Leaving the EU will matter a great deal for trade, writes Pierre-Louis Vézina. He argues that in time, Brexit will surely hurt UK exports.
Most experts are convinced Brexit will hurt UK exports. That’s because we’ve learned from past episodes that removing trade barriers does actually boost trade. On average, bilateral trade is around 40% larger after trade agreements are signed. But we don’t really know about the reverse effect, that of undoing a trade agreement. It hasn’t really happened before. It’s probably not minus 40%. Trade agreements bring about new trade relationships, they create new business links, and they allow firms to introduce their products in new markets. These relationships persist. It takes time to find the right supplier, the right products, to write up contracts and establish trust relationships. Firms would rather not do this too often. So undoing a trade agreement probably does not destroy as much trade as signing a new one creates.
The dismantling of colonial empires actually tells us a bit about the persistence of defunct trade agreements. When colonies gained independence in the 1960s, trade with the metropole did not suddenly collapse. It did erode slightly, but colonial empires actually still shape today’s trade patterns. So, will Brexit reverse all the trade gains brought about by deep EU integration? Probably not. It will hopefully hurt trade only slowly and it won’t undo everything from one day to the next.
And there’s even another reason why trade patterns should persist, at least in the short run. It’s because foreign multinationals, who trade a lot, don’t want to move. Many are part of clusters, like car plants in the West Midlands, and agglomeration forces are hard to put in reverse gear. Industries like banking, fashion, and technology have clustered in parts of London and now benefit from a dense talent pool and a constant flow of ideas. This has become such an important locational advantage that industries don’t dare to move yet. Few firms have announced moves to France or Germany. It will take a very hard Brexit to undo those clusters.
Also, Britain can’t defy gravity. The EU is not only an ex-partner, it’s also a neighbour and the largest market in the world. Exports to the EU will continue to be sizable. Large deviations from such gravity forces require sanctions or embargos. Even a hard Brexit shouldn’t have that pull, hopefully.
Don’t you mean freedom fries buddy? Image by Señor Codo, licenced under (CC BY-SA 2.0)
So the emergence of good old tariffs and other trade barriers will probably not harm as much as liberalisation helped. But there will be blows. In particular, the deterioration of Britain’s image abroad, and not just in EU countries, should hurt its exports. This is what happened to French exports to the US when France decided to vote against the war in Iraq. France-bashing became mainstream and ubiquitous across US cities, French fries became freedom fries, and French exports to the US fell by 15%. The same thing happened to German car sales in Greece when the German government bullied Greece over debt payments. Flagship products like Minis or Burberry scarves could be hit. Consumer boycotts do hurt trade. The lowered opinions of Europeans about the British could further reduce exports. Economists have shown that bilateral opinions, captured by the Eurobarometer public opinion surveys or even by Eurovision voting patterns, have a relatively large effect on trade. The confrontational British government at odds with EU counterparts could aggravate the problem as even political skirmishes sometimes reduce trade. When the Japanese government brought back a history textbook that ignored Japanese war crimes of World War II, the Chinese government got really upset and Japanese firms doing business in China lost much market value. So if the divorce gets hostile, exports could be hurt badly.
There’s another issue we need to pay attention to. The hostility towards immigrants could also have a large effect on trade. Migrants have been identified as key to trade between countries. They know how to do business with their origin country. They have market knowledge, they speak the language. They can navigate through the bureaucracy. The French who work in banks in London are the ones making the phone calls to French companies and that go to meetings back home to establish contacts. This leads to trust relationships that foment trade. Migrants also like to import nostalgia from back home. The retired British in the South of France order from Marks and Spencer. Most worryingly, migrants do not want to live in a country where the government is openly anti-immigrant and where crossing the border is a painful experience. They thrive on an open world. Loudmouthed officials and border agents could deter not only immigration but also business travel, even if new visa restrictions are not imposed. Less business travel means fewer face-to-face meetings and fewer deals. Across US States business-class air travel is directly related to the volume of exports, especially in sophisticated products.
Brexit could thus be quite damaging for UK exports in the long run. The drop of the pound has already mirrored this bleak future. Thankfully this may attenuate the other negative Brexit effects by making exports cheaper and giving them a slight boost. But the damage done could be long-lasting.
This post represents the views of the author and not those of the LSE Brexit blog, nor the LSE.
Pierre-Louis Vézina is a Lecturer in Economics at King’s College London.
What about tourism?
If I have a long weekend in my end, will I really want to go to a UK that has no €, people have gone crazy and I might be asked for a passport/visa?
The reason colonial trade did not collapse post independence is because free trade and supply chains continued. See here: http://bit.ly/2pwcyko. But anyway, it did reduce in the end, in relative although less so absolute terms. Dramatically.
So the conclusion is that withdrawing from the Single Market won’t have an obvious, large impact, unless the world consists mostly of diehard EU federalists obsessed with the idea of punishing Britain, or the UK Border agency becomes staffed with London cabbies.
One day we’ll wonder why didn’t Brexit years before…
Er, no. Did you read the article?
Why yes, yes I did. The first half concludes that the negative effects on trade shouldn’t be very large presuming that the EU does not interpret the UK seeking free trade as a hostile act requiring sanctions and embargoes, the second half seems to be Mandatory Sinister Brexit Warnings.
The article presents no evidence that Britain’s image has deteriorated abroad; the number of tourists taking advantage of the cheaper pound suggests we’re fine. ‘Brand Britain’ has always involved a certain eccentricity and proud independence, has it not?
Half the British electorate votes in profoundly Eurosceptic ways; well, so does the French electorate. I can’t see Brexit causing mass consumer boycotts of aircraft components, or Ed Sheeran mp3s to be burnt in the streets. CETA caused plenty of protests; it didn’t seem to translate into hatred of Canadians.
As for the argument on immigration, I’m quite sure there’ll continue to be plenty of high-skilled French in London. I’d be amazed if the height of border bother for EU businessmen wasn’t that they might possibly have to use a different queue.
So yes, the first part tells us that Brexit wouldn’t cause that much damage straight away even on a no-deal scenario (and even then I’d be confident that we’d agree a trade deal after a few years once federalist hurt has died down). The second part consists of doom-mongering so outlandish that it compares Brexit to war-crime denial.
This is more of a ramble than a real counter-argument in all honesty. Take the immigration issue, for instance. We have a Prime Minister that’s just made a firm commitment (apparently she is serious) to reduce net migration below 100,000. The only way to do that is to create serious obstacles to immigrants moving to the UK. Either the Prime Minister isn’t serious or these restrictions will have an impact. We’re so far from that target at present that these restrictions will have to be pretty severe to get anywhere close to it (and as British citizens we can expect to have the same restrictions placed on us – thanks again Brexiteers).
If we leave on no deal we’ll immediately have tariffs (in some cases a complete loss of access) affecting some of our exporters. Obviously that will have an impact short-term and I highly doubt even May is willing to go there. Long-term, Brexit (particularly with the added immigration restrictions being discussed) will simply damage business conditions for those businesses located in the UK and we don’t seem to have much to offer as compensation – the weak pound, slashing corporation tax and old fashioned bribery isn’t going to go far.
Some people have attempted to quantify this and have shown what the likely damage will be to trade, but really we shouldn’t need to quantify it. It’s basic common sense that if you have unfettered trading access today and lose this access tomorrow (what else can leaving the single market be?) then trade is going to be affected. Normally in a free trade negotiation a country is trying to increase its access; we’re one of the first countries to be calling for trade negotiations that will actually reduce our access from what we currently have. And for what? To satisfy some half-baked ideological obsession with “sovereignty” and a bunch of limp rhetoric that doesn’t affect our lives in any meaningful sense at all. It’s a folly from start to finish and the sooner we recognise it as such the better off we’ll all be.
One of the strong arguments made by a portion of the Leave side was that the point of exiting the EU was to reduce trade with Europe. In other words, it’s not a risk that Brexit will reduce trade with the EU but it is the point of Brexit.
There was vividly described as the UK being “shackled to a corpse” with Brexit being an opportunity to cut trade with the EU in favour of trade with higher growth Asian economies and the USA.
Under this viewpoint a deep trade deal with the EU is a bad thing as it would inevitably involve regulatory costs for the UK economy and would restrict the ability to sign trade deals with other economies as the EU’s rules on product, environmental and labour are not compatible with deep trade deals with the growing Asian and US economies.
It would be good if the election included a debate on what sort of country we want to be as we leave the EU: is the future about deregulation and focusing on other countries for trade or is the future to focus on a deep trade deal with Europe?
Good points, this is a debate we should definitely be having. Many Brexiteers pointed to the Commonwealth as being both larger than the EU economically and The Future. Well, in terms of regulations, how would that work given the Commonwealth includes countries from India to Tuvalu? Are both the UK and EU prepared to mutually recognise/share goods regulations in order to minimise any checks on the Northern Ireland border? Might it be advantageous to align British goods regulations with the EU, and services regulations with the US?
I’d largely agree with the article, but in there are some critical issues which have the potential to go nuclear very fast, and about some of which the UK government seems to be in deep denial, as far as one can tell from Parliamentary Select Committee sessions, etc, and also the almost complete lack of concrete preparations.
A prominent example would be Data Protection and Privacy legislation, conflict over which has the capacity to stop a large proportion of service exports overnight. The last Select Committee displayed painfully clearly a minister responsible with little or no grasp of the issues and no ideas about or plans for likely future trajectories. There was much self-congratulatory talk about how the UK currently boasts a “gold standard” implementation of existing regulation and will be fully compliant at the point of leaving the EU, while the stark reality (completely unmentioned) is that the UK has been in constant dispute with the Commission over the adequacy of its implementation for over a decade and would probably not be granted ‘adequacy’ if it were not inside the EU, and that current changes to UK legislation are likely to exacerbate this problem!