and fuel over consumables. We've seen this before: high oil prices in 2010-13 were a major reason for the failure of the UK's recovery after the financial crisis. There is no reason to suppose that this time would be different.
The same energy price constraint bites on domestic businesses, which would face higher costs than their overseas competitors. Given this, would they really be able to undercut importers by enough to generate widespread substitution effects - especially if, after a hard Brexit, the Government decided to cut import tariffs unilaterally, as some have suggested?
We need substantial investment in replacement energy sources as North Sea Oil dries up. The UK has neglected this investment over many years now, and it is about to pay the price for this folly. Replacement energy sources take quite some time to come on stream, and during that time the UK will face higher energy prices and associated inflation, to the detriment of households, businesses and the economy as a whole.
The second obstacle is inward investment. The UK has historically been a favourite destination for foreign investors, attracting more capital investment than anywhere else in Europe. This is no doubt due to its dominant financial sector, deep and liquid capital markets, and enormous supply of investment assets. Being a favoured investment destination is of course, something of a double-edged sword: the UK's yawning current account deficit is to a considerable extent due to its attractiveness to foreign capital (the capital account is the mirror image of the current account, so a capital account surplus is matched by a current account deficit). But if the UK is to develop new domestic and export businesses, it will need inward investment.
Some people seem to think that the current starry performance of the FTSE 100 indicates that inward investment into the UK is holding up. Sadly, this is not true. The falling currency is a clear sign that investment is leaving the UK, as are rising yields on gilts. At present, all the signs are that investors are becoming exceedingly wary of investing in the UK.
All of this leads me to conclude that those who think a falling pound will somehow bring about radical rebalancing of the economy away from financial services and towards revitalisation of manufacturing are taking far too simplistic a view. The UK economy is highly financialised and largely consists of service industries. Manufacturing is still about 14% of the economy, but the heavy manufacturing of the past is gone: UK manufacturing now is specialised, highly skilled and makes extensive use of imports. Even were foreign investment to hold up, it would take a very long time for the UK to expand manufacturing to the level of say Germany. It's worth remembering that a 25% devaluation in 2008-9 made little significant difference to manufacturing production or goods exports. As I said above, why would this time be different?
Sterling's fall should be regarded as at most a short-term monetary stimulus to the economy. The UK now has the loosest monetary policy in the G7 (eat your heart out, Kuroda-san!). This is in large measure the reason for the apparent calm in the UK economy, along with buoyant consumer confidence (which is no surprise, since the great British public apparently believe that leaving the EU and restricting immigration will make them more prosperous). It creates a breathing space in which the Government can devise a sensible approach to leaving the EU. But if it is to foster lasting change, it must be partnered with a radical fiscal response involving substantial infrastructure investment, a properly funded business bank and a realistic industrial strategy. Without these, sterling's fall will simply herald the dawning of a poorer, meaner future for Britain.
Related reading:
Brexit is making Britons poorer and meaner - The Economist
UK's trade-weighted currency index slumps to historic new low on hard Brexit fears - The Independent
Brexit and Britain's Dutch disease - FT Alphaville
1. Great Article! You might have added a few things things, I'll be brief (and somewhat clumsy) since I am on mobile:
First, Russia suffered a shock since 2014 when oil crashed;this was on top of a decline in investment and the economy since Putin started nationalising things around 2012 or so.
In the UK's case the currency crash is already happening since investors can anticipate the decline in the pound. But the actual reduction in export revenues nor any potential decline in productivity or increase in the state sector hasn't happened yet. So there is much more pain to come.
Second, you will likely see an increase in political instability going forward as the depreciation starts to make itself felt. This will drive away even more investors. The "people's power" could be the thin end of the wedge, like the start of the French Revolution.
Third, the UK's food dependence guarantees trouble. The UK will not be able to impose tariffs on food or otherwise dissuade foreign countries from selling into the British market IMHO unless it wants to end up like Russia. Since Moscow has imposed "counter-sanctions" on foreign produce, combined with the depreciation in the ruble, Russians now spend half their income on food.
So the UK will not be able to prevent the EU from just dumping its surplus production on Britain without British farmers getting reciprocal rights. It would suit the EU to wreck the UK's agriculture in any case to prevent competition and for geopolitical reasons. The alternative is for the UK to risk food riots it seems when combined with a weak pound. So this will weaken the UK's hand during the Article 50 negotiations.
Fourth, a weaker currency means that the UK's geopolitical weight is smaller, which makes trade deals harder to get. A smaller economy can't afford to open as many diplomatic missions abroad either.
In particular, the military will be hurt by an inability to buy expensive equipment and components from abroad, so their means less F-35s or noise reducing components for submarines and the such. This will be embarrassing when the cuts are announced. The UK is a merchantile sea power, not a frugal land power like Russia; I'm not sure it will cope with these changes circumstances well
The cumulative effect will be to make the UK less useful to the US, so Washington will be less inclined to do favours for London, or turn a blind eye to things like shady tax schemes in the City. This will diminish the pound further,
Fifth, I'm not sure how the UK could break out of a wage-price spiral with stagflation in this political climate. Thatcherite tactics would just make more trouble. This will cause inflation to increase even more.
I am seeing hints of Latin-American style populism that will be very hard to get away from if it gets into the UK's political system. It could be considered a bad political equilibrium.
Sixth, as the pound gets weaker and more volatile, an independent Scottish currency will be more viable. A country at risk of breaking up will find it harder to attract investment and will be more unstable.
Seventh, All of these factors are mutually reinforcing to some degree. Most people seem to expect
pound-euro parity to be sufficient to balance out the current account deficit. But taking all of the above into account, the true equilibrium will be lower, I'm not sure by how much though.
Finally, Ireland and the punt might give an idea for the future of the UK going forward, the Irish Central Bank was always paranoid about inflation.
1. I might rephrase part of that post actually since it was potentially unclear.
Instead of thinking of modelling the rate of the pound, or even modelling the British economy, think in terms of modelling the UK as a holistic entity.
The UK as an entity roughly consists of several "systems" : the political , the economic, the military, the diplomatic and so on. In this case the monetary system could be viewed as a subset of the economic system.Obviously all of these various parts interact with each other.
A sufficiently severe shock in one system can propagate to the other ones and influence them. The first order effect can then spread out again in turn and so on and so on until a new stable point is reached.
A currency crash will weaken the UK politically and militarily. But the weakness there can feed back into the economy. This in turn means a weaker currency which will weaken the UK further.
In the meantime the political system is becoming less effective: Scotland is considering seceding. Politicians call for price controls and complain that the Bank of England should be serving the people instead of fatcat bankers.
London finds it harder to get the ear of Washington, which diminishes its influence in Europe further. As a result, EU policy tends to be more anti-British which harms the UK's economy and causes more political instability.
I could continue adding in more factors, but I think people get the point.
The breakup of the Soviet Union, which was precipitated by an oil price crash, shows how far this could go. The UK in 5-10 years time will likely be weaker in every dimension and not just in macroeconomic terms, as a result any long term forecasts of the state of the British economy based on economic models alone are likely to be too optimistic.
2. Seems like British economists forgot the external conditions of the UK in the post-war period. And even then, the UK had a larger manufacturing sector than nowadays. Import restrictions and exchange controls were the norm, am I wrong? Devaluations weren't much of a help even at that time. This is my main disagreement with MMT people who believe that floating your currency solves the balance-of-payments constraint. You had a good post on this before.
3. Perhaps you were saying this, Frances, but it doesn't feel apt to describe the UK's unusually high historical inward FDI as good "performance". I appreciate the capital and current account are both endogenously determined, but it seems much more likely that the FDI was driven by strong imports than that the foreign demand for FDI pushed the UK to a large current account deficit.
As I see it, the main component of inward FDI which is surged is retained earnings at the UK affiliates of international corporations.
1. I really don't agree. Imports do not drive the demand for London property, nor for sterling-denominated financial assets sold worldwide. The UK's economy is financialised and it hosts the world's premier financial centre. That, not imports, is what drives the UK's current account deficit - just as the US's current account deficit is driven by global demand for US dollars and US treasuries.
4. The last three UK Article IV annual reports from the IMF indicated overvaluation of Sterling estimated at 12%-18% in the latest report. With a current account deficit reaching 7% of GDP the “kindness of strangers” has, perhaps, reached its limits.
1. Please don't read too much into the current account deficit. The trade deficit is much smaller and very stable. The big increase in the last couple of years is because of divergence of returns on sterling and Euro assets, which is mainly due to ECB monetary policy.
2. I think the contrast to Brexit inspired depreciation and current account inspired depreciation is well founded. Maybe, Brexit was the final straw but the trade weighted index has been trending down for a while. The BoE underground blog has a good piece.
3. Very sorry, Mike, but Dork of Cork is banned from commenting here, so I've deleted his post.
5. I am in the opposite situation to you: earnings in pounds but costs in dollars; so e.g. a 2kg bag of sugar is now 1.66 and before 1.42, approximately. But still a leaver. If UK businesses as these fine folks suggest are partly just using the depreciation as a cover to increase their sterling prices then that will gradually come into the spotlight: no increase in output etc. Marmite should be going through an export boom as a wholly UK made product without any currency depreciation import inflation costs yet they are raising their UK prices. If they have raised their export sterling price then it is clear that they are just profiteering at the expense of UK output.
1. You seem to be suggesting that Unilever was taking advantage of the sterling fall to force through an unwarranted price rise on a product on which its costs had not risen.
I'm afraid I disagree. Unilever produces its accounts in Euros, so it faces translation losses on all sales in sterling, regardless of where the product is produced. So although Marmite is produced entirely in the UK, Unilever would still want to raise the sterling price if sterling fell versus the Euro. In fact, although it caught the attention of the UK media because it is an archetypal British product, Marmite was far from being the only product affected. Unilever wanted to raise prices across the board.
2. Why is Unilever trying the same thing with some Irish supermarkets?
6. Frances, yours is more or less the line taken by Eichengreen as well.
Although I don't quite understand what the fuss is about. That Brexit is a shock is clear, capital flows are reversing. Would it have happened anyway at some point in the future given the high CA deficit? Maybe but who cares. Now the point is: the UK with a floating currency can implement countercyclical policies (fiscal and monetary) to respond to the shock. The ball is in the government side now.
It should be stressed though that if UK had a peg (or had joined the Euro) the impact of the capital flight would have had pro-cyclical effects with much much worse consequences on output and employment.
In the end, crises happen, whether triggered by political decisions or by changes in investors' mood. The UK has the tools to respond, unlike some of its EU partners. Let's hope they use the tools well now.
1. Mirco, I completely agree. If the UK were in a fixed exchange rate system the policy options open to it would be far more restricted and it would be at serious risk of a "sudden stop". Because it has an independent and well-respected central bank, and control of monetary policy due to the floating exchange rate, it can buffer the productive economy to a considerable extent. With supportive fiscal policy, we should be able to ride out this short-term storm reasonably well.
That said, however, the Bank of England can't do everything. Falling sterling does mean inflation in essential goods, particularly oil, gas, foodstuffs and raw materials. This means firstly that businesses will face higher costs, which will squeeze their profits if they are not exporters. Only 11% of UK businesses are exporters, so that means MOST UK businesses will face higher costs. This is bound to have negative consequences for wages and employment. On top of this, households face higher domestic bills. So real incomes will be squeezed from two directions. The Bank of England could raise interest rates to prevent inflation rising too much, but at the moment the Governor is signalling that monetary policy will remain loose. This is probably wise: raising interest rates into a short-term supply shock is not good policy unless inflation is really spiralling badly, which at the moment it is not. It is widely thought that the ECB raising interest rates in the 2011 oil price shock triggered the Eurozone crisis. The Bank of England won't have forgotten that.
Longer-term, recovering from what will be quite a nasty supply-side shock will require fiscal, not monetary, policy.
7. Back to coal then as the indigenous energy source?
1. Not coal but new very efficient combined cycle gas power stations. Natural gas import prices are at a "[...]current level of 4.21 (MMBtu), down from 4.47 last month and down from 6.71 one year ago. This is a change of -5.82% from last month and -37.26% from one year ago". It is a pity that these price reductions are not fully passed on to consumers in our dysfunctional energy markets.
2. Interesting. Why can't these new systems be stuck on top of fracking ng wells, not literally, but very local to the well.
3. Horizontal fracking too new to understand lifespan of a single well. Many small gas plants, e.g. one per site, would be uneconomic. Also, the opposition to fracking might be overcome by the small footprint of well site. But a 200MW plant with electricity pylons to the grid would be hard to disguise with a few trees. And, it is doubtful that a single field could keep such a plant running so build near additional supply points.
BTW - cheaper energy equals cheaper Marmite.
Admirable reply. You can make a valuable contribution to the specific requests asked for by the new infrastructure commission. It does cover energy production.
5. UK fracking due to start early 2017 and Ineos already importing cheap US shale gas via Grangemouth. I suspect Ineos is considering building/buying CC gas plants once it has secured sufficient [cheap] gas supply.
6. Can they not be persuaded to do some crude refining too: jet a1 and diesel with chemicals in completely modern plants.
8. The long term success of the UK economy has been chronically neglected by successive governments for decades. It is now in permanent decline heading towards third world status.
The "point scoring" adversarial political system is unable to establish and support longterm multidecade policies to bring the economy out of the mess.
Built upon an empire, essentially theft from other nations, the uk has since done almost nothing to remain globally competitive. All the hubris has to be knocked out of the island and the stark reality that the uk is now an insignificant and unattractive place to do business must be faced.
India is the largest industrial employer, China is to build a nuclear power station, France is to supply steel for submarines. Britain has entirely lost the plot, seemingly an economy based on rising house prices and a parastic financial industry.
Inward investment? Oh dear, another symptom of third world status. If the uk had an economy then the uk would be making investments abroad, not expecting developing countries to invest in the uk. Which they will no longer be doing, as the gateway to Europe is now closing.
There is no hope. The uk has become a nation of property speculators and benefit collectors run by a bunch of self-serving incompetent politicians.
1. You seem to hit the nail on the head, good and hard.
9. Maybe somebody has already made this point - in which case, apologies - but we keep hearing about serious skill shortages in the UK (which of course is one very good reason why we need well-qualified immigrants). But improving the skills levels of the existing population is much easier said than done, and successive governments have been trying, and failing to correct this problem for decades now. My point is that while it may be a "good thing" in the long run to move away from an unbalanced, finance-based economy, we won't be able to do this without a radical improvement in skills. And it could take a generation, IF it ever succeeds. Our comparative advantage in finance has developed over two or three centuries. You can't just wave a magic wand and turn the UK into....Germany.
10. "But improving the skills levels of the existing population is much easier said than done, "
We did do this rather well during WW2.
How many UK citizens could pilot a four-engine plane, service a radar installation, or even drive an HGV, in 1939?
Mind you, I suspect this was accomplished without input from even one Professor of Education.
11. The GB Pound exchange rate seems to be following a linear downward trend that was going on before Brexit.
In graph #1, if you drew a strait line from the 1st data point to the last you roughly get a linear interpolation (line) fit. The divergence seems to be three months before Brexit when the pound exchange value was rising above the linear line. Then you get reversion to the line with an temporary overshoot after the vote.
Thus, it might not be the fault of Brexit, as the fall started earlier.
1. No way. The sudden fall in sterling in June is very clear, and even more evident on the GBPEUR chart in my latest post. Also, a chart going back further would show sterling falling from the beginning of the year. News reports throughout this time clearly show the fall was due to Brexit uncertainty.
An interesting attempt to rewrite history,but I'm not convinced.
2. "News reports throughout this time clearly show the fall was due to Brexit uncertainty."
So, that explains more than year drop.
Thank you. I stand corrected for analyzing from a foreign country such little information as a graph of two variables. (GBPUSD exchange rate and time.)
After doing some research, it looks as if the referendum was known before it's announcement in February of 2016. As, and in out referendum was a campane promise by Mr. Cameron who was elected prime minister in May 2015. And, there must have been discussions and news before as you mentioned.
My speculative interpretation was not intended to rewrite history. I should have framed it as a question.
So, are the folks in the financial markets acting that far ahead, before referendum announcements?
12. Falling sterling might be an indicator with a problem with the desirability of British exports compared to imports. I don't know how to fit this in with purely merchant traders.
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Patrick Minford's holidays
Skewering Patrick Minford has become something of an economists' bloodsport. I admit, I have done my fair share of Minford-bashing, though I do try to stay away from trade economics. Others are much better at lampooning Minford's antediluvian approach to trade economics than me.
But when Minford starts pontificating on the effect of currency movements on the balance of trade, I can't resist getting out the shotgun. Minford is appallingly bad on anything that involves foreign exchange. He just doesn't seem to understand how floating exchange rates interact with trade dynamics and capital flows. So it is unsurprising that his latest venture into this complex subject is as disastrous as the last.
Here is Minford, in the Express, talking about Brits and their holidays:
The mood of British consumers is good, reflecting the fact that the economy continues to grow and create record employment.
A staycation is best because of the Brexit devaluation, which makes British holidays unbeatable value and is driving a strong improvement in the UK’s balance of payments.
As a reminder, here is the Brexit depreciation,* charted:
No, you are not seeing things. Most of the real depreciation happened before the Brexit vote. Maybe the FX community priced in Brexit even though they didn't really expect it? Mind you, the pound has never recovered - perhaps Brexit might have something to do with that. Though personally I think it is more likely that what is keeping the pound down is the total shambles that the Government is making of Brexit. Would you invest in sterling assets right now, if you didn't have to?
But even if there were a "Brexit devaluation", the notion that it makes holidays in the U.K. "unbeatable value" for Brits is completely loony. What sterling depreciation has done is make holidays everywhere else more expensive for Brits. Holidays in the U.K. are no cheaper than they were before. They may even be more expensive, if the tourist industry is cashing in on a windfall from Brits forced to forego their customary 10 days on the Algarve. You know, demand rising faster than supply results in higher prices? For some reason, when foreign exchange is involved, Minford's grasp of basic economics seems to desert him. However you look at it, British holidays for Brits are not "unbeatable value". They are a poor substitute for the sun and sand to which Brits have become accustomed. I would also have to say, from my own experience of holidaying in the U.K., that even with sterling depreciation they may not work out much cheaper than a holiday abroad. Entertaining the kids in the British rain can be extremely expensive.
But are holidays in Britain "unbeatable value" for everyone else? This is sterling versus the U.S. dollar:
Hmm. If I were an American, I would be kicking myself if I didn't visit the UK in late 2016 or early 2017. That was "unbeatable value". Now, not so much.
It's also worth noting that the "Brexit devaluation" in the second half of 2016 was short-lived: by the end of 2017 the pound was almost back to where it had been before the vote, though not back to where it was in 2015. Sterling depreciation in 2018 is mainly because of a very strong dollar, driven up by Fed interest rate rises, quantitative tightening and the Trump administration's tax cuts. The pound is far from the only currency that is depreciating versus the dollar.
How about Europeans? Here's sterling versus the Euro:
Holidaying in the U.K. looks pretty good for Europeans right now - as indeed it has for the whole of the last year, largely because of the strength of the Euro due to the Eurozone economic recovery. Yes, you read that right. The persistent weakness of sterling versus the Euro is because the Eurozone is growing more strongly than the U.K. The U.K. may have record low unemployment, but real wages are barely keeping pace with the inflation caused by sterling depreciation and, more recently, oil price rises. Furthermore, U.K. GDP growth has collapsed since the Brexit vote and is now weaker than in either the Eurozone or the U.S., according to the OECD:
.But what about the "mood of consumers"? Is it as buoyant as Minford says? Here is what Deloitte has to say about U.K. consumer confidence right now:
Consumer confidence improved in the second quarter of 2018, according to the latest Deloitte Consumer Tracker. Overall consumer confidence grew by two percentage points to -4% benefitting from the effects of a strong labour market, gradual wage growth and the feel-good factor associated with the start of the summer...
Eh, wait....minus four percent?
...This represents the highest level of consumer confidence since the Tracker started in 2011 and comes after a year of consistent growth from a low point of -10% in Q2 2017. However, there is a note of caution alongside these results as confidence remains in overall negative territory.
Consumer mood, gloomy but improving. Hardly "good", is it, Patrick?
But I have been saving the best till last. Minford says that the "Brexit devaluation" - which remember is now over two years old - is "driving a strong improvement in the balance of payments". Now of course he is quoted in the Express, which is not noted for its strength in the economics department. I'm not sure that the average Express reader would have much idea what the "balance of payments" is. But readers of this blog do, so I've fact-checked Minford's statement. It's complete baloney.
Here is the U.K.'s balance of payments since 2015, from the latest ONS balance of payments release (which unfortunately does not take us beyond March 2018):
Perhaps my eyes aren't what they used to be, but this doesn't look like a "strong improvement" to me. It looks like a stubborn deficit in trade in goods, an equally stubborn surplus in trade in services, and some variation in primary income. The narrowing of the current account deficit since Q4 2015 appears to be almost entirely driven by changes in primary income, and all it has done is restore the balance to where it was in Q1 2015. That's not "improvement", it's stagnation.
But perhaps Minford means the trade balance, not the current account. The trade balance is the balance of exports and imports in both goods and services. Here it is from 2016 to Q2 2018:
Umm, this doesn't look like a "strong improvement" either. What does the ONS itself have to say about the trade balance?
• The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.
• Removing the effect of inflation, the total trade deficit widened £4.1 billion in the three months to June 2018; falling goods export volumes were the main factor as prices generally increased.
• The trade in goods deficit widened £2.9 billion with countries outside the EU and £2.6 billion with the EU in the three months to June 2018.
Oops. So much for sterling depreciation causing a "strong improvement in the balance of payments". Currently, the trade deficit is worsening.
The fact is that everything Minford said is wrong. There is no "strong improvement" in the balance of payments, holidays in Britain aren't "unbeatable value" for Brits, consumer mood is not "good", and although the U.K. economy is "continuing to grow", it is much weaker than before the Brexit vote. Brexit uncertainty is undoubtedly weighing on the pound, but the "Brexit devaluation" simply is not generating the benefits that Minford claims.
Of course, if Brits all chose to holiday in Britain instead of flying to the sun, there would be an improvement in the balance of payments. Perhaps that's what Minford wants. After all, his exuberant post-Brexit forecasts (as much as 6.8% boost to GDP) depend upon sterling depreciation strongly boosting the UK's external position. He's got to bring it about somehow. So, Brits, stay at home. Your country needs it.
If I were of a suspicious frame of mind, I would at this point start wondering whether Minford set out to deceive Express readers, who - let's face it - are somewhat gullible when it comes to fictitious data and voodoo economics which support their Brexit faith. But it may be that he was misquoted by Express journalists, who aren't exactly known for factual accuracy. Or perhaps he is just losing it.
Whatever the reason, those two sentences from Minford are no more true than "£350m for the NHS" on the side of a bus. And no more honest.
Related reading:
Tariffs, trade and money illusion
An Alternative Brexit Polemic
The snake oil sellers
* Minford incorrectly uses the term "devaluation" to mean "depreciation". Devaluation is a deliberate act of policy, usually in a fixed or managed exchange rate system - for example, Wilson's devaluation of the pound in 1967. Depreciation is a fall in the market exchange rate.
1. Some indication of what Minford had in mind on the balance of payments might be given by his letter to The Times from July ( His figures are correct and only a little selective. However, I think his assertion that this reflects changes in trade rather than in investment income is incorrect.
1. Thanks Nick. That's interesting. I think you may well be right about investment income. I will have a look at the NIIP for that period.
2. Nick, it's definitely caused by changes in primary income, not trade. Specifically, income from direct investment turned negative in Q4 2015, but has now recovered and is roughly back to where it was in Q1 2015. The peak to trough movement is getting on for £10bn, which is more than enough to account for the improvement in the current account balance. See chart 3 here:
2. This comment has been removed by the author.
1. I used figures going back over two years. That is what the charts show, including the trade balance chart from the latest ONS release.
I have warned you before about personal attacks and rudeness. I will not post comments from you that attack me or anyone else commenting on this site.
2. This comment has been removed by the author.
3. This is not a political post, it is simply a debunking of extremely dodgy economic assertions and wrong statistics. Please confine yourself to discussing the subject of the post and refrain from political grandstanding.
4. I remind you AGAIN of the comment policy of his blog, as stated on the About This Blog page:
- be polite and refrain from personal attacks on me or anyone else
- stick to the topic.
I will delete any posts you make that violate either of these rules.
5. This comment has been removed by a blog administrator.
6. This comment has been removed by a blog administrator.
3. Depends entirely on the period over which the analysis takes place, e.g.
1. Consumer confidence - is (i) much higher than in 08/09, (ii) lower than in 15, and (iii) had been increasing from late 17.
2. Current account balance - is significantly better than in Q5 15, worse than in Q1 17, had been trending up since Q2 17.
On the 'value' point, similarly depends on if the term is being used on an absolute or comparative basis.
Minford may not have made all of that clear. I'm not taking a position either way. But there are valid arguments supported by selective data points for his position, just as there are for yours.
4. Do other economies - the Eurozone for example - take 0.7% of all domestic sales/purchases, i.e. their GDP and send it abroad by law as foreign aid?
Our 2018 Economic growth figure is an expansion in sales/purchases (GDP) in the economy, of just 0.3%.
If 0.7% of that economies GDP is then to be taken, and sent abroad, doesn't that mean actual domestic economic activity has shrunk overall by -0.5%???
If GDP = C + I + G + (I -E) i.e. the Balance of Payments bit (Imports-Exports) on the end, means we subtract the money that is sent/spent abroad, this would indicate we are in a recession caused by excessive foreign aid payments.
How have I got this wrong???
1. It's not that simple.
Firstly, you have the national accounting wrong. Foreign aid is not part of the external sector (I-E). It is part of G. If you reduce G by that amount, total GDP is reduced, obviously. But as the benefit of foreign aid shows itself in the balance of payments (countries receiving aid can be better able to afford our exports), removing it from G only overstates GDP ex-foreign aid.
Secondly, you have GDP growth figures wrong. 0.3% is a quarterly figure, not a full-year figure. Independent forecast figures published by HM Treasury show estimated full-year GDP growth rate for 2018 as 1.4%.
Nice try, but foreign aid is a fleabite, no more.
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Can the U.K. Grow Through Devaluation?
Why didn’t the U.K.’s 25% devaluation work?
The answer most Keynesians immediately offer up is the U.K. government’s insistence on pursuing an austerity program during a period when there’s a shortfall of aggregate demand and a tightening of credit conditions–never mind the private sector’s urge to deleverage.
On the other hand, not everyone trusts the GDP data. U.K. employment has grown strongly during recent months, belying the GDP reports’ suggestion the country is back in recession.
But even if you doubt the GDP data, it’s hard to escape the view that the U.K. economy is struggling relative to previous recoveries.
One major problem with the devaluation was that businesses tend to take time to respond to changes in exchange rates. Supply contracts are usually for many months ahead and it takes a while for increased demand to filter through to increased investment and employment. What’s more, input costs go up pretty quickly as commodity prices rise. So the benefit of higher prices for exported goods is delayed while cost pressures are felt pretty quickly.
At the same time, households are hit by higher prices of imported goods, especially food and fuel. The Bank of England underestimated the degree of price pass-through by a big margin in calculating the effects of the depreciation on inflation.
In the U.K., price rises from the devaluation were exacerbated by rises in the value-added consumption tax. With earnings remaining static and inflation rising, British households were squeezed hard.
What’s more, the U.K.’s manufacturing sector had shrunk so much over the decades that even to the degree that it was helped by a weaker pound, the effect was swamped by the hit to household incomes.
Meanwhile, sterling’s devaluation has in part been reversed. Sterling has appreciated roughly 8% on a trade-weighted basis over the past year.
It’s not clear that devaluations are necessarily expansionary even on a theoretical basis. A paper by Paul Krugman during the 1970s argued that in so far as devaluation shifts resources towards economic actors with higher propensities to save, a falling currency can be contractionary. Which, it seems, happened in the U.K. over the past few years.
As Tyler Cowen, a George Mason University professor, recently pointed out on his Marginal Revolution blog, country-specific factors are extremely important when discussing the effects of depreciation.
What’s more, to the degree that foreign exchange movements are a barometer of sentiment about an economy’s future outlook, a falling currency can be a disincentive for companies to invest. This is most easily seen by the relative performance of the German, Japanese and Swiss export sectors during their strong currency periods. Firms invested in labor-saving technology, went up the feeding chain in terms of technology and quality, and therefore to higher-margin activities.
And yet the Bank of England is committed to its view that the way forward is growth through a weaker pound through continued expansion of its quantitative easing program and lower for ever interest rates. Maybe it’ll work. Eventually.
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Does a devaluation help the economy?
A devaluation (depreciation) occurs when the exchange rate falls in value. This causes exports to be cheaper and imports to be more expensive. In theory, it can help increase economic growth, though it may cause inflation.
In theory, a devaluation will cause the following to happen:
• The price of UK exports will be lower in foreign currencies. This will increase the competitiveness of UK exports and should cause an increase in demand for UK exports.
• The price of imported goods into the UK will increase. This will reduce our spending on imports and instead we will be more likely to buy domestic goods.
• The increase in (X-M) should cause an increase in Aggregate Demand (AD), economic growth and cause a reduction in unemployment.
• The increased competitiveness should cause an improvement in the current account on the balance of payments.
The impact of a devaluation depends on economic circumstances.
• If a country is suffering from being uncompetitive with high unemployment and low inflation – a devaluation may help considerably.
• However, in a severely depressed global economy (e.g. 2008-13), a devaluation may be insufficient to restore economic growth.
• The fall in the value of the Pound (2016) is partly due to concerns over Brexit (British exit from EU). This is causing uncertainty and will likely to reduce investment from export firms. In this situation, the devaluation will probably do little to boost economic growth. However, with inflation near zero, the usual inflationary pressure of devaluation will not be a problem.
UK Devaluation between 2008 and 2013
Between 2008 and 2013, the Pound experienced a 25-30% devaluation in Sterling, but the UK had only a weak recovery, some cost push inflation and a surprisingly large current account deficit. It seems the depreciation in the pound did little to help the UK economy. This was due to several factors
• Demand for exports and imports relatively inelastic. UK continued to import more expensive German cars, but export demand also inelastic.
• Weak Eurozone growth. 2008-13 was a period of low EU growth, therefore more competitive UK exports were insufficient to boost export demand.
• Fiscal austerity and fall in bank lending were major factors depressing the economy. Therefore, the devaluation was insufficient to compensate for the fall in other components of AD.
Pound Sterling Index
Pound Sterling index. The Index measures the value of the Pound Sterling against a basket of major trading countries.
Impact of devaluation on economic growth
1. Economic growth. In terms of economic growth, the five years after 2007/08 devaluation were relatively low. The devaluation was insufficient to stop the deepest recession for a long time, and the recovery was weak – compared to other recoveries. (see: Comparison of different recessions)
2. Current account deficit. The current account deficit actually got bigger from 2010.
In 2008, the current account deficit was less than 2% of GDP. At the end of 2013, this current account deficit fell to more than 5% of GDP – a very high deficit (more at current account balance of payments) This seems to contradict economic theory – as you would expect a devaluation to improve the current account – not worsen it.
How do we explain the relative failure of devaluation to rebalance the economy in UK 2007-13?
1. Inelastic demand for exports and imports Evidence suggests that demand for UK exports is relatively inelastic. UK exports have become less price competitive as we’ve moved away from low-cost manufacturers to a variety of services and high-tech manufacturing; these goods tend to have relatively few close substitutes. Therefore, even if the price falls, the increase in demand is relatively low. Similarly, demand for imports is relatively inelastic meaning we continue to pay the higher price. (The Marshall-Lerner condition states a devaluation will worsen the current account if PEDx + PEDm >1)
2. Firms didn’t always pass on the effects of devaluation. In theory, devaluation leads to a lower price of exports. However, firms could choose instead to keep the foreign currency prices the same, but increase their profit margins instead. Rather than passing the devaluation onto foreign customers, UK exporters just make more profit. In a recession, exporters are keen to improve their cash balances and so are keen to increase profit margins.
In 2008, the Bank of England showed that the rapid devaluation hadn’t caused a fall in the UK terms of trade. UK export prices didn’t fall, but actually increased. It explains how a devaluation may not cause lower export prices – at least in the short term.
Source: Bank of England. See terms of trade effect
3. Weak external demand
A devaluation is not much help if your main export partners are in a recession. The double dip EU recession means there has been a fall in demand for UK exports. This has outweighed the more competitive prices. The weak external demand is a key factor in disappointing current account figures.
4. Higher import prices
UK Inflation showing cost push inflation in 2008 and 2012
The problem of devaluation is that it leads to higher import prices. Raw materials used in production increase in price and contribute to cost-push inflation. To some extent, higher raw material costs offsets the lower export prices. Recently, the Bank of England deputy governor, Paul Tucker stated he would be open to a weaker pound, but the benefits of a weaker pound would be lost if inflation expectations rose. (Reuters)
The impact on inflation has been muted because of the negative output gap; but, in the past few years, the inflationary impact of devaluation has often been greater than the Bank of England forecast and was a major factor in explaining the cost push inflation we have seen in recent years.
As a rough rule of thumb, a 10% devaluation may increase prices by 2-3%.
The components of the CPI most effected by a devaluation are (regression coefficient)
1. Air travel (-1.29)
2. Vegetables (-1.22)
3. Gas (-0.71)
4. Fuel (-0.54)
5. Books (-0.35)
5. Poor Productivity growth
Devaluation only really affects demand. The other side of the equation is supply and productive capacity. The past five years have been very disappointing from the perspective of UK productivity. Devaluation doesn’t necessarily do anything to promote investment and higher productivity. Some even argue that devaluation can reduce the incentive to be efficient because you become competitive without the effort of increasing productivity. Poor productivity could be another factor explaining the current account deficit.
Overall Impact of devaluation
Devaluation 2008-12 had less impact on the economy than we might expect. Devaluation is certainly no magic bullet, which solves the ills of the economy. Part of the reason is that the whole global economy, and Europe in particular, was depressed. In a depressed global environment, the benefits of a devaluation are muted. However, despite the limited impact of devaluation, I believe the economy would be significantly worse, if we were in the Euro and 30% overvalued. If that was the case, we would be struggling to regain competitiveness through internal devaluation – an even deeper recession.
Devaluation of 2016
What about the devaluation of 2016, will this help the UK economy?
In many regards, it may be a repeat of 2008 – a fall in the value of the Pound doing little to help the economy.
• Global growth is weak
• Demand is relatively inelastic
• The pound is falling over uncertainty – e.g. Brexit. This will not encourage manufacturers to invest.
Examples of devaluation
(1) See technical difference between depreciation and devaluation here. I sometimes use devaluation when correct term is depreciation only because in everyday language people tend to talk about devaluations when strictly speaking it is a depreciation.
By on June 2nd, 2016
5 thoughts on “Does a devaluation help the economy?
1. If firms do not pass on the price reduction made possible via currency depreciation, say by maintaining $ or Euro prices, they will receive more Sterling for their exports. If the demand for such goods is price inelastic, that might be beneficial to UK Balance of Trade.
1. So any adjustment in output would have to be in import replacing sectors. It takes time and it seems likely that the uncertainty slows down adjustment.
Nobody will add capacity while the outlook is uncertain and exporters may be happy to take higher Sterling margins rather than extra volume.
2. It depends on how quickly information is received by the parties concerned – the importers and exporters – when more time is taken, even with the devaluation Balance of trade would worsen. The situation will gradually improve as seen from the j curve effect. However, if the rate of inflation rises, than those of its competitors, a country will not be able to manage its competitiveness in the international front, and export revenue is likely to fall and imports show a rising trend. This would deteriorate the current account balance. Therefore devaluation should be exercised with great care.
3. Isn’t a further problem that the UK has lost a lot of exporting companies – particularly during the Thatcher years – so whilst the devaluation of sterling should give us an advantage we no longer of the goods to sell?
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Advantages and disadvantages of devaluation
Readers question: what are the advantages and disadvantages of devaluation?
Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation means that the value of the currency falls. Domestic residents will find imports and foreign travel more expensive. However domestic exports will benefit from their exports becoming cheaper.
Advantages of devaluation
1. Exports become cheaper and more competitive to foreign buyers. Therefore, this provides a boost for domestic demand and could lead to job creation in the export sector.
2. A higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.
3. Higher exports and aggregate demand (AD) can lead to higher rates of economic growth.
4. Devaluation is a less damaging way to restore competitiveness than ‘internal devaluation‘. Internal devaluation relies on deflationary policies to reduce prices by reducing aggregate demand. Devaluation can restore competitiveness without reducing aggregate demand.
5. With a decision to devalue the currency, the Central Bank can cut interest rates as it no longer needs to ‘prop up’ the currency with high interest rates.
Disadvantages of devaluation
1. Inflation. Devaluation is likely to cause inflation because:
• Imports will be more expensive (any imported good or raw material will increase in price)
• Aggregate Demand (AD) increases – causing demand-pull inflation.
• Firms/exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness. The concern is in the long-term devaluation may lead to lower productivity because of the decline in incentives.
2. Reduces the purchasing power of citizens abroad. e.g. it is more expensive to go on holiday abroad.
3. Reduced real wages. In a period of low wage growth, a devaluation which causes rising import prices will make many consumers feel worse off. This was an issue in the UK during the period 2007-2018.
4. A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because the devaluation is effectively reducing the real value of their holdings. In some cases, rapid devaluation can trigger capital flight.
5. If consumers have debts, e.g. mortgages in foreign currency – after a devaluation, they will see a sharp rise in the cost of their debt repayments. This occurred in Hungary when many had taken out a mortgage in foreign currency and after the devaluation it became very expensive to pay off Euro denominated mortgages.
Evaluation of impact of devaluation
• It depends on the state of the business cycle – In a recession a devaluation can help boost growth without causing inflation. In a boom, a devaluation is more likely to cause inflation.
• The elasticity of demand. A devaluation may take a while to improve current account because demand is inelastic in the short term. However, if demand is price elastic, then it will cause a relatively bigger increase in demand for exports. (See: J-Curve effect)
• If the country has lost competitiveness in a fixed exchange rate, a devaluation could be beneficial in solving that decline in competitiveness.
• Exports and imports increasingly invoiced in dominant currencies such as Euro and Dollar. This means that a fall in the value of Sterling has less impact on UK competitiveness because UK exports may be involved in Euros anyway. See paper on “Dominant Currency Paradigm” August 7, 2017 (Casas, Gopinath)
• Type of economy. A developing economy which relies on import of raw materials may experience serious costs from a devaluation which makes basic goods and food more expensive.
Case studies of devaluation
UK leaving ERM in 1992
In 1992, the UK was in recession. Trying to keep the Pound in the ERM, the government increased interest rates to 15%. When the government left the ERM, the Pound devalued 20%, but more importantly, it allowed interest rates to be cut, and the economy recovered. This is widely considered to be a beneficial devaluation. An important note is that the Pound was overvalued in early 1992.
See: also: UK in the ERM 1992
2. UK – 25% fall in value of Sterling in 2008/09
The pound fell considerably after the financial crisis of 2008/09, the depreciation in the Pound made UK goods more competitive. It also caused some cost-push inflation. The benefits of this depreciation were muted because of weak export demand in the global recession. The depreciation in the Pound also caused imported inflation, which during a time of low wage growth, reduced household living standards.
Between 2007 and 2018, UK prices rose 30%, compared to 17% in the Eurozone.
With low wage growth, imported inflation has led to periods of falling real wages.
3. Russian economic crisis – 2014
The Rouble plunged during the economic crisis. This was due to fall in price of oil and balance of payments problems. The scale of this devaluation was not helpful – causing a rise in inflation and decline in living standards. The problem was not so much the devaluation as the fact the economy was reliant on oil exports – so when oil prices fell there was a significant fall in demand for the Rouble.
See: Fall in value of the Rouble – an example of the impact of the devaluation in the value of the Rouble on the Russian economy.
Long-term effects vs short-term effects
A long-term devaluation tends to reflect an underperforming economy.
In the post-war period, the UK has experienced a decline in the value of the Pounds against its main competitors
• 1948, £1 = $4 and 13.4DM
• 2018, £1= $1.3 and 2.2DM
This shows the Pound has fallen, but in this period, UK living standards have increased at a slower rate than the main G7 economies (apart from Canada) Generally, in the long-term the weak pound is caused by a weak economy (relatively high inflation)
Note: See explanation on the technical difference between devaluation and depreciation.
See also:
By on September 19th, 2018
15 thoughts on “Advantages and disadvantages of devaluation
1. one of the disadvantage of devaluation is:A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings. Can it work to developing countries?
2. Am sory to say that devaluation has no significant positive impact on the Nigerian economy.its disadvantage is more felt and therefore not good in our context.we havnt significant export to enjoy devaluation.
3. To some developing countries like Zimbabwe if imports are basic eg raw materials,oil wich has inelastic demand,the importers wil b left wit no altanative bt to pass the next cost to consumers by way of high prices.If so we wil be at the mercy of cost push inflation
4. What are the operation that the world trade organisation undertake to operates in global system of trade rules
5. My name is Tandaika Michael am studying at saut in Tanzania. I like to visit this site, but can we specify exactly the roles of devaluation in country’s economy??
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The effects of an appreciation
An appreciation means an increase in the value of a currency against other foreign currency.
An appreciation makes exports more expensive and imports cheaper.
An example of an appreciation in the value of the Pound 2009 – 2012
• Jan 2009 If £1 = €1.1
• June 2012 £1 = €1.27
• In this case, we can say there was a 15% appreciation in the value of the Pound against the Euro – between Jan 2009 and June 2012.
Effects of an appreciation on the UK economy
1. Exports more expensive. The foreign price of UK exports will increase – so Europeans will find British exports more expensive. Therefore with a higher price, we would expect to see a fall in the quantity of UK exports.
1. Imports are cheaper. UK consumers will find that £1 now buys a greater quantity of European goods. Therefore, with cheaper imports, we would expect to see an increase in the number of imports.
1. Lower (X-M) With lower export demand and greater spending on imports, we would expect fall in domestic aggregate demand (AD), causing lower economic growth.
1. Lower inflation. An appreciation tends to cause lower inflation because:
• import prices are cheaper. The cost of imported goods and raw materials will fall after an appreciation, e.g. imported oil will decrease, leading to cheaper petrol prices.
• Lower AD leads to lower demand-pull inflation.
• With export prices more expensive, manufacturers have greater incentives to cut costs to try and remain competitive.
2. Monetary policy. It is possible that an appreciation in the exchange rate may make the Central Bank more willing to cut interest rates.
• An appreciation reduces inflationary pressure so interest rates can be lower.
• Also higher interest rates would cause the currency to rise even more. If the Central Bank thought appreciation was too rapid, they may cut rates to reduce the value of the currency.
Impact of appreciation on AD/AS
Assuming demand is relatively elastic, an appreciation contributes to lower AD (or a slower growth of AD), leading to lower inflation and lower economic growth.
Impact of an appreciation on the current account
Assuming demand is relatively elastic, we would expect an appreciation to worsen the current account position. Exports are more expensive, so we get a fall in eXports. Imports are cheaper and so we see an increase in iMports. This will cause a bigger deficit on the current account.
However, the impact on the current account is not certain:
1. An appreciation will tend to reduce inflation. This can make UK goods more competitive, leading to stronger exports in the long term, therefore, this could help improve the current account.
2. The impact on the current account depends on the elasticity of demand. If demand for imports and exports is inelastic, then the current account could even improve. Exports are more expensive, but if demand is inelastic, there will only be a small fall in demand. The value of exports will increase. If demand for exports is price elastic, there will be a proportionately greater fall in export demand, and there will be a fall in the value of exports.
3. Often in the short term, demand is inelastic, but over time people become more price sensitive and demand more elastic. It also depends on what goods you export. Some goods with little competition will be inelastic. China’s manufacturing exports are more likely to be price sensitive because there is more competition.
Evaluating the effects of an appreciation
• Elasticity. The impact of an appreciation depends upon the price elasticity of demand for exports and imports. The Marshall Lerner condition stations that an appreciation will worsen the current account if (PEDx + PEDm >1)
• Elasticity varies over time. In the short run, we often find demand for exports and imports is inelastic, so an appreciation improves current account. But, over time, demand becomes more elastic as people switch to alternatives.
• The impact of an appreciation depends on the situation of the economy. If the economy is in a recession, then an appreciation will cause a significant fall in aggregate demand, and will probably contribute to higher unemployment. However, if the economy is in a boom, then an appreciation will help reduce inflationary pressures and limit the growth rate without too much adverse impact.
• It also depends on economic growth in other countries. If Europe was experiencing strong growth, they would be more likely to keep buying UK exports, even though they are more expensive. However, in 2012, the EU economy was in a recession and therefore was sensitive to the increased price of UK exports.
• It also depends on why the exchange rate is increasing in value. If there is an appreciation because the economy is becoming more competitive, then the appreciation will not be causing a loss of competitiveness. But, if there is an appreciation because of speculation or weakness in other countries, then the appreciation could cause a bigger loss of competitiveness.
Is an appreciation good or bad?
• An appreciation can help improve living standards – it enables consumers to buy cheaper imports.
• If the appreciation is a result of improved competitiveness, then the appreciation is sustainable, and it shouldn’t cause lower growth.
• An appreciation could be a problem if the currency appreciates rapidly during difficult economic circumstances.
Rapid appreciation in 1979 and 1980 contributed to recession of 1980 – 81
For example, in 1979 and 1980, the UK had a sharp appreciation in the exchange rate, partly due to the discovery of North Sea oil. The value of the Pound increased from £1=$1.5 to £1 = $2.5. However, this appreciation was a factor in causing the recession of 1981 – which particularly affected UK exports and manufacturing.
14 thoughts on “The effects of an appreciation”
1. the only problem with the appreciation is it makes the exports expensive which in turn will affect the economy after some years. so according to me the ratio of imports and exports must be maintained properly.
• appreciation will to some extent induce deflation since imports will be cheaper and domestic producers will be now loosing the market as their prices will be high so they will reduce their prices so as to fight competition against import prices and attract consumers to shift and buy domestic products.
• Foreign investment will fall in case of appreciation and pull out of the domestic country since it will be more expensive for the foreign country’s currency to convert into the domestic country’s currency after the rise in the exchange rate.
Local investment will also fall since exports will become expensive and foreign country’s may switch to cheaper exports from other countries. It will be more expensive for the local investors to undertake production for exports since entrepreneurs are often profit maximizing. However, this happens when the PED for the exports is elastic. In case of inelastic goods, exports revenue may actually rise and local investors will gain from the appreciation of the currency.
2. appreciation is good in a closed economy and in command economies but in open economies in the long run it is not beneficial
3. if a country still has fixed exchange rate system (e.g domestic currency is pegged to the dollar) and displays a large imbalance in balance of payment in form of a current account deficit then what can b e potential monetary medium to long term problems the country may face?
4. The UK is in a unique position where it doesn’t really have much to export – especially products that will be effected by fx (north sea oil etc…).
It’s therefore more suited to following an economic policy that keeps the GBP at a stronger level, since it has little to gain from exports.
The stronger GBP would also mean that the UK is able to benefit from being a strong currency haven that is able home in as a banking center.
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The Exchange Rate and the Balance of Payments
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The Exchange Rate and the Balance of Payments
For those of you who have not read the previous Learn-It, here is a quick recap. Theoretically, a current account deficit should cause the value of the pound to fall. In this case, the value of imports into the UK is higher than the value of exports sold to foreigners. Hence, the demand for foreign currencies to buy these imports is higher than the demand for the pound to by our exports. Simple supply and demand analysis, therefore, suggests that the value of the pound should fall. For a current account surplus, simply reverse the above explanation.
In the case of a deficit, the subsequent lower value of the pound will make exports relatively cheaper and imports relatively more expensive. The value of exports sold should rise and the value of imports bought should fall. The deficit should be eliminated automatically (again, reverse the explanation for a surplus).
This story worked well until the controls on the world capital markets were lifted. Once capital could go wherever it wanted, currency transactions for investment and speculative purposes took over. A country's trade position is no longer relevant. If an economy is doing well, which usually means that consumer spending is high (spending on imports in particular), a current account deficit is expected. Perversely, instead of the currency falling for the reasons outlined above, the currency is as likely to rise, because investors and speculators like to place their money on 'winners' (for example, economies that are doing well). In fact, a currency may even rise following a cut in interest rates (which would normally cause the currency to fall following the outflow of money trying to find better rates elsewhere) because the markets may take it as a sign that the economy will improve in the future! See the previous Learn-It for more discussion on the determination of the exchange rate.
In the rest of this Learn-It, we shall be looking at the theoretical relationship between a change in the exchange rate and current account disequilibria.
Assume that the UK has a current account deficit (which is not hard to do!). If the pound were to devalue (a large drop in its value) then one would expect the deficit to reduce. Why? Because exports will become relatively cheaper, and so their demand should rise in foreign markets, and imports will become relatively more expensive, so their demand should fall in the UK.
But will this always be the case? The success of a devaluation of the pound in terms of reducing a current account deficit will depend on foreigners' elasticity of demand for British exports and UK consumer's elasticity of demand for foreign imports.
The Marshall Lerner condition states that for a devaluation to be successful in terms of a reduced current account deficit, the sum of the two elasticities, must be greater than one.
To illustrate that this should be true, let's look at exports and imports separately.
Export elasticity
If you think about it, UK exporters can't go wrong if the pound falls in value. How ever small the depreciation in the pound is, and however low the elasticity for their exports is, the revenue they will receive will have to rise.
For example, let's take a car company that is exporting cars to the USA whose price is £10,000 in the UK. Let us also assume that the exchange rate between these two countries is £1 = $2. These cars will have a price of $20,000 in the USA. Now assume that the pound devalues by 10% so that the new exchange rate is £1 = $1.80. The price in the USA is now $18,000. Unless the elasticity of demand for these cars in the USA is zero (highly unlikely) then the demand for these cars in the USA will increase. Although American consumers now only have to pay $18,000, the British car company still receives £10,000 for each sale. However large or small the fall in the value of the pound is, the sterling price of the car stays the same. Even if this company only sells one extra car, they will still receive an extra £10,000.
In summary, for export revenue to rise following a devaluation of the pound, the elasticity of demand for these exports simply has to be greater than zero (which is perfectly inelastic demand). Obviously, the higher the elasticity the bigger the increase in export revenue, but anything over zero will help reduce the current account deficit.
Import elasticity
In the case of imports the situation is a little less favourable. A devaluation of the pound will cause the price of imports into the UK to rise. The demand for these imports will fall, but the revenue that the foreign producers receive will not necessarily fall.
For example, assume that an American car company exports their cars into the UK. The price for these cars in the USA is $30,000. Again, assume that the initial exchange rate is £1 = $2. This means that the price of these cars in the UK will be £15,000. Now assume that the pound devalues by 25% giving an exchange rate of £1 = $1.50. Swapping this exchange rate around to give the price of dollars in terms of pounds, we have $1 = £0.67. So now the American cars are priced at £20,000 in the UK. The change in the revenue received by the American car company will depend on the elasticity of demand for their cars in the UK.
Assume that the elasticity is 1.5, which is relatively elastic. As you will know from the topic called 'Elasticities', if demand is relatively elastic and the price rises, the decrease in demand will be relatively larger. This means that the loss in revenue from the decrease in demand is higher than the gain in revenue on each unit due to the higher price. The diagram below helps to explain:
Import elasticity
Note that the elastic demand curve is relatively flat, so that when the price rises, the fall in demand is relatively larger, and the 'gain' box is much smaller than the 'loss' box. The more elastic the demand for UK imports is, the more successful a devaluation will be in terms of reducing import revenues (which go out of the country) and the bigger the reduction in the current account deficit.
Now assume that the elasticity is 0.5, which is relatively inelastic. Again, you should know that, in this case, when the price rises, the decrease in demand in relatively smaller. This means that the loss in revenue from the decrease in demand is lower than the gain in revenue on each unit due to the higher price:
Import elasticity
This demand curve is relatively inelastic, and so is fairly steep. You can see that the price rise is proportionately much larger than the fall in demand, so the 'gain' box is much larger than the 'loss' box. If the demand for UK imports is relatively inelastic then devaluation will result in increasing import revenues (which go out of the country), which contribute to a larger current account deficit.
Putting exports and imports together
So, the condition for exports and imports separately can be summarised as follows:
Eex > 0 for a devaluation to increase export revenues
Eim > 1 for a devaluation to reduce foreigners import revenue
By adding the zero and the one, we get the following overall condition:
Eex + Eim > 1 For a devaluation to be successful in terms of reducing a current account deficit.
Note that, overall, as long as the two elasticities add up to more than one the devaluation will reduce the deficit, even if the two individual conditions above are not satisfied. For example, if Eex = 0.6 and Eim = 0.6, import revenue will rise following a devaluation, but this will be more than compensated for by a larger rise in export revenue. The elasticities add up to 1.2, which is more than one, so overall the situation improves. Obviously, the higher both elasticities are, the more successful devaluation will be in terms of reducing the current account deficit.
As the title suggests, this is a curve that is shaped like a 'J'. Look at the diagram below:
The J-curve
Let us assume that the economy is at point A, experiencing a current account deficit. The government decides to devalue the pound to help eliminate this deficit. The J-curve shows that, in the short term, the deficit may get bigger before, eventually, it starts to reduce. In other words, the Marshall Lerner condition is not satisfied in the short run, even though it will be in the medium to long term.
Why might this be the case? The main reason is time lags. It takes time for producers and consumers to adjust their purchases to the changed prices brought about by the devalued exchange rate. Certainly, firms will have orders planned in advance, and will not react to the price changes for a number of months.
Exports revenues may not rise immediately, but they will not fall either, but foreign import revenues may well rise, as increased import prices are combined with static, or at least very inelastic, demand. The current account deficit will probably get worse. After a period of time, foreigners will react to the lower export prices and UK firms and consumers will react to the higher import prices. The Marshall Lerner condition should be satisfied as demand for both exports and imports become more elastic and the deficit should start to fall.
Remember that higher import prices will feed through to higher inflation eventually. This will reduce the competitiveness of British industry causing long-term problems for the current account. This is why many politicians see devaluation as failure. Once the economy is past the trough of the J-curve and the deficit is falling, the devaluation may seem like a good idea. But the subsequent rise in inflation (the government's number one macroeconomic objective nowadays) and its implications for competitiveness mean that devaluation is never a good long-term solution. British exporters complain of the high pound, but devaluation will not necessarily do them any favours.
It should be noted that in today's world of free flowing capital, it is very hard (some would say impossible) for a government to actually implement a policy of devaluation. The markets decide the country's exchange rate. When the UK was part of the Bretton Woods fixed exchange rate system, occasional 'realignments' would occur (i.e. devaluations). Now that the pound floats on the foreign exchange markets, the currency might appreciate (rise gently in value) or depreciate (fall gently in value) but big, one off drops in the value of the currency do not really happen. The last big devaluation was when the pound fell out of the ERM and the pound fell by around 15% in one day.
The 'upside down' J-curve
The analysis above can work for countries with persistent current account surpluses that they want to eliminate. Look at the diagram below:
The 'upside down' J-curve
Assume that the economy is at point B, experiencing a current account surplus. Rather than devaluation, the government will want to revalue their currency to make exports relatively more expensive (reducing their demand) and imports relatively cheaper (increasing their demand). Again, there will be time lags. Consumers and producers will not react to these changes immediately. The demand for both exports and imports will be relatively inelastic in the short run. Export revenues will not change (a fixed UK price, remember) but the revenue paid for foreign imports will fall. This will make the current account surplus get even bigger in the short run.
In the medium term, firms and consumers will adjust their purchases in line with the changed prices. The demand for both exports and imports will become more elastic and the surplus will eventually start to fall. The result is an upside down J-curve!
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Tariffs, trade and money illusion
In the past few days, I have read three pieces from Economists for Brexit - now renamed "Economists for Free Trade" - extolling the virtues of "hard" (or "clean") Brexit and calling for the UK to drop all external tariffs to zero unilaterally after Brexit. Two are written by professors of finance (Kent Matthews and Kevin Dowd). The third is from the veteran economist Patrick Minford.
All three of these pieces wax lyrical about the benefits to GDP and welfare from unilaterally reducing external tariffs to zero. But bizarrely, not one gives adequate consideration to the currency effects of trade adjustment and the likely monetary policy response. Minford's brief discussion contains a schoolboy error (of which more shortly). The other two never mention it at all.
In today's free-floating currency regime, trade shifts and currency movements are intimately linked. Indeed, for some countries, trade shifts are driven more by capital flows and associated currency valuation changes than they are by trade policy. So I am at a loss to understand how anyone can seriously discuss trade policy without considering currency effects and monetary policy. Especially professors of finance, who really should know better.
First, let's consider how trade policy changes affect currency exchange rates. Recently, there was much discussion of a "border adjustment tax" by policymakers in the USA. The idea was that imposing a tax of, say, 20% on all imports to the USA would discourage businesses and consumers from buying imports, thus encouraging domestic US businesses at the expense of foreign exporters to the US. Additionally, US exporters would be exempt from import taxes, thus encouraging exports. The combination of the tax on imports with exemption from the tax for exporters is the reason why this is called a "border adjustment tax". It is similar to a VAT, except that VAT is typically also imposed on domestic production.
American economists Caroline Freund and Joseph E. Gagnon studied the effects of border adjustment taxes in a number of countries. They concluded that changes in the inflation-adjusted trade weighted exchange rate ("real effective exchange rate", or RER) wipe out any advantage from a border adjustment tax:
Overall, our results support the basic theoretical conclusion that RER movements fully offset borderadjusted consumption taxes, including the VAT. Our results also suggest that a large share of the movement in the RER comes via consumer prices. In particular, increases in VAT rates temporarily increase inflation, which permanently changes the RER. There is little evidence of any significant effect of border-adjusted consumption taxes on the current account balance, although there may be different effects on the components of the current account. Most of the adjustment occurs within three years.
For foreign exporters who are paid in their own currency, the effect of the import tax is a wash: the tax raises the sales price of their products in the importing country, but the strengthening dollar entirely offsets this. In theory, importers could force FX losses on to foreign exporters by insisting on paying in their own currency: but exporters faced with FX losses are likely to respond either by raising export prices in their own currency or by diverting sales elsewhere. After all, there are always other markets.
For US exporters, the effect is also a wash, since any benefit they get from being excused the import tax is lost in the exchange rate appreciation. No-one benefits from a border adjustment tax.
But wait. Aren't Economists for Free Trade talking about tariffs, not taxes?
As Gavyn Davies explains, the US's border adjustment tax plan is equivalent to a tariff on imports and a subsidy on exports. Unilaterally reducing all tariffs to zero is therefore equivalent to reducing taxes on imports without adding an export subsidy.
For example, if the average import tax is currently 25%, made up of 20% VAT and 5% external tariff, reducing the external tariff to zero is a 20% cut in import taxes. Note that domestic businesses do not benefit from this cut, and neither do exporters. Trading conditions therefore become more difficult for domestic businesses relative to foreign exporters, while export trading conditions remain unchanged if other countries do not respond to the tariff cut.
Economists for Free Trade argue that falling nominal import prices would improve people's real disposable incomes, giving a demand boost to the economy which should kickstart a supply-side response. Additionally, nominal business input costs would fall, enabling a production increase to meet higher consumer demand and improve export performance, while increased competition from imports would force domestic businesses to raise productivity, improving both GDP and nominal wage growth. It sounds like a paradise. What's not to like?
Sadly, this omits the effect of exchange rate changes. If raising taxes on imports causes the currency exchange rate to rise sufficiently to wipe out the benefit to domestic businesses, similarly we would expect cutting import taxes to cause real exchange rate depreciation sufficient to wipe out the benefit to foreign exporters.
There would, however, potentially be a benefit to exporters from the exchange rate depreciation. Therefore, we might expect that unilaterally reducing import tariffs to zero would give a boost not to domestic demand but to exports. This would apply even if trade partners did not reciprocate with tariff cuts of their own.
Neither Kent Matthews nor Kevin Dowd mention this. Worse, Minford bizarrely assumes that sterling depreciation only applies to exporters, not importers:
Now, think about what happens if we reduce our trade barriers on imports. We reduce the prices of imports to consumers, and this creates both a gain to them and more competition with our home producers, forcing them to raise productivity. This is a most definite and permanent gain to our economy - a rise in consumer welfare and in GDP. A natural by-product of this is, as we produce more, we export more to pay for our higher imports. In the short run, this comes about by a fall in sterling to stimulate these sales; in the long run, once our new markets are established, sterling recovers to its old level, its job done. We are quite familiar in the UK with this sterling movement; the pound regularly falls when we need to stimulate output in export industries, as it has done after Black Wednesday when we left the ERM, also after the financial crisis, and latterly after Brexit.
The exchange rate depreciation arising from unilaterally cutting import tariffs would benefit exporters while making no difference at all to importers? Really?
This is the schoolboy error I mentioned at the start of the post. It is by no means the only glaring error in Minford's paper, but it is the one that concerns me here. Combined with persistent confusion of nominal and real effects throughout the paper, it fatally undermines his entire economic analysis.
Falling import prices would indeed encourage consumers to spend more initially. But as the effects of the sterling depreciation began to bite, import prices would rise again. The consumer stimulus would fizzle out and sales would return to where they were before. Freund and Gagnon's research is definitive. The deflationary stimulus would be temporary, not permanent, and would be followed by rising inflation that wiped out its short-term benefits.
On the export side, as I've already noted, sterling depreciation should boost exports - although as the UK is very integrated in international supply chains, the effect is highly uncertain and could be very short term. But there is no evidence to support Minford's assertion that in the long run sterling's exchange rate would recover. To the contrary, Freund and Gagnon show that the RER adjustment is permanent - and it is the real, not the nominal, exchange rate that matters for export competitiveness.
Nor would the nominal exchange rate necessarily recover, either - at least not permanently. In each of the examples that Minford gives, the pound did indeed bounce back to some extent as the economy recovered: but over the much longer term, the story is one of continual decline. For example, sterling's exchange rate versus the dollar has declined from $4.70 in 1915 to $1.28 today.
This is not to say that cutting import tariffs is a bad thing. Reducing tariffs to zero as part of a free trade agreement usually benefits everyone. But unilaterally cutting tariffs simply cannot give the real benefits that Economists for Brexit claim. The nominal changes might look good, but they would be entirely illusory.
However, Dowd cites Hong Kong and Singapore as examples of countries that successfully operate zero-tariff regimes. If those countries can do it, why can't the UK?
There is an obvious size difference, of course. There are also significant differences of culture and regime: Singapore, for example, has high levels of state ownership and practises severe financial repression. But this post is about currency effects. Why doesn't the benefit of their zero-tariff regimes disappear in currency adjustments?
The simple answer is that neither country has a freely floating exchange rate. Hong Kong has a currency board which pegs its currency to the US dollar. Singapore's monetary authority explicitly maintains the value of the Singapore dollar within an (undisclosed) band. Neither country would allow its currency to depreciate sharply as a freely floating British pound would be likely to under a zero-tariff regime.
A unilateral zero-tariff regime could deliver the domestic benefits that Economists for Free Trade envisage if the Bank of England actively intervened to prop up sterling. This appears counterintuitive, but remember that the benefits are supposed to accrue from falling real import prices. Nominal falls accompanied by sterling depreciation would not deliver those benefits. Therefore, sterling would have to be prevented from depreciating. This would mean sharp rises in interest rates even while consumer prices were undergoing a short-term fall. In the UK's highly indebted, fragile economy, the consequences for financial stability could be severe. Anyway, why would you want to hobble exports to encourage a consumer boom, in a country that has large trade and fiscal deficits and relies on debt-financed consumer spending to maintain economic growth?
Not one of the Economists for Free Trade mentions any of this, let alone discusses it. The total absence of any consideration of currency effects in both Dowd's piece and Matthew's suggests to me that they don't understand the connection between trade and currency, which as they are not trade economists is perhaps not all that surprising. But if their grasp of trade economics is really so weak, why are they writing about it at all?
And as for Minford - words fail me. This man is a professor of economics, but his paper is riddled with elementary errors. Are these people really the best and brightest economic brains in the Brexit camp? I sincerely hope they are not. For if they are, God help us.
Related reading:
Brexit, trade and echoes of the past
Some unpleasant trade realities
The dominance of Brexit
Three reasons why the UK could be going into recession - Forbes
The "Britain Alone" scenario: how Economists for Brexit defy the laws of gravity - LSE
Brexit free trade illusions from the 19th century - FT
The economic benefits of Brexit, revisited and rectified - Professor Alan Winters
Image from Real-World Economics Review Blog
1. It's hard to know whether Minford's proposals would raise GDP and make we plucky Britons richer unless the UK's export performance under Unilateral Free Trade (UFT), as Minford's proposal has become known, is considered. On the face of it, UK export performance would be damaged by UFT because of tarrifs, or other barriers, imposed by the EU and the Rest of the World on UK exports.
As for the effect of dropping all import tarrifs the addition to GDP claimed by Minford, so far as I can determine, would depend on the elasticity of UK imports.
If the elasticity of imports is zero then the volume of imports will not change if import tarrifs are dropped. If so, then the entire benefit of the tarrif reductions will be captured in GDP such that the increase in GDP will be equal to the reduction in the nation's import bill. The reduced demand for foreign currency required to meet this new shiny import bill should by itself raise sterling's value. If so, this would logically be deleterious to UK exports, which would presumably face EU and ROW tarrifs in any case. Not good.
If the elasticity of imports is unity then there will be a small reduction in the nation's import bill leading to an equivalent small gain to GDP. Presumably a small upward pressure exerted on sterling's value will result. Consumers will presumab;y binge on the cheaper imports.
I suspect in reality import elasticity lies somewhere between zero and unity. I also suspect that any consumption binge arising from UFT will be short lived, although much depends on how the UK's post Brexit performance develops. Minford et al do not seem to have squarely addressed the issue of Britain's export performance post Brexit.
Pig in a poke, anyone?
1. Actually, on reflection, I am as probably as mistaken as Minford et al.
Changing the value of imports does not change the value of GDP (double entry bookkeeping) . So the impact of eliminating import tarrifs will simply reduce government revenue and, by itself, have no impact on GDP.
I hope I'm correct to say this
2. And there is a second error in my first piece:
Given import elasticity, then the value of imports denominated in foreign currency would rise if import tarrifs were removed. So as Frances says, this by itself would cause sterling to depreciate, not appreciate as I incorrectly first said, once import tarrifs are removed.
I believe my mistakes are similar to Minford's, ie I failed to separate fiscal effects from GDP effects.
I shall hang my head in shame
2. Its very strange that a country that is being forced to sell its own assets to pay for a massive trade deficit is seeking to devalue its assets in order to reclaim control over its assets. I suppose believing that markets buy dear and sell cheap would give every optimist a Brexit wet dream.
3. Dismal propaganda dressed up as academic argument. This is all we seem to get these days from the right especially over their pet obsessions like Brexit. The media lap it up.
4. As an aside, the UK government currently raises approximately £3bn per annum from customs duties, which would be lost under Minford's UFT proposal. His proposal, by itself, would thus increase the annual fiscal deficit by this amount.
5. Thanks Frances for this piece. I wish this type of rebuttal could be more widely published. The devastating thing is, we have triggered A50, cut the hawsers and are sailing into the Atlantic with our S/S Global Britain - I don't get the feeling it is reversible. I am extremely concerned about the UK's economic future.
6. There is at least one fallacy in this article. As far as consumers and producers are concerned, tariffs have the same effect as transport costs. They push up prices of imported products, imported raw materials and imported components. This gives rise to inefficiencies as access to the best-value source is artificially restricted in favour of the locally produced item. "Anti-dumping" tariffs are particularly damaging as producers are deprived of access to low cost inputs, which makes them less competitive. They are then fighting for market share against producers in other countries which allow the dumped items to be imported.
It seems to be not appreciated that the main losers from dumping are the dumpers who have wasted resources in producing something and selling at below the cost of production.
Exchange rates are influenced by other factors than exports and imports. Sterling is supported by the attraction of low-tax real estate.
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Winner of the New Statesman SPERI Prize in Political Economy 2016
Tuesday, 6 December 2016
The OBR and the impact of Brexit
In doing my homework for an appearance at the Treasury Select Committee this morning, I noticed one point which is of some relevance to the debate about whether the OBR is being too pessimistic about the impact of Brexit. Two major ways in which Brexit will have an influence on the public finances is through lower immigration from the EU and lower productivity. The two are linked, because the OBR correctly assumes that lower immigration of skilled labour will in itself reduce productivity. (Productivity also falls in the OBR’s analysis because of reduced investment.)
The OBR also assumes that Brexit will reduce the trade intensity of the UK: less exports and imports. This is pretty obvious to anyone who has looked at international trade: transport costs may not be as high as they once were, but gravity equations tell us that geographical distance is still a key factor in influencing whether trade takes place, which means that reduced trade with the EU will not be matched by new trade outside the EU.
The Treasury analysis of Brexit assumed that this lower trade intensity would also reduce productivity. The OBR do not include this effect, calling it too uncertain. This is a slightly surprising judgement. To see this, look at this piece by Maurice Obstfeld, chief economist at the IMF. Here is a quote:
“Empirical research supports Ricardo’s fundamental insight that trade fosters productivity [by increasing efficiency through comparative advantage]. But the productivity and growth benefits of trade go far beyond Ricardo’s insight. With trade, competition from abroad forces domestic producers to raise their game. Trade also offers a wider variety of intermediate production inputs firms can use to produce at lower cost. Finally, exporters can learn better techniques through their engagement in foreign markets, and are forced to compete for customers by raising efficiency and upgrading product quality (for example, Dabla-Norris and Duval, 2016).”
Now few things are ever certain in economics, but none of these transmission mechanisms from greater trade to higher productivity are particularly fanciful: they all make common sense (at least as seen by an economist). They are all one directional, which means assuming an effect of zero is an extreme point in every case. In this sense, the OBR is being rather optimistic about the impact of Brexit on the UK economy.
1. 'The former Conservative minister repeated advice he gave 30 years ago saying people in the UK should follow the examples of Poland, Hungary and Lithuania...When asked if people should get on their bikes to look for work Lord Tebbit, 79, said: “Yes. People do it in Poland, in Hungary, in Lithuania. Why are they more willing to do it than we are?”' (Daily Mail, NATHAN RAO, Wed, Feb 23, 2011).
Funny how the 'semi-house-trained polecat' and his Leave allies weren't making that point during the 2106 referendum.
But they'll be back to it once the poorer Tory voters have outlived their Leavey usefulness.
2. I watched your testimony at the select committee. It must be frustrating being asked misconceived questions when the person sitting next to you shares some of the misconceptions! Well done though, just wish more MPs had bothered to show up to hear it.
1. To be fair to the MPs, the previous session (with Portes + Weale) had overrun, so our session went well over time, and maybe some MPs had prior appointments. But knowing some people watch these things helps me in deciding whether they are worth doing.
3. I have no idea of the degree to which popular optimism about "making Britain great again" reflects residual imperial thinking. But, looking from afar, I can assure Britons that there is no UK-shaped hole in the world economy waiting your return.
New Zealand had its own Brexit in 1973 when the UK unceremoniously dumped us to enter the EEC. At that time the residuals of imperial mercantilism were still alive and well. We shipped the frozen carcasses of grossly overweight sheep to London in return for Austin Allegros. Hint: it was a terrible deal all round.
New Zealand adapted because it had to. But changing after a major trade shock takes time. It feels like 20,30 or 40 years here. And all that time all the other ups and downs in the world are still going on.
Now we no longer have those special ties and I can't see us ever wanting to recreate them.
4. Alexander Harvey7 December 2016 at 04:52
Well put, and thanks.
What part of uni-directional don't people understand?
Robert Chotes (OBR) is reported to have said:
"... negative effects are partially offset by a near-term boost to GDP from stronger net trade volumes, as the weaker pound encourages exports and discourages imports and as weaker consumer and investment spending mean less demand for imports."
I noted the "nerm-term" qualifier.
FWIW I find him to be a little optimistic, but he is excellently qualified to do his job, so I defer.
Further afied:
The ONS article:
Explanation beyond exchange rates: trends in UK trade since 2007 (2013)
"Economic theory suggests that a country’s trade balance should increase following a depreciation of its currency. Goods produced abroad become more expensive compared with domestic alternatives,
while the price of domestic goods falls relative to the price of goods produced abroad. Consequently, imports are expected to fall and exports are expected to rise, leading to an increase in the home country’s balance of trade. This broad pattern is evident with a lag following sterling’s exit from the European Exchange Rate Mechanism (ERM) in 1992, after which the UK’s trade balance returned to surplus for much of the period between 1993 and 1998. However, the absence of a clear response of the UK’s balance of trade to the depreciation of sterling during 2007 and 2008 suggests that something more complex has occurred."
It goes on to comment on a modern tendency for import and export prices to move in tandem, both increasing after a sterling devaluation more or less in step.
The "textbook" divergence of UK import and export prices and the differential advantage for exporters over importers in volume terms did not hold. This may suggest that much of the "good news" over accelerating export sales is neither going to be across the board nor sustained.
5. I think your analysis is perfectly reasonable as far as it goes but it is a partial picture. I realize that it is meant to be a partial picture but Brexit is only one issue that will materially affect the economy in the next twenty or thirty years and one has to place it in some sort of context.
As far as Brexit is concerned I actually believe that the situation will be worse than even you paint it because I think there are now increasing signs that the Euro may fail and, if this is the case, then there have to be doubts about the future of the EU itself. The turmoil that may be engendered by all this is not good for the UK although of course the UK is not the proximate cause of this. If this does happen it will likely reinforce some of the factors you rightly highlight.
The more fundamental point is that Brexit is only one of several major structural issues that will determine the future of the UK economy. Both demographics and robotics/AI will be major issues over the next twenty/thirty years and, in my view, will dwarf the effects of Brexit.
My point is that you may be right about Brexit on what might be termed the ceteris paribus basis but there are other influences that are at least as important that will make a huge difference and will likely interact with the factors that you are highlighting.
6. people at the OBR know it, people at the bank of england know it, everyone knows it, but, it has become politically impossible in the UK to "question the merits of brexit".
7. No such thing as comparative advantage.
It's just another failed model using Tiger Woods cutting his neighbours grass.
8. The idea is to create MegaCityOne in the UK. In fact if you run the 'clustering' free trade models to their conclusion that is what you end up with - everybody living in a very small space.
And to think we spent the early part of the 20th century demolishing tenements as slums.
9. It might be the case that less trade lowers productivity, but I guess it is pretty hard for the OBR to quantify this. Ie, whether the effect will be significant. Whether it will be significant in the short term or just the long term.
Also given the fact that normally the direction is from less trade to more trade, it is not necessarily clear that the same would happen in the other direction. Ie. if companies have previously been in a free trade environment, it does not follow that their productivity will drop from removal from that free trade environment (it might just stay the same). Whereas it does follow that their productivity would increase upon exposure to that environment.
Also more generally lots of other things that might potentially raise productivity that I'm sure OBR do not take account of, given the complete myriad of things that will potentially be affected.
10. If Brexit lowers the 'trade intensity' of the UK, then it will presumably lower the trade intensity of the EU.
Surely, the best way to avoid this would be to have a free trade agreement between the UK and the EU. Yet oddly, the noises from the EU hierarchy are that there will be no such agreement - or that it's conditional on free movement. But I would have thought the EU would be delighted to keep more of their talented citizens rather than have them come to the UK.
Given your analysis, it looks like what seems to be the UK government's desire (free trade but no free movement) is a win-win for the EU given the UK is currently a 'net importer' of EU citizens.
Why on earth would the people running the EU not want to have something that would benefit their citizens?
Or is there something else going on? It almost seems the Juncker's of this world are more interested in 'punishing' the UK than the welfare of their own people. That way they discourage others from leaving the club and get to keep their personal power and privileges.
Sounds like a protection racket to me.
11. Obstfeld's statement ' With trade, competition from abroad forces domestic producers to raise their game' seems intuitively valid, but the problem is that the anatomy of this process is not benign. What happens is that inefficient producers go out of business with attendant job losses, while more efficient ones may or may not expand. Improvements in productivity often occur when business segments shrink to a more efficient core but this may not be accompanied by net benefit to the general population.
12. Why are you still using the Tory framing of the OBR? There is more fiscal space than that. Quit playing away from home at Tory united.
- Random
13. Thanks for this article, however can I ask whether the UK economy was in "rude good health" prior to Brexit, or whether the current and eventual impacts of Brexit will make a bad situation worse.
Since the Referendum there has been a rush to blame most things on the outcome, and I'm just trying on a personal level to put it in context.
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How the UK can benefit from a free trade future after Brexit – even outside the single market
The benefits of free trade have been familiar to economists since Adam Smith. Trade encourages specialisation and leads to lower costs, higher productivity and higher living standards.
Yet for some economists, things are different when it comes to the UK leaving the EU’s customs union and single market. The customs union was built on the German Zollverein model of protecting domestic industries from foreign competition around the time of German unification 150 years ago. Today, free trade is promoted within the EU, which is good. But the customs union imposes barriers to trade with the rest of the world, which is not.
The single market also imposes a hugely burdensome regulatory edifice on economic activity within the EU. Brexit will give the UK the opportunity to pursue its own free trade policy with the rest of the world and to escape the needless regulatory burdens of the single market.
Too many economists have refused to take seriously the idea that Brexit has the potential to provide economic benefits to the UK. Before the referendum, Treasury economists assured the public that a vote to leave would cause “an immediate and profound shock to our economy” leading to recession and a large increase in unemployment.
These are predictions that have since proved to be very wide of the mark. Modelling by the LSE’s Centre for Economic Performance (CEP) predicted that leaving the EU could only have negative consequences for the UK economy.
The consensus is misleading
One of the problems with much of this analysis is the apparent reluctance by many economists to model scenarios in which Brexit provides any benefit at all to the UK economy. For example, a key plank of the CEP modelling is their assumption that Brexit would cause a reduction in foreign direct investment (FDI) of over 20%.
In fact, inward investment in the UK has been at record levels since the referendum, while confidence about future FDI into the UK is higher now than before the referendum. Clearly, had the CEP been prepared to model a scenario in which Brexit increased FDI, they would have come up with a much more balanced range of estimates of the net effect of leaving the EU.
Even worse, the impression is sometimes given that the economics profession is united in predicting that Brexit can only lead to significant losses for the UK economy. In fact, as a new book by economists Phil Whyman and Alina Petrescu demonstrates, this idea of a consensus is misleading.
For example, work by Patrick Minford, chair of Economists for Free Trade (EFT), concludes that embracing free trade, regaining control over the net EU budget contributions and reducing the regulatory burden could give a boost to the UK economy of up to 7% of GDP – some £135 billion a year.
A different approach
It has been suggested that the model used in the EFT analysis is so flawed as to be worthless in comparison to the “gravity model” used for calculations favoured by the Treasury and CEP. With the gravity model, bilateral trade and FDI flows between two countries are modelled as a function of economic variables such as a country’s economic output (GDP), demographic variables such as population size, geographic variables such as distance, and cultural variables such as a common language. A standard conclusion of this model is that it is better to be as close as possible to a big trading block.
But how well does the gravity model predict trade and FDI flows? Not that well. Britain’s main trading partners in the 19th century were the US, Canada, the West Indies, Argentina, Brazil and China. Not a near neighbour from the European continent in sight. The UK’s share of exports to the EU has fallen from 54% in 2006 to 43% today, whereas given the move to “ever closer union” over this period, the gravity model would suggest that the share should have moved in the opposite direction.
In the 19th century, the US was one of the UK’s biggest trade partners.
Minford’s work takes a different approach, emphasising rational expectations and the supply side of the economy. Now, of course it is normal for economists to debate the pros and cons of different modelling approaches and it is quite reasonable to question them.
What is not reasonable is to dismiss out of hand any attempt to take seriously potential gains to the supply side of the economy and the efficiency gains from greater free trade. Indeed, Minford has made a detailed and robust defence of his model arguing that it fits the reality of trade flows much better than the gravity approach.
The Brexit issue has brought out the worst of many economists. In some cases, they have allowed their political prejudices to colour their scientific judgement. Whether or not Brexit leads to improvements or reductions in economic well-being remains to be seen.
What should not be in doubt is that there are sound economic reasons for believing that Brexit has the potential to bring about significant economic gains for the UK. The referendum is over and Britain knows that it will be leaving the EU. Rather than prolonging the discredited Project Fear, now is the time for economists to work hard to ensure that those potential benefits from Brexit come to fruition.
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Thought leadership
How the UK can benefit from a free trade future after Brexit – even outside the single market
(20 September 2017)
Professor of Finance and Economics, Kevin Dowd (Durham University), Professor David Paton (Nottingham University) and Professor David Blake (University of London) discuss how the UK can benefit from a free trade future after Brexit.
The benefits of free trade have been familiar to economists since Adam Smith. Trade encourages specialisation and leads to lower costs, higher productivity and higher living standards.
Yet for some economists, things are different when it comes to the UK leaving the EU’s customs union and single market. The customs union was built on the German Zollverein model of protecting domestic industries from foreign competition around the time of German unification 150 years ago. Today, free trade is promoted within the EU, which is good. But the customs union imposes barriers to trade with the rest of the world, which is not.
The single market also imposes a hugely burdensome regulatory edifice on economic activity within the EU. Brexit will give the UK the opportunity to pursue its own free trade policy with the rest of the world and to escape the needless regulatory burdens of the single market.
Too many economists have refused to take seriously the idea that Brexit has the potential to provide economic benefits to the UK. Before the referendum, Treasury economists assured the public that a vote to leave would cause “an immediate and profound shock to our economy” leading to recession and a large increase in unemployment.
These are predictions that have since proved to be very wide of the mark. Modelling by the LSE’s Centre for Economic Performance (CEP) predicted that leaving the EU could only have negative consequences for the UK economy.
The consensus is misleading
One of the problems with much of this analysis is the apparent reluctance by many economists to model scenarios in which Brexit provides any benefit at all to the UK economy. For example, a key plank of the CEP modelling is their assumption that Brexit would cause a reduction in foreign direct investment (FDI) of over 20%.
In fact, inward investment in the UK has been at record levels since the referendum, while confidence about future FDI into the UK is higher now than before the referendum. Clearly, had the CEP been prepared to model a scenario in which Brexit increased FDI, they would have come up with a much more balanced range of estimates of the net effect of leaving the EU.
Even worse, the impression is sometimes given that the economics profession is united in predicting that Brexit can only lead to significant losses for the UK economy. In fact, as a new book by economists Phil Whyman and Alina Petrescu demonstrates, this idea of a consensus is misleading.
For example, work by Patrick Minford, chair of Economists for Free Trade (EFT), concludes that embracing free trade, regaining control over the net EU budget contributions and reducing the regulatory burden could give a boost to the UK economy of up to 7% of GDP – some £135 billion a year.
A different approach
It has been suggested that the model used in the EFT analysis is so flawed as to be worthless in comparison to the “gravity model” used for calculations favoured by the Treasury and CEP. With the gravity model, bilateral trade and FDI flows between two countries are modelled as a function of economic variables such as a country’s economic output (GDP), demographic variables such as population size, geographic variables such as distance, and cultural variables such as a common language. A standard conclusion of this model is that it is better to be as close as possible to a big trading block.
But how well does the gravity model predict trade and FDI flows? Not that well. Britain’s main trading partners in the 19th century were the US, Canada, the West Indies, Argentina, Brazil and China. Not a near neighbour from the European continent in sight. The UK’s share of exports to the EU has fallen from 54% in 2006 to 43% today, whereas given the move to “ever closer union” over this period, the gravity model would suggest that the share should have moved in the opposite direction.
Minford’s work takes a different approach, emphasising rational expectations and the supply side of the economy. Now, of course it is normal for economists to debate the pros and cons of different modelling approaches and it is quite reasonable to question them.
What is not reasonable is to dismiss out of hand any attempt to take seriously potential gains to the supply side of the economy and the efficiency gains from greater free trade. Indeed, Minford has made a detailed and robust defence of his model arguing that it fits the reality of trade flows much better than the gravity approach.
The Brexit issue has brought out the worst of many economists. In some cases, they have allowed their political prejudices to colour their scientific judgement. Whether or not Brexit leads to improvements or reductions in economic well-being remains to be seen.
The ConversationWhat should not be in doubt is that there are sound economic reasons for believing that Brexit has the potential to bring about significant economic gains for the UK. The referendum is over and Britain knows that it will be leaving the EU. Rather than prolonging the discredited Project Fear, now is the time for economists to work hard to ensure that those potential benefits from Brexit come to fruition.
David Paton, Chair of Industrial Economics, Nottingham University Business School, University of Nottingham; David Blake, Professor of Finance & Director of Pensions Institute, City, University of London, and Kevin Dowd, Professor of Finance and Economics, Durham University
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Friday, 15 June 2018
Why fears about a Brexit ‘no deal’ are vastly overstated
Philip B. Whyman
It has become increasingly accepted, not least by the prime minister and opposition leadership, that the negotiation of a comprehensive trade relationship with the EU is necessary to prevent the UK economy falling off a ‘cliff edge’.
It is assumed by leaders of all the main political parties and the Confederation of British Industry (CBI) to be economically necessary to prioritise continued EU market access over other policy goals that could be achieved through Brexit.
This concern is shaping the UK's strategy towards negotiations with the EU and has provided at least part of the motivation for the UK to consider requesting a transition period to facilitate the Brexit process.
This approach is not, however, without profound consequences. The most obvious quid pro quo of a transitional agreement is the UK having to accept similar rules and regulations to those currently required by full membership.
The most contentious aspect of this is the likely insistence from the EU that continued access to the single market requires the perpetuation of the free movement of capital and labour for the duration of this transition term. This would be a particular problem for the prime minister, given her previous statements in favour of a tighter immigration system.
A lengthy transition period also has the potential to further undermine the status of politics and politicians for those who voted to withdraw from the EU given that, more than half a decade after what had been portrayed as a decisive vote, there would have been little substantive change on the ground.
Given the pivotal nature of the ‘cliff edge’ hypothesis, it is perhaps surprising that so little attention has been given to evaluating whether ‘no deal’ would represent a ‘chaotic Brexit’, or whether it would simply represent only a slight disruption of normal economic activity.
Essentially, would it represent a ‘cliff edge’ or more of ‘a slight bump in the road’?
The downsides to post-Brexit economic models
It is often claimed that there is a broad consensus amongst economists that Brexit would prove damaging to the UK economy. Yet, out of the forty or so economic studies which have sought to predict likely economic impacts relating to Brexit, fully one third suggest either a net gain to the UK economy or that the cost–benefit is dependent upon the form of relationship ultimately agreed between the UK and the EU.
The currently best available economic predictions were developed before the European referendum, and the most prominent of these suffer from a flawed approach, particularly in relation to missing variable bias. Yet their conclusions are still influencing much that happens in the Brexit debate.
Moreover, the danger is that forecasts can themselves become self‐fulfilling prophesies, as individual businesspeople or consumers react to predicted events and by their changed actions precipitate these same predicted outcomes.
Future options
A wide variety of potential future trading relationships could be forged between the UK and the EU (each has its own advantages and drawbacks):
1. Full membership of the EU—the current status quo, which could only be pursued by either ignoring the European referendum result or holding a second referendum;
2. Apply for membership of the European Free Trade Agreement (EFTA) and through this, membership of the European Economic Area (EEA);
3. Negotiate a customs union with the EU;
4. Negotiate a free trade agreement (FTA) with the EU;
5. Failure to negotiate a mutually satisfactory agreement with the EU, which would lead to the UK trading according to WTO rules.
There is a clear policy trade‐off between market access and policy flexibility when considering the various trading arrangements that could be negotiated between the UK and the EU. So it is a pity that none of the economic studies undertaken to date have sought to test rigorously the relative merits of this trade‐off in order to determine which of these choices would be preferable.
The WTO option
How disastrous would it be for the UK to revert to trading with the EU on the same basis as most other countries in the world, namely according to World Trade Organisation rules? Perhaps not as much as is generally assumed.
Trading according to WTO rules does incur costs, which are detailed further in my journal article for the Political Quarterly. But the WTO option has a number of advantages.
For example, compared to EEA membership, where the UK would have to abide by current EU rules on the free movement of labour and regulations across all trade‐related matters, the UK would have none of these restrictions under the WTO option. Similarly, whereas the UK would be constrained to accept the common external tariff within a customs union arrangement, under FTA or WTO arrangements the UK would be free to negotiate its own trade agreements with any other country across the globe as it would wish.
Thus, the WTO option maximises the policy flexibility that could be utilised by UK policy makers following the completion of Brexit, but at the expense of incurring additional trade‐related costs.
Whilst a comprehensive FTA would be the preferred option for this author, reverting to trading by WTO rules does not appear likely to result in the damaging economic scenario that many commentators seem to suggest. Rather than ‘no deal’ resulting in the UK economy ‘falling off a cliff edge’, a more accurate metaphor might be that it might experience a small bump in the road.
Indeed, it may offer greater potential for reshaping the UK economy over time, rather than tying it more closely to the EU for short term advantage.
Philip B. Whyman is Professor of Economics and Director of the Lancashire Institute for Economic and Business Research (LIEBR), at the University of Central Lancashire.
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I am shocked that the Remain interest has been so successful in wrongly frightening people about the problems of the UK functioning under WTO if there is no EU deal. The EU accounts for a diminishing part of the world economy and of our trade. Its markets are slow-growing, and its population is ageing. Its share of world output has halved since 1980 and will continue to reduce. The growth markets of the future are outside the EU. The GDP of the Commonwealth is now some 30 per cent more than that of the EU (including the UK).
We are also clear that we do not want to be tied to accepting instructions from the EU and ECJ, unable to establish our own trade agreements; and that it is also undesirable to remain tied to the EU economically with its antiquated and protectionist Customs Union, protectionist Single Market, and its overweight regulation model. Membership of the EU has been a drag on the UK economy for a long time. What we need is a post-Brexit competitiveness boost, which to be effective requires a clean break. Post-Brexit, we also need to be able to decide our own regulatory regimes.
My preference for some time has been a Canada-style managed “Free Trade Plus” Agreement, but the Prime Minister’s negotiations have opted for keeping the UK tied to the EU, in several ways and for a long time. I would, therefore, now prefer the option of a managed, No Deal Brexit, trading under WTO rules. The WTO option is not about falling off a cliff or crashing out. Rather it would provide us with the economic freedoms we need in order to make the best of Brexit. It was this which the citizens of this country voted for in the referendum. Around a half of our international trade (55 per cent) is already conducted under WTO rules, and with non-EU, WTO members.
The WTO has made huge advances in facilitating trade across customs borders: under the Landmark Trade Facilitation Agreement (TFA) developed countries with adequate resources are expected to install state of the art, border systems to avoid impeding trade. Streamlined, computerised borders are now the norm. The WTO’s rule-based trading regime is comprehensive, tried and tested and respected by the world’s trading nations.
Over the last decade Britain’s exports have grown by over 60 per cent. Exports to the EU grew by only 40 per cent, but to non-EU economies by 80 per cent. It is clear where the growing markets are. Trade and the UK can thrive under WTO rules. Trade is driven by commercial realities, irrespective of the Single Market – to which we would still have access under WTO rules, as a third country. From an EU perspective, the possibility of free trade with the UK should be extremely attractive. The EU has a trade surplus with the UK of approximately £100 billion a year. For Germany, the UK is the second biggest market for its cars.
The WTO fear campaign has hugely exaggerated the potential risks of temporary and short-term crisis in moving our EU trade to WTO rules. Given the preparation that has gone on, I believe there would be very few glitches in practice. For the longer term, just as we conduct our trade successfully with the US under WTO rules, so too we can conduct our trade successfully with the EU under WTO rules.
How are the last-minute negotiations are likely to break? Theresa May is on clear record as saying that “no deal would be better than a bad deal”. But she does not want No Deal, as it would run the political risk of breaking up the Conservative Party. She has now delayed the “meaningful vote” in the Commons until March 12th at the latest, when the Prime Minister’s deal will be the only option. It is also clear that there is no parliamentary majority for even a managed No Deal.
The EU would also like to achieve a deal, in part to secure the £39 billion UK contribution to the EU; and, longer term, to support EU trade and the EU £100 billion, UK trade surplus. The EU does not, however, wish to make departure from the EU ‘too easy’, and wants to discourage others from seeking to depart. This could end up causing the UK to withdraw to WTO, unilaterally, but this now looks unlikely. The key territory is the Northern Ireland backstop terms. An acceptable deal for the UK could be achieved with modern technology. But in the backstop agreement that the Prime Minister has negotiated so far, the UK is left being required to accept ECJ law and rulings, without any appeal. The main reason for the referendum result was a strong objection to being told what to do by EU organisations.
I suspect both the UK and the EU will, ‘at the last minute’, manage to agree an unsatisfactory compromise, which sounds just about acceptable to both; although I fear it would be a bad deal for the UK, and could be a sell-out on the crucial issue of having to accept ECJ law.
Whichever way the Prime Minister eventually goes, she will also continue to run the risk of splitting the Conservative Party. For what it is worth, my advice to her would be to stick to principle (which is always defendable) rather than opt for fudge. I anticipate, however, that we will end up with a standard EU, last minute, ‘fudge’ Deal.
57 comments for: Howard Flight: The Brexit deal. I suspect we will end up being presented with a last-minute fudge.
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Bargaining post-Brexit trade deals: worse even than "project fear"
Negotiating a post-Brexit trade deal with the EU will be harder than the outers say: every EU country, even those Britain doesn't trade much with, will be able to wield a veto
David Harbord Tim Lord
13 June 2016
Brexiteers hope to convince us that Britain will, after exit, be able to retain its status as a global trading nation with special deals with its largest trading partners in the EU and elsewhere. Remain has painted a bleak picture of what will happen to the economy if Britain exits. Applying some elementary game theory to post-Brexit negotiations suggests that things might be worse for an EU trade deal than even Remain's so-called "project fear" is arguing.
The OECD's recently published analysis of the economic consequences of Brexit concluded that by 2020, UK GDP will be 3.1% smaller than it would be with continued EU membership, and more than 5% smaller by 2030. [The Economic Consequences of Brexit: a Taxing Decision, April 2016]. Other analyses have arrived at similar conclusions. Such estimates have, unsurprisingly, been cited by Remain campaigners as a powerful argument against the UK leaving the EU.
The OECD estimates that UK growth will be 0.5% lower in 2017 and 2018 following Brexit, and that a "trade shock" in 2019, the end of the two-year negotiation period, will reduce growth by a further 1.5% in that year.
The OECD assumes that the UK will not reach a new trade deal with the EU until 2023, implying that trade after 2018 will be conducted under WTO rules, which will raise costs for UK exporters. It also assumes that the UK will not sign any new free trade deals with non-EU countries before 2030.
Brexiteers contend that these estimates are based on a flawed account of the UK's bargaining position in negotiating (or renegotiating) trade deals post-Brexit. They argue that the UK will be in a strong position to negotiate with the EU, as EU countries have as much to lose from a cessation or worsening of trade relations as the UK does. As the world's fifth largest economy, they argue that countries would be queuing up to do deals with Britain if it left the bloc.
Brexiteers further contend that Britain could use its clout, as Europe's second-biggest economy, to get an even better deal than it currently has. They point to Britain's trade deficit with the rest of Europe to argue that EU countries need access to the British market more than Britain needs access to Europe. They also imply that if no deal with Europe is forthcoming, relying on WTO rules or having a free-trade deal like Canada's might be good enough.
The Economist points out that the Brexiteers' trade deficit argument may not make much sense, however. [Brexit brief: Unfavourable trade winds, The Economist, March 26 2016]. What probably matters more is the share of exports, and roughly 45% of British exports go to other EU countries, while only around 7% of their exports come to Britain. While it is no doubt true that German carmakers will wish to continue selling into the British market, several EU countries barely trade with the UK at all. A new trade deal will likely be of little interest them.
Moreover, the WTO rules do not remove tariffs on all products, so exports of cars to the EU would attract a tariff of about 10%, and both the WTO and Canadian arrangements exclude financial services which make up Britain's biggest exports to the EU.
These details aside, the key area of contention remains the likelihood of reaching advantageous trade agreements quickly after Brexit. Evaluating the competing claims and counterclaims is not straightforward, as all are based on uncertain and untestable assumptions about the ease of concluding new trade deals. There is a well-established body of economic theory, however, which can be used to shed some light on this issue, as well as on the likely outcomes of any negotiations, at least in relatively simple cases. Nash bargaining theory (named after the mathematician and Nobel prize winning economist who's remarkable life was portrayed in the movie A Beautiful Mind), is the only fully developed economic theory for analysing bargaining situations and identifying the key factors which determine their outcomes.
How can Nash bargaining theory be used to shed light on the post-Brexit UK/EU trade negotiations? A key factor in the negotiations is the fact that any trade deal with the EU requires the approval of all 27 other member countries (plus the European Parliament). This means that any member state, even if it has only negligible trading ties with the UK, can use its veto power to extort concessions before approving an agreement.
To see this in its simplest and starkest form, let us suppose that the post-Brexit EU consists of just two states, Germany and "Small". Also suppose, as the Brexiteers claim, that Germany places a great deal of importance on its trade with the UK, leaving the UK and Germany in symmetrical negotiating positions, or in positions of equal “bargaining power”. If trade between the two countries creates a total surplus (or what economists call "gains from trade") of 2X million Euros over the status quo of restricted or no trade, the Nash Bargaining Solution would allocate X to each side. That is, the gains from trade will be split equally between the two countries.
"Small" on the other hand, has almost no trade with the UK, which to keep things stark we may assume to have a value of 1Euro. One might presume that in this case "Small" would have no important role to play in the negotiations. But since "Small" has veto power over the deal which allows Britain to obtain X from trade with Germany, the Nash Bargaining Solution gives "Small" a payoff of (1+X)/2. That is, "Small" is able to “extort” half of X from the UK simply by wielding its veto power.
This is an extreme example based on the simplest imaginable scenario. Clearly countries don't directly bargain over the division of the gains from trade when negotiating trade agreements. But the point is that EU countries with little or nothing to gain from a trade deal with the UK, but with veto power, will have every incentive to use their veto power to scupper any deal that does not offer them sufficient benefits. This fact alone could make Brexiteers' hopes of reaching an advantageous trade deal quickly with the EU post Brexit a wild pipe dream.
The agreements bargainers will reach under the Nash Bargaining Solution typically depend upon a number of other factors, including the bargainers' payoffs in the event that an agreement is not reached (the “disagreement payoffs”) and their degree of Impatience, or how important it is to each side that a deal is reached sooner rather than later.
Both of these factors seem to weigh against the Brexiteers' arguments. Since it will be common knowledge that the UK's trading position will worsen after the initial two-year negotiation period is up, even large EU trading partners like Germany will likely be in no hurry to negotiate an new trade agreement. After two years, Germany will continue trading within the EU as before, but the UK will trade under WTO rules. This increases Germany's disagreement payoff relative to the UK's and results in Germany receiving a higher share of the gains from trade in any agreement. The two-year deadline also makes reaching an agreement more urgent for the UK than for other the EU countries, which once again reduces the UK's expected share of the gains from trade. This is because the less impatient bargainers can credibly threaten to delay any agreement until the more impatient bargainer makes further concessions.
Finally, the UK will need to establish new trade agreements with countries that it currently has access to via EU treaties, such as Korea, Mexico and South Africa. These countries too will likely be aware that strategically delaying agreement might be to their advantage, as the UK's bargaining position deteriorates over time. Brexiteers may be wildly overly optimistic about the prospects of reaching new and better trade deals around the world soon after Brexit.
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Options for a ‘Global Britain’ after Brexit
Steven Brakman, Harry Garretsen, Tristan Kohl 11 May 2017
On 29 March 2017, the British Prime Minister, Theresa May, wrote officially to the EU that the UK has the intention to terminate its EU membership.1 This announcement is the starting point for upcoming negotiations between the UK and the EU. New trade deals for the UK will be an important part of the negotiations, not only with the EU but also with the rest of the world. The letter from the Prime Minister indicates that for the UK government, the principles of Brexit are as outlined in the White Paper of 2 February 2017, which states that the UK aims to “forge a new strategic partnership with the EU, including a wide reaching, bold and ambitious free trade agreement...” and that “we will forge ambitious free trade relationships across the world” (HM Government 2017: 8).
From an international trade perspective, the choice of the UK to leave the EU is remarkable. Leaving a large free trade area like the EU will most likely be trade- and welfare-reducing for the UK. Without a new trade agreement, relative trade barriers will change such that trade with the EU will become relatively more expensive, resulting in trade diversion away from the EU and trade creation with the non-EU world. The balance between these developments will most likely be trade- and welfare-reducing, as trade barriers between the UK and the EU – the largest trading block in the world – increase. This gloomy evaluation is corroborated by almost all trade analyses of Brexit. The estimates range between roughly a 1.5% reduction in GDP to more than 7%, depending on the assumptions made on how Brexit will take shape (see Baldwin 2016 for an overview). Only ‘Economists for Brexit’ have produced a positive estimate, but this is a clear outlier in the available estimates (see Miles 2016 for a survey).
The need to strike new trade deals for the UK seems obvious. This begs the question: what kind of trade deal? Does the UK really has a viable alternative to its current membership of the EU, like the ‘Global Britain’ strategy advocated by the May government? A few options come to mind when considering this issue, such as a US-UK trade partnership or a trade deal with all non-EU countries. On a more pessimistic note, one could not look at Brexit in isolation but also consider the consequences of the present anti-trade or anti-EU sentiments, such as a collapse of the EU following a possible ‘Frexit’, or even the most extreme anti-globalisation scenario, a total collapse of all trade agreements, and analyse how a Brexit scenario would play out if the overall international trade climate (further) worsens.
Predicting the consequences of these scenarios is of course difficult – because we do not know what future trade arrangements might look like – but based on past experience with trade agreements, one can approximate the size of the trade effects. In a new paper, we analyse a few of these options for the UK with the help of a gravity model (Brakman et al. 2017). A gravity model explains bilateral trade flows by looking at the economic size of countries (GDP) and the trade barriers (distance, membership of a trade agreement) between countries. The logic of the model says that the larger the trading partners and the smaller the trade barriers, the larger the volume of trade. The calculations of alternative trade scenarios are relatively simple. First, one estimates the model for the world as it is, including all existing trade agreements. Alternative scenarios can then easily be implemented by turning a specific trade agreement on or off and recalculating the (hypothetical) trade flows. This gives a reasonable indication of the static trade effects.2
Brexit scenarios
The benchmark for the alternative scenarios is Brexit itself. The trade effects on the global economy in the case of a hard Brexit – that is, the UK leaves the EU and all trade agreements that the EU has with the rest of the world – are depicted in Figure 1. On the horizontal axis, countries are ranked according to their GDP per capita, and on the vertical axis the percentage change in value-added exports (VAX).[3]
Figure 1 Hard Brexit: The UK terminates its EU membership and membership of all other EU-based trade agreements
Note: Bubbles are proportional to countries’ value-added exports in 2014.
As Figure 1 shows, a hard Brexit scenario has a strong negative impact on the value-added exports of the UK, decreasing these exports by almost 18%, mainly because trade with the (remainder of the) EU becomes more expensive. So what about the alternatives, such as a US-UK trade deal or a trade deal between the UK and the rest of the world? Figures 2 and 3 give the answer.
The main effect of the trade agreement between the UK and the US is that it increases the value-added exports for both countries by approximately 2%. For the UK, this implies that the negative impact of Brexit is only marginally offset by a bilateral trade agreement with the US (compare the -18% in Figure 1 with the -16% in Figure 2). Easier access to the US market compensates the trade loss of Brexit to some extent, but within the logic of the gravity model the US is further away and thereby less attractive and relevant as a trade partner.
Figure 2 Hard Brexit followed by a trade agreement between the UK and US
Note: Bubbles proportional to countries’ value-added exports in 2014.
What happens if the UK goes for a hard Brexit but at the same time manages to strike a trade agreement with all other countries outside the EU in our sample? As Figure 3 shows, this scenario would indeed provide a boost for the value-added exports of the UK and many other countries. For the UK, it is still the case that the impact of a combination of hard Brexit with a true Global Britain scenario is negative to the extent that its value-added exports fall by more than 6%. The main reason is distance – although the ‘rest of the world’ is large, it is also distant to the UK, not just in the sense of actual distance (compared to the EU) but also with respect to cultural, institutional, legal, and other differences that act as impediments to trade. The net effect of more access to the rest of the world and a hard Brexit is such that it is hard to see how Global Britain can be a viable alternative to or substitute for the UK’s current EU membership.
Figure 3 Hard Brexit followed by the UK joining trade agreements with all countries in the world except EU members
Figures 2 and 3 still describe relatively optimistic scenarios, where it is possible to negotiate new trade deals. However, it is not impossible that the Brexit will be part of larger anti-EU wave that possibly results in the dissolution of the EU itself. Many current national elections offer voters the option to cast an anti-EU vote. In some EU countries, these parties are popular, increasing the likelihood of another exit. The trade effects of such an extreme situation are much more dramatic than those depicted in Figure 1; it is not only the UK that would experience a significant reduction of international trade, but all other countries as well (see Brakman et al. 2017 for these additional scenarios).
The UK government states that it is aiming to replace the UK’s membership of the EU by other, broad trade agreements. However, at this stage it is not clear what these new trade agreements will look like and which countries could be involved. What are the alternatives for the UK government? A US-UK trade deal? A more extreme worldwide trade deal? If the UK government aims to compensate for the large negative trade shock of Brexit, the options seem limited. Based on existing empirical evidence on trade agreements, our conclusion is simple. If the UK wants to limit the negative trade effects of Brexit, the UK has no trade-enhancing alternative to an agreement with the EU that essentially mimics the situation in which the UK is a member of the EU.
Baldwin, R E (ed.) (2016) Brexit Beckons: Thinking ahead by Leading Economists, CEPR Press.
Brakman, S, H Garretsen, and T Kohl (2017), “Consequences of Brexit and Options for a ‘Global Britain”, CESifo Working Paper No. 6448.
Dhingra, S, H Huang, G Ottaviano, J-P Pessoa, T Sampson, and J Van Reenen (2017), “The Costs and Benefits of Leaving the EU: Trade Effects”, CEP Discussion Paper No. 1478.
HM Government (2017), The United Kingdom’s exit from and new partnership with the European Union
Miles, D (2016), “Brexit Realism: What Economists know about costs and voter motives,” in R E Baldwin (ed.), Brexit Beckons: Thinking ahead by Leading Economists, CEPR Press.
[1] http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/29_03_17_ article50.pdf
[2] This underestimates the possible effects of a Brexit as we do not include long-term effects on innovation, productivity, or migration (Dhingra et al. 2017).
[3] We use ‘value-added exports’ (VAX) because changes in value-added trade are more directly linked to the income and welfare of the countries involved than gross exports; these data also include domestic (non-tradable) services that are used in the production of tradable goods.
Topics: Europe's nations and regions International trade
Tags: Brexit, EU, free trade agreements, Global Britain
Professor of International Economics, University of Groningen
Professor of International Economics and Business, University of Groningen
Assistant Professor of Global Economics & Management, University of Groningen
CEPR Policy Research
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Stay: Why Brexit will be an economic disaster for Britain
In this two part series for the CSBR Zero-Sum blog, senior writers Lloyd Lyall and Jason Xiao go head-to-head over the Brexit debate. This week they tackle the constructive arguments for their position; next week, they will have an opportunity to respond to each other’s claims.
On June 23rd, British voters will take to the polls with a chance to shape their country’s economic future. The ballot will feature just one question: Should the United Kingdom remain a member of the European Union, or leave it? While EU membership entails a plethora of social and political issues, the economic consequences of the EU referendum will certainly be among its most far-reaching and impactful legacies. Here, I will argue what has largely been the consensus among Britain’s economic policy experts and leading academics: “Brexit” will be an economic disaster.
The first reason for Britain to stay in the EU is the enormous swath of inter-EU trade benefits it will lose by leaving. Trade with the EU is enormously important for Britain; 45% of British exports go to European Union countries. Much of this trade is only possible because of the shared regulatory standards, trade agreements and ease of movement provisions between EU member states. If the UK left, if would immediately face higher tariffs as a result of losing the preferential trade status conferred upon EU members. Non-tariff barriers to trade would also rise: most EU regulation collapses 28 national standards into one European one, but by leaving the union, UK businesses would have to navigate significantly more red-tape to sell their products. This significantly dampens Britain’s ability to do business with its most important group of trading partners.
A second reason not to go is that Britain’s departure would leave it without the ability to benefit from EU-negotiated international trade deals. The EU currently holds many major trade agreements with other economic world powers (upwards of 50 are either currently in force or provisionally applied), and as an EU member the UK benefits from the terms of these agreements. For example, the EU is currently in the midst of negotiating new major agreements with the United States (the Transatlantic Trade and Investment Partnership) and Japan. The London School of Economics estimates that these new trade deals would lower UK prices by a further 0.6% and save UK consumers £6.3 billion per year. If Britain leaves the EU, its ability to benefit from agreements like these will disappear.
Proponents of Brexit argue that the UK can simply renegotiate trade agreements with all of its current partners, but there are several reasons to believe that the renegotiation process will be both painfully long and largely unsuccessful. First, it is important to recognize the sheer logistical challenge of renegotiating hundreds of trade agreements with dozens of countries at the same time. A limited amount of UK negotiators will need to tackle a massive number of issues, and as a consequence there is likely to be a long and painful transition as new deals are ironed out.
Even in the long run, however, there is good reason to believe that UK-negotiated deals will simply be worse than the current EU deals the UK benefits from. With a combined GDP larger than any single world country, the EU bloc has tremendous power in international trade negotiations. It can negotiate from a position of strength, because its member states constitute a significant portion of other countries’ buyers. The UK alone, however, is a much less important trade partner for other countries and hence has far less ability to secure favorable deals for itself.
To illustrate, consider the role played by the United States. The US is one of the UK’s most crucial trade partners: as the UK’s largest single-country export destination it consumes $50.2 billion worth of British goods and services annually. When UK trade interests are represented by the EU block at the negotiating table, the US has an incentive to listen: the EU as a bloc does more trade with the US than any single country in the world. As only one component of that bloc, however, the UK accounts for just 3% of US total trade. If the US were instead negotiating trade deals with just the UK, it would be far easier for the US to ignore British interests and offer unfair deals: the UK needs the US far more than the US needs the UK. The result is tariffs and regulations that are more one-sided and biased against the UK than the status quo.
Even if all I have argued thus far turns out to be wrong and Britain does miraculously renegotiate outstanding deals with all of its current trade partners, the uncertainty that exists at present will impact another crucial area: investment. Foreign direct investment in particular is a crucial issue for the UK: it is the biggest net recipient of FDI in the European Union, and needs capital inflows to finance its large current-account deficit. Uncertainty over the UK’s future after a Brexit will turn away foreign investment, damning the UK to a long and painful road to recovery.
A UK exit from the EU would pose massive and long-lasting damage to the British economy. The London School of Economics has estimated such an exit could sink UK income immediately by £50 billion per year, with the long-run impacts of Brexit this figure could turn out to be far more. The magnitude of this choice is scary indeed: British voters have an opportunity this June to cripple the world’s foremost political union and launch their country to instability and recession. If they vote responsibly, they will reject Brexit and avoid this fate.
By Lloyd Lyall
Works Cited
"Foreign Trade." United States Census Bureau. U.S. Department of Commerce, Dec. 2015. Web. 27 Feb. 2016.
“A Background Guide to “Brexit” from the European Union.” The Economist. Feb. 2016.Web. 27. Feb. 2016.
Dhingra, Swati; Gianmarco Ottaviano and Thomas Sampson. “Should We Stay or Should We Go? The Economic Consequences of Leaving the EU.” The London School of Economics and Political Science. Feb. 2016. Web. 27. Feb. 2016.
Picture taken by Pavlina Jane on July 13, 2013, titled "Time Bank, London", obtained through Creative Commons.
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Brexit Implications: The Future of Britain
Following the successful re-election of David Cameron in 2015, the reality of a British exit (Brexit) from the European Union became clear. Now, the date has been set for the referendum to determine the future of Britain. David Cameron opposes an exit. The powerful London mayor, Boris Johnson supports the idea. Boris has been ranked as the most senior official to take the lead from Cameron. While many polls predict that Britain will stay in the Eurozone, what would be the implications of a Brexit? The significance of EU to the United Kingdom’s economy cannot be underestimated. In fact, a large percentage of the United Kingdom (UK) trade is conducted by the EU. The role of the UK (and all the member states) is in promotion. Currently, more than 60% of all trade agreements the UK is is as a result of its membership to the EU. This will probably increase to 85% if the negotiations spearheaded by Cameron bear fruits. In addition, as part of the European Union (EU), the UK enjoys no tariffs on goods moving within all the member states. This ensures that there is a free movement of goods and services within different countries. In addition, the EU is a key negotiator for all the 28 member states in the World Trade Organization (WTO). It also negotiates the Free Trade Agreements (FTA) on behalf of the member states. The UK is also a full member of the European Commission (which proposes legislation). It is also a member to the EU Council of Ministers and European Parliament.
Graphic Crispus
Brexit Implications: Understanding the Losses
Therefore, with all these issues, it is clear that UK will have major losses if it exits the union. According to a research by Open Europe, an exit will lead to a 0.8% decrease in Gross Domestic Product (GDP) by 2030. Other studies by NISR states that the GDP will drop by 2.5% after the Brexit. In addition, UK will have a reduced role in Europe because of the new tarrifs that will be introduced. Some might argue that UK will also levy other countries. However, as an individual country doing business around Europe, this will be to Britain’s disadvantage. A research by CEPR states that the withdrawal will cost 1.77% of GDP annually. With a GDP of £25.7 billion, this means that £3.8 billion will go to tariff barriers while the rest will go to non-tariff barriers (NTB). Another challenge for a Brexit will be on the agreements and FTAs the UK is party to as a member of the EU. The UK has many treaties and agreements (trade and political) with many countries such as South Korea, South Africa, and Mexico among others. After the exit, it is expected that the UK will not automatically retain these agreements. This will bring its fair share of challenges. As a trader, having a good understanding of the various sectors of the UK’s economy will help you allocate capital to the right areas. Remember that the UK has for long had an important role in trade in the European Union.
The chart below shows the trade balance between UK and the EU member states. Many UK’s companies have a footprint in other EU member states. For instance, the aerospace sector in the UK is responsible for about 2.3% of exports. Imposing trade barriers among the countries will have significant impacts. The food, beverages, and tobacco sector is a highly protected sector within the European Union where the key beneficiaries are the producers. If UK exits, then this sector will be greatly affected. With these implications, it is certain that the UK will lose if it exits the European Union. This will lead to a decline in value to the pound. In fact, a few weeks ago, when Boris endorsed the idea of a Brexit, the pound lost more than 2%. In addition, the other sectors of the economy will be negatively affected. In days (or months) before the poll, I expect the major indices in the UK to decline. The same will be true to the pound. However, since I believe that the UK will not exit, these asset classes will go up after the poll.
Brexit Implications – Useful Links
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One year until Brexit: How is it shaping up?
With the official date for Brexit just one year away, we look at what the future might hold for the UK and EU.
It’s hardly been out of the news since the vote to leave the EU was announced over 18 months ago. Now, the UK is just one year away from exiting the common market trading bloc that it has been a part of since 1973 (when the EU was the European Economic Community). How are the exit negotiations shaping up, and what are the likely consequences of Brexit, as we currently understand it?
Is the official leaving date actually March 29 2019?
Yes, but with caveats. On March 19 this year Britain and the EU agreed the terms for an official ‘transition period’ which has been created to allow what has been termed an ‘orderly withdrawal’. Effectively this means that the UK will still have to play by the EU’s rules until December 31 2020, but during this time can proceed with global trade negotiations that will come into force in 2021.
The transition period terms are relatively straightforward, however the continuing issue of the Irish border is a sticking point within them. In brief, they are:
• EU citizens arriving in the UK between March 19 2019 and December 31 2020 will have the same rights as those who arrive prior. The same will apply to UK expats on the continent
• The UK can create its own trade deals during the transition period
• The UK will still have to abide by existing EU trade deals with other countries
• The UK will effectively remain part of the Common Fisheries Policy, yet without a direct say in its rules, until the end of 2020
• Northern Ireland will effectively stay in parts of the single market and the customs union until the border issue with the Republic of Ireland can be solved.
What has to be negotiated on a global level?
Essentially a huge number of treaties with countries spanning the globe, the trading rules for which have been agreed with the EU as a trading bloc rather than individual countries such as the UK. The country hasn’t been in this position since joining the (then) EEC back in 1973, so from the big trade deals with partners such as the USA, through to agreeing tariffs on the import of cereals from minor partners, the UK has to make new agreements.
According to a report in the Financial Times in May 2017, the UK has to renegotiate at least 759 treaties with approximately 168 countries thanks to Brexit. The FT article states that at worst many of the deals will simple replace “EU” with “UK” in the treaty, and at best the UK might get a better deal, but there are no guarantees. In some cases there are treaties that the UK will simply not bother trying to replace where a workaround is available. There is a lot of is administration but there isn’t a lot of is time.
Kent Business School’s Dr Carmen Stoian;
“Leaving the EU inevitably means forgoing some of these gains (of being part of the EU) as a result of the increased barriers to trade and investment that are likely to occur in all possible scenarios. Whilst free trade with non-EU partners is likely to generate some economic growth, the UK’s geographical location, historical, economic, political and business links with the continent makes the EU the UK’s most logical and natural business partner. So no wonder that impact studies are finding that long-term economic growth will be affected negatively by Brexit, in all scenarios.”
As well as trade and tariffs, the UK will repeal all EU laws currently governing the country and, over a period of time, have to replace these with home-grown laws. According to the government’s own white paper there is “no single figure” for the number of EU laws that are enacted in the UK, however the BBC cites 12,000 EU regulations, 7,900 statutory instruments passed by Parliament to implement EU legislation and 186 acts of Parliament that incorporate EU influence. This is just the tip of the iceberg, and until the UK formally leaves the EU new laws still apply and will subsequently have to be unpicked and replaced.
The economy
In the run-up to the referendum, and ever since, there has been an ongoing and often savage row over the economic impact of Brexit on the UK economy. Who can forget the Leave camp’s big red bus that seemed to promise £350m per week, saved from the EU, to be pumped into the NHS?
Of course the actual outcome is near-impossible to predict with any degree of accuracy as quite simply, we don’t know what will happen. EU countries are unlikely to want to make it easy for the UK to create deals within the common market than already exist, so realistically Great Britain has to look further afield and hope that it can retain and even increase tariff-free trade agreements. Moreover, EU countries are scrambling to attract tech, manufacturing and financial companies away from their traditional hubs in the UK through a host of financial incentives.
In recent weeks Anglo-Dutch giant, Unilever announced that it was going to move its headquarters from London to Rotterdam. Dr Carmen Stoian wrote;
“…the move is driven by both push and pull factors, amongst which political factors cannot be neglected. Since the British vote in the EU referendum in June 2016, governments, local authorities and business networks in various European countries have worked hard to improve the investment climate in their markets in order to attract multinationals headquartered in London that may be wary of Brexit.”
Aside from the £40bn (if not more) ‘divorce bill’, the UK will no longer receive EU grants and rebates, however as one of the ten countries that pays in more than it receives, we will be better off. For example, the UK received £4.6bn in 2014/15 from the EU, but contributed £8.8bn in the same period. But for UK businesses, the majority of which were pro-EU, the uncertainty of the future has caused many to be pessimistic about their own and wider economic growth. When the UK leaves it will become a member of the World Trade Organisation of its own right which should protect the country from unfair or discriminatory tariffs, but the ultimate shape of the trade agreements may take years to come out in the wash.
International Trade Secretary, Liam Fox, is optimistic;
“We have a £17bn surplus in services with the European Union, the European Union has a £102bn surplus with the UK, so it would be very damaging to businesses in Europe not to come to a deal. Therefore I think that the economic well-being of the people of Europe, of the businesses of Europe will ultimately take precedence in these negotiations over the politics of every closer union.”
Moving forward
The relationship between the UK and EU will undoubtedly continue to be very strong; after all, the EU is Britain’s biggest trading partner. With negotiations very much ongoing there will be a lot more clarity as to the situation in the coming 12 months.
Both sides are fighting hard to protect their own interests whilst balancing the rights of the people who will be most affected and the businesses that rely on a ‘good’ deal being struck. It’s of no interest to either side to be too hard on the other, but equally in any break-up there is going to be a level of animosity and neither wants to lose out.
The big issues surrounding the customs union, Irish border, fishing policy and migration will continue to be debated – hard and difficult decisions need to be made and agreed over the next year. What is likely, however, is that come March 19 2019 there will still be a very long way to go until the picture for the UK-EU relationship is clear.
For more information on the internationally-focused undergraduate and postgraduate programmes Kent Business School can offer, have a look at our website.
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