Brexit and trade agreements for the UK

First of all,  Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.

Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).

As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.

A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.

Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.

Ghosn but not forgotten

Pronouncing the man’s name is difficult enough. To understand the details of the Renault-Nissan linkage (also incorporating Mitsubishi) is even harder. But the effects are striking. A more or less unique enterprise was created that reflected the strong if different industrial policies of two G-7 member countries. France believes in national champions, and holds onto the best of state-owned enterprises. This is not just because their trade unions would never agree to anything else. It is also because strong French companies are seen as a projection of state power and perhaps more importantly as a basis for economic independence This policy has often been reinforced in practice by the movement of key staff to and fro between government and business. In Japan, the cohesion of government and business is not so explicit. This is because it does not need to be: national cohesion is still very strong, to the extent that most Japanese feel themselves to be part of something greater than themselves.
Renault Nissan is unique in that it is has been a more or less balanced partnership. Other multinational car industry ventures are more hierarchical. The VW group includes Spanish and Czech arms(SEAT and Skoda) but the German end calls the shots. It’s unique also because other joint ventures with the Japanese car industry have not endured (GM and Toyota, Daimler-Chrysler and Mitsubishi, Ford and Mazda, Volkswagen and Suzuki). Of course, there is  international co-operation at lower level (in engines, platforms, etc.).
But what’s the future for Renault-Nissan? Nissan has the experience on electric vehicles that will be needed for the future. Also, Japan has a lot of expertise in solid-state batteries, which are supposed to be the next big thing. But with Mr Ghosn no longer present, does Renault-Nissan have the global strategies it will need, with lots of newcomers going into electric vehicles?For such alliances to work, the lessons of the past need to be drawn from other alliances: communication is key. Without that, you cannot even begin to give and to take.

There are at least two interesting points about electric vehicles. The first one is that they are less complicated to make than the kind with internal combustion engines. One study even says that they typically have 20 moving parts as opposed to  about 2000. This seems absurd: after all if you take four wheels, four windows, five doors, three mirrors, one steering wheel, one handbrake, and two pedals, you already have a total of 20 moving parts, and then there are the windscreen wipers. But in any case we can accept that they’re easier to make. Which might lower production costs. Which might encourage new foreign direct investment in different places. Which means tariffs, especially protective ones, will change to try to keep up.

The second interesting thing about electric vehicles is that they can have very good acceleration, resulting in  higher average speeds even with the same speed limits.

Brexit and the UK Labour Party

Brexit is not yet as viciously divisive an issue within the UK Labour Party as it is within the UK Conservative Party. But opinion is at least as diverse. The lack of clarity in the thinking of the party’s leader, Jeremy Corbyn, is not helping. In an interview the other day, he said that, if elected, a Labour Government would seek “a better deal” and would look to negotiate “a customs union” with the EU. Now, remember that there is an EU customs union, of which Turkey is also a member. For now, the UK is a member. Use of the term “a customs union”, and many Labour speakers employ it, suggests that something other than the existing customs union is envisaged. But this is logically impossible unless the existing one is to be abandoned by the EU. A customs union implies a common external tariff. Is Corbyn suggesting that this be different from the existing one? If not, why can’t he say that the UK would want to stay in the EU customs union. Or does he envisage a new arrangement whereby the UK and the EU would agree a new common external tariff, incidentally requiring renegotiation of all EU trade agreements with the rest of the world?

Mr Corbyn is also concerned about the State Aids rules of the EU. He says that he would be concerned if they interfered with a Labour government taking measures to encourage industry. With some exceptions, state aid rules come into play if a government gives a benefit to a firm in its own country that it denies to others. After Brexit, if a UK firm wants to trade with the EU and has had unfair benefits from the UK government, it will come up against the State Aid rules either immediately as part of whatever agreement is ultimately reached between the EU, or else later on at WTO level.

Corbyn’s position on the EU needs to be more carefully developed. At the moment, it looks a bit as though he shares the Tory Brexiteers’ delusions that the UK can negotiate with the EU as an equal partner, if not a superior one, and that exiting the EU will mean that the UK is free to do whatever it likes.

More prescriptions for the euro

“Handelsblatt” is a daily newspaper published in German in which is really very good. It gives a comprehensive coverage of German and international business news and issues. On its website, it also has something called “Handelsblatt Today”, which gives some material in the English language. It had a piece recently about the euro, entitled “The euro must be fixed or dropped”. This is heavy on assertions and light on facts, apart from a reference to Alexander Hamilton and the federal takeover of state indebtedness at the formation of the United States of America.
“To survive in the long term, the euro zone needs at a minimum: the ability to tax and spend, combined with balanced-budget laws in member states; automatic stabilizers such as unemployment benefits for the whole currency area; and joint deposit insurance for banks”.

Well, the eurozone is a subset of the EU, and the EU has already some ability to tax and spend. Balanced-budget laws would be too restrictive, fetishizing a particular 12-month period: instead we have had the Stability and Growth Pact, excessive deficit procedures and so on. Unemployment benefits for the whole of the euro area are not necessarily an obvious requirement, because cultural and language differences have militated against a single labour market in the EU, and social services and public health systems are stronger than in the United States. Finally, although there is a long way to go, joint deposit insurance for banks is under consideration by the Council. But there are national schemes in place, and it’s not clear that the absence of a wider scheme is essential for the euro zone to “survive in the long-term”.

EU: economic policy, please…….

Natalie Nougayrède from the Guardian newspaper had an article recently in which she talked about her encounter with the Austrian Foreign Minister at a public discussion  on the future of Europe. She had criticised the Austrian minister for her participation in a government that includes a very right-wing party, the FPÖ, and she pointed that the Minister had refused to deal with the issue, instead focusing on the lack of participation by the French government ministers in recent EU Council meetings.

I was present at this discussion, and one of the things that depressed me was the Austrian Minister’s response to the question as to what Europe meant to her. She did not mention democracy, human rights, or peace: instead, she concentrated on the geographical and historical definition, emphasising that for her it included the Mediterranean, and even Algiers. What depressed me also were the remarks of two far more impressive speakers at the event: the former Foreign Minister from Croatia said that everything she had valued in Europe now seemed under threat, and the chairman of the Bundestag’s foreign affairs committee said that for the first time he believed that Europe could fail.

What has this got to do with trade and investment, you ask? Well, when this kind of discussion begins to preoccupy the leaders of the EU, economic questions tend to get put to one side. But unemployment, especially youth unemployment, is still high. Economic governance is far from complete. There is still a huge amount of work to be done to make the EU a true Single Market. And the external economic policy of the EU is very limited and needs to be enormously enhanced. All this means politicians working together to take action and give leadership.

IMF projections and international trade policies

As usual, the IMF World Economic Outlook has been published in connection with the annual meeting of the World Bank and the IMF. The new report has a special emphasis on the impact of changes in trade policy, which as we know has seen a lot of action in the field of tariffs, with sanctions also playing a role. The revision of the NAFTA agreement, involving Canada, Mexico and the United States, is a further factor.
Behind the world economic survey is a huge amount of data and forecasting work, which encompasses broad economic and policy variables, giving a detailed picture in macroeconomic terms of each country as well as its various aggregates, up to the year 2023 in the case of the current survey. This data is of interest in its own right, but it is also interesting to compare the forecasts made at a detailed level this year with those made last year. Looking at the NAFTA countries, it seems that Mexico has had its expectations increased quite a lot. Compared with last year’s survey, Mexico’s GDP is almost 25% higher in all the years from 2018 to 2022. Canada has had its forecast increased by something over half a percent in the later years. Apart from Mexico, a big beneficiary of the revision of the projections has been the United States, where the US GDP in 2022 is 6.8 per cent higher than the estimate made last year. China’s increases on the other hand, are pretty small, with the GDP estimate for 2022 being revised upwards by 0.1 per cent
At world level the picture is a negative one. The IMF now thinks that world GDP growth in 2022 will be 3.58 per cent, while a year ago it was forecasting 3.76 per cent. Eurozone growth in 2022 is now forecast to be 1.45 per cent (previously 1.49 per cent).
Do these IMF forecasts imply that the US will be a slight beneficiary of its recent confrontational trade policies, since the US GDP forecast has been revised upward and world growth forecasts revised downwards? Well, perhaps, but macroeconomic forecasts embody a lot of things, such as structural change, technological change, resource constraints and so on, some of which the forecasters themselves may be not even be aware of. In other words, trade policies may not be the only factors at work.
And even if you do think that confrontational trade policies benefit the US, you should also ask yourself whether losses for the rest of the world won’t reduce the impulses for US growth farther down the line. And you should consider how much better it would be if the US and its trade partners were reducing barriers to trade (and investment) rather than increasing them.

Moving Up the Value Chain

Moving Up the Value Chain
This is one of the most used and least defined phrases in discussions of business strategy and sometimes national policy also. It has been used to describe improving profitability, improving productivity, better marketing, innovation and a lot of other things. Moving up the value chain is always assumed to be a good thing. The “chain” itself is never described, nor is the process by which one is to move up it, or what will happen if everyone does this. The chain is apparently static, a kind of ladder on which one may climb from link to link, provided one has the right consultants and follows their advice.
This is not to say that value chains aren’t important. Global Value Chains (GVCs) are a big policy focus in industrial policy, and a subject of considerable analysis. But the terminology might need to be revised. Why a chain, anyway? As I have said elsewhere, the use of the word “chain” suggests something linear and also something fairly sturdy and difficult to break.
Such an image is not really helpful in trying to understand global production systems. In practice these often involve parallel sections, where there are multiple sources and destinations. Production location will often be determined by the need to be near supplies or near consumers, so duplicate plants will be needed. And the need to ensure continuous availability of inputs will often require supplies to be drawn from more than one source.
Earlier this year I had an interesting discussion with the Statistical Division of the United Nations. Apart from the huge range of activities they have in the established fields of data such as commodity trade, national accounts and so on, they are now taking an additional approach in order better to understand GVCs, selecting one sector and exploring it in depth, breaking it down by ownership and identifying business functions to see the impact of particular processing stages.
It’s great that this is being done at an international level. Firstly it complements the multisector work continuing in the OECD on so-called “trade in value added”. Secondly, by carrying it out at the UN Statistical Division, a body with huge experience in trade and industry data, the work can be contextualised more readily and can draw on co-operation from governments worldwide. Because of the reach and the impact of GVCs they are of strong policy interest, not just to individual governments in particular cases, but also to all concerned with the stability and future of the world economy.

Competitiveness Liga

People like numbers, as long as there are not too many. And people have a broad grasp of rankings: they know the difference between coming first in a race and coming last. From this comes some of the appeal of competitiveness rankings. I understand this appeal: I worked myself in that area for many years, supporting the National Competitiveness Council in Ireland, and also involved in policy benchmarking at EU level and being part of an international competitiveness network. However, in our NCC reports we resisted the temptation to have an aggregate ranking, because we felt that it would conceal more information than it revealed.
Nevertheless, competitiveness rankings are well established. The two big ones, the IMD and the World Economic Forum rankings, are widely quoted and governments and businesses appear to take them seriously enough. Both reports work in the same basic way, gathering indicators of what are believed to be the factors of competitiveness and putting them together in composite sub-rankings which are then combined into a single ranking for those who want an overview. The key results are here:

RankIMD 2017IMD 2018WEF 2017-2018
1Hong Kong USASwitzerland
2SwitzerlandHong Kong SARUSA
3SingaporeSingaporeSingapore
4USANetherlandsNetherlands
5NetherlandsSwitzerlandGermany
6IrelandDenmarkHong Kong SAR
7Denmark UAE Sweden
8Luxembourg Norway UK
9Sweden Sweden Japan
10UAE Canada Finland

 

Clearly there are similarities, but also surprises.  For IMD,  the United Arab Emirates ranks seventh in the world, and, unlike WEF, IMD finds no places in the top ten for large advanced economies such as Germany, the UK and Japan.

The IMD 2018 Report came out in May 2018 and the website gives the rankings for 2017 and rankings and scores for both 2017 and 2018. By scores is meant a composite index prepared in order to provide a ranking. A quick look at these shows three things
1. First of all the top ten doesn’t change very much. As in a football league, two drop out (Ireland and Luxembourg) and two are promoted (Norway and Canada).
2. If we look at all 43 countries covered by IMD, we find that the most competitive countries are most similar. The top ten are closer to each other than lower groups are.
3. These single rankings actually don’t tell us very much: the underlying data is probably far more interesting.

The euro, again

Paul Krugman had a strange piece in the New York Times yesterday. He said that many of Europe’s problems came from the “…disastrous decision, a generation ago, to adopt a single currency. …. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression.”

There are a lot of things wrong with this kind of thinking, and Krugman is not the first to come up with it. Many US and UK economists think the euro is a bad idea. But to point to Iceland, without ever considering the very specialised nature of its economy and resource endowment, makes little sense. And to talk about exchange rates as the key to competitiveness, without ever mentioning taxation, or skills, or education, or regulation, or infrastructure, or science and technology policy, or telecommunications, or connectivity, or language, or legal systems, or any other factor, is very odd.

Italy and the euro

The formation of a new populist government in Italy is getting a certain amount of attention from commentators. The Süddeutsche Zeitung outlines growing worries in Brussels and Bonn that the new government will threaten the stability of the EU through questioning its fiscal rules and in particular may hinder further eurozone reforms. The Neue Züricher Zeitung highlights nervousness among Italy’s creditors and the uncertainty over how much confrontation there will be between the new government and Brussels . Le Monde concentrates on the personalities and backgrounds of the two party leaders concerned, but the Wall Street Journal gives it little coverage, saying “European stocks climb as Italy tensions ease for now”. In the UK, the Telegraph has an article headed “As Italy has shown, the euro is a far bigger threat to Europe than Brexit” from a former Conservative party leader and foreign minister. The Financial Times focuses on the potential prime minister of Italy and the constitutional constraints on radical change.
What will happen? Hard to say exactly, but the most unlikely thing of all is for Italy to leave the euro. First of all, Italians, having had the euro, will not want to move to a currency nominally at least under the control of domestic politicians. Secondly, Italy is not in the G-7 by accident: it has a huge range of sophisticated businesses who are well able to see that the costs of leaving would be enormous and well outweigh any benefits.