The trade deal fetish

John Bolton says the UK can strike a quick trade deal with the US. This reminds me of an under-appreciated fact – that it is not trade rules that are significantly holding back UK exports.

Brute facts tell us this. As part of the EU, the UK and Germany have the same trading rules. Last year, however, Germany exported $134bn of goods to the US whereas the UK exported only $65.3bn. Per head of population, Germany’s exports to the US were therefore 60% higher than the UK’s. Much the same is true for other non-EU nations. Last year Germany exported $11.8bn to Australia whilst the UK exported just $5.9bn, a per capita difference of over 50%. German exports to Canada were $12bn whilst the UK’s were $7.3bn, a 28% per capita difference. German exports to Japan, at $24.1bn were 2.2 times as great per head as the UK’s. And German exports to China, at $109.9bn were three times as great per capita as the UK’s $27.7bn.

Now, these numbers refer only to goods where Germany has a comparative advantage over the UK. But they tell us something important. Whatever else is holding back UK exports, it is not trade rules. Germany exports far more than the UK under the same rules.

As for what it is that is holding back exports, there are countless candidates – the same ones that help explain the UK’s relative industrial weakness: poor management; a lack of vocational training; lack of finance or entrepreneurship; the diversion of talent from manufacturing to a bloated financial sector; the legacy of an overvalued exchange rate. And so on.

If we were serious about wanting to revive UK exports, we would be discussing what to do about issues such as these. Which poses the question: why, then, does the possibility of trade deals get so much more media attention?

 One reason is that the right has for decades made a consistent error – a form of elasticity optimism whereby they over-estimate economic flexibility and dynamism. Back in the 80s, Patrick Minford thought, mostly wrongly, that unemployed coal miners and manufacturers would swiftly find jobs elsewhere as, I dunno, astronauts or lap-dancers. The Britannia Unchained crew think, again wrongly, that deregulation will create lots of jobs. And some Brexiters in 2016 thought sterling’s fall would give a big boost to net exports.

In the same spirit, they think free trade deals will raise exports a lot. But they won't - and certainly not enough to offset the increased red tape of post-Brexit trade with the EU. Jobs and exports just aren’t as responsive to stimuli as they think. The economy is more sclerotic, more path dependent, than that.

Secondly, the BBC has a bias against emergence. It overstates the extent to which outcomes such as real wages, share prices or government borrowing are the result of deliberate policy actions and understates the extent to which they are the emergent and largely unintended result of countless less obvious choices. In this spirit, it gets too excited about trade deals and neglects the real obstacles to higher exports.

But there’s something else. Perhaps the purpose of free trade deals is not to boost exports at all. It is instead largely totemic. Such deals are one of the few things we’ll be able to do after Brexit that we couldn’t do before. They are therefore a symbol of our new-found sovereignty. They are, alas, largely just that – a symbol.

Comments

[e]

Really, after 40 years can this all still be put down to thinking wrongly. Isn't this stuff well known. And 'sovereignty' might allow the deal making, but it won't be dictating the terms of any (potentially dark and devious) international dispute resolution process, that's for sure.

[Mr Art]

To compare Britain against only Germany is disingenuous. Germany is a well known outlier on per capita exports.

That doesn't contradict your arguements for improving Britain's export strength of course.

[D]

Remain say that we'll lose exports/trade/jobs due to leaving a trade deal' with the eu. I'm sure Chris has said this himself (?).

In this context, surely trade deals elsewhere can help make up for *some* of that loss?

So, as Chris says, trade deals haven't/won't massively change our economy, but they do make some difference.

[rogerh]

What would the right national environment for exports look like?

Lowish housing costs, stable families, reasonable education, reasonable transport to the workplace and of course job opportunities. A healthy mix of manufacture and services and finance. Otherwise we are priced out of the market or cannot meet the market or cannot get to work or don't have any work or are stuffed when the world changes.

Then we look at aspirations. What do our middle classes aspire to work at and what do our working classes aspire to work at. For most I suspect chance and what is available are the main drivers. But our 'nice' jobs, medicine, law, academe, government, science and engineering all have problems. Training for medicine is restricted by government funding, law seems overcrowded but good for a few, academe is a poor second pay wise, government is not much of an export driver. Science and engineering jobs are highly regional, getting housing and temporary accommodation nearby and transport to work is a problem and the pay is not that great.

We seem to have been without any sort of strategy for a long time. Indeed I suspect a 'sod The North' attitude has been prevalent coupled with the idea finance will cover the gap, so do nothing else. We now face Brexit and a need to export, but 'you can't fatten a pig on market day', so we look to face some lean times. Whether Boris et al can or will come up with a sane plan to fatten the British industrial pig is still up for discussion. I doubt it.

Underlying all this is the UK class system and the sense that no sensible person like us would sully their hands with business or industry. Why, we would consult, or advise or sit on a committee alongside people like us. We would of course live in a leafy suburb or the Cotswolds, we would block anything so vulgar as housing or a business park or an airport or road.

I cannot help but think the attitude of the Britain Unchained mob is 'pull up the ladder Jack, I'm all right'. Meanwhile you lot can enjoy the only strategy we have - a race to the bottom.

[Tony_B]

The exemplar of the USA's trade relationship with China should be viewed as a horror show for a nascent "free Britain". Britain is economically less powerful and have to cope with a predatory US leadership. PM Johnson would be powerless in demands from Trump to change this-or-that, on his whim.

Martin Rawson neatly summed up Brexit as a "Heist" - what more can be said about the purposes of the political economy.

[Nanikore]

Germany is an economy that is the antithesis of Britain's. It is poorly understood by US and UK economists, and US/UK educated German neo-classical ones. Particularly its collective bargaining system. According to neo-classical theory this shouldn't work.

Some of the remarks of Wren Lewis and Krugman, for example, show incredible ignorance. They concentrate on its monetary policy, which they say is neo-liberal. But again, they just look at their models and don't really try to understand it.

But the German economy is a model of the future. We want broad democratic participation in economic decision making. People must feel they have a stake in economic decisions. The Lander Financial System and cooperative industrial relations systems are a good start. But don't clutter it with neo-classical theory.

[Ted]

This argument doesn't strengthen the remainer position much: if trade deals aren't that important why the fuss about leaving the EU - isn't EU membership just a big free trade deal?

[The Rage]

Ted, your point is dead as well. Trade deals do not matter outside bourgeois capital expansion. Financial collapse and contraction of debt is all that's left.

[Blissex]

«if trade deals aren't that important why the fuss about leaving the EU - isn't EU membership just a big free trade deal?»

Indeed Project Fear (whether of leaving or remaining) is bullsh*t, and being in or out does not *currently* matter that much in the aggregate, either politically or economically, because the political powers and economic impact of the EU are quite small: after all the EU manages only 1% of GDP directly and has very small delegated powers, mostly exercised through the EU Council, which is made of government heads and ministers.

But by the same argument leaving is hardly worth it too, and the economic and political advantages of remaining are greater than those of leaving even if *currently* the margin is relatively small.

But the EU is a strategic political project more than a trade project, and while it is in very slow development, the goal is to give more influence and thus more sovereignty and independence to the *peoples* of Europe though closer union of those *peoples*; political sovereignty and independence comes also through size, and as Churchill said in 1944 "When I was at Teheran I realized for the first time what a very small country this is".

That's the big deal, and what the EU is *currently* is not what matters as to deciding to Leave or Remain.

[Blissex]

«In this context, surely trade deals elsewhere can help make up for *some* of that loss?»

Certainly so, but in pretty small measure, as outside the EU the big economies are all protectionist or anyhow export oriented, and quite far geographically, which is costly.

The key to “help make up for *some* of that loss” won't be the trade deals as such, WTO terms are indeed pretty decent already, but will be, as "Britannia Unchained" argues, much more competitive english labour costs.

Outside the EU english workers in order to compete in the big worldwide market will become cheaper than many chinese, indian, vietnames, etc. workers, something that will greatly boost the incomes and living standards of those employing them in England.