Brexit in a Brave New World

Feb 7, 2017 Daniel Gros

When it comes to bilateral trade, gains and losses are distributed asymmetrically between the larger and the smaller economy. In the best of times, that would be bad news for the United Kingdom as it seeks new trade deals with the European Union and others – and these are not the best of times.

BRUSSELS – When it comes to bilateral trade, gains and losses are distributed asymmetrically between the larger and the smaller economy. In the best of times, that would be bad news for the United Kingdom as it seeks new trade deals with the European Union and others. And these are not the best of times.

Economic theory predicts that erecting new trade barriers hurts both sides. But economic principles also suggest that the larger of the two economies is likely to lose less.

In the case of a tariff, for example, lower demand from the larger economy will tend to push down the prices of the goods that it imports. The smaller economy is unlikely to have enough of an impact on overall demand for the goods it imports, and thus on their prices.

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0 Comments on this paragraph, 11 Comments on this article

S Sam Feb 14, 2017

The article ignores that: 1) UK is in front of the queue and not at back of the queue with United States. 2) UK will have free trade agreements with many fast developing countries 3) British pound is a lot more competitive and most countries would like to devalue their currency as UK has. 4) The premise of the author is based on outdated report based on many incorrect static assumptions.
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Steve Hurst Feb 12, 2017

Seems to me the EU is belatedly realising that Brexit may well be a unity problem for the EU with Claude Junckers chuntering on about unity problems and the unlikelihood of common aspriations being shared by Polanad and Hungary versus France and Germany. Well there is no unity in the EU Claude which is why reform is paralysed. Brexit could have been avoided by a temporary cap on free movement to ease pressure on the UK, but no dogma said no way and dogma will kill the EU. The expansion of the EU was political not economic, as was the introduction of the EZ without the necessary transfer union mechanisms. It is economics that will destroy enforced political dogma
- Steve Hurst Feb 14, 2017
  
  Jageet
  
  ScandNord doesnt want UK, it would dominate the group too much
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- jagjeet sinha Feb 12, 2017
  
  SCANDINAVIAN NORDEUROPE
  Well, Indeed it is the Economic Europe that France has to focus on, rather than attacking The Anglosphere's One Island in Europe.
  ClubMed needs MONTREALS-ON-THE-MEDITERRANEAN to harness Migration and Macroeconomics - to confront The Anglosphere.
  Constructive positioning is great for all quarters of Europe - The Latin quarter, The Russian quarter, The German quarter et al.
  The author seems to have clutched at EUSSR's world domination prowess - rather than Constructive Positioning in the predicament.
  The Scandinavian Nord quarter perhaps Britain's best bridges across The English Channel - Economic Europe's best hope.
  The politics of Megalomania from ClubMed has always ended in tears - every 100 years.
  Unfortunate realities that Claude Junckers chuntering May bring forth.
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jagjeet sinha Feb 8, 2017

LINGUA FRANCA
The Voice of France sounding ominously like the Voice of Russia - admonishing the erstwhile Soviet Republics.
With Brexit, France in pole position to shape The Europe of Napoleon's dreams.
Given the strengths of Europe that the Author outlined, The EU finally The Superpower it always wanted to be.
Towering above Trump 's America besides Britain, the French finally fulfilling DeGaulle's dreams.
The PetroEuro that DeGaulle desired after the Dollar's demolition on 15 August 1971 - perhaps nearly there.
Time opportune for French to finally replace English as Europe's Lingua franca as well.
Vive de les Francaise.
- jagjeet sinha Feb 12, 2017
  
  : ) : ) : )
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- Steve Hurst Feb 12, 2017
  
  Jageet
  
  Lingua Franca is Greek not French, however its just as appropriate as Greek finances are the Eurozone's Trojan Horse
  
  : )
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Byung-chul Kim Feb 8, 2017

'Multiple studies confirm this, concluding that the UK will bear the lion’s share of the costs of Brexit.'

Both studies produced months before the referendum (March and April 2016), one by the largely pro-Remain LSE.

The other by the OECD. which has already backtracked on its growth forecasts for the UK.

Not only that, but Catherine Mann, the OECD’s chief economist herself inadvertently condemned the report by, astonishingly, conceding that the OECD had been unable to predict that the Bank of England might intervene.

Something that any junior analyst, or even plain old layperson might have expected.

So the two principle studies on which this article heavily relies are of not of only of questionable intent, but also of dubious conclusions.

That's not to say there won't be an economic impact, of course there will.

But basing such an analysis on two out of date, flawed studies does nothing to advance such an argument.
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Robert Bruce Feb 8, 2017

Even before negotiations begin it seems that writers on both sides of the UK/EU divorce are psyching themselves up to believe that they will get the better end of the deal. Convention does indeed suggest that the bigger party in any negotiations (the EU in this case) will generally have the upper hand, but when it comes to international trade negotiations there are many more factors at play. Most obvious so far is the steep fall in the the value of the pound, which has already lost 15% of its value against the Euro since the Brexit vote. Even if we assume reversion to WTO rules as the worst likely outcome, this fall in the pound is likely to more than offset any new tarriffs for UK exporters. Conversely EU companies wanting to sell to the UK will face a double hit from a weaker pound, on top of any tarriffs imposed.

With so many unknown factors, it is impossible to know who will have the strongest position in any final negotiation, but both sides are in danger of failing to see the wood for the trees. The one thing everyone should be agreed on is that the outcome of this divorce is certain to reduce economic growth on both sides, and the more aggresive the trade stance becomes, the worse these losses will be. We cannot be as naive as Donald Trump, who still seems to believe that trade wars can somehow lead to better economic growth. Given the common pattern of acrimony in divorces we will need cool heads in the months ahead to remind us that a sensible Brexit deal - one which respects the privileges of EU membership, but still promotes free trade with the UK - is in everyone's best interest.
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Bernard Fudim Feb 7, 2017

Supply and demand is not always a uniform entity purely responding to numerical quantity. In my own import/export experience of the 60s through 90s, I found that specialty electronic products made in the UK could have a market in the USA, especially when the specifications were sufficiently unique, so that the standardizations inherent within American military requirements, could not support sufficient American interest and production. In those instances I found markets that were willing to pay more for items made by similar companies located in the USA and in Britain. So the Britain I knew manufactured products to suit more limited applications but at higher prices. Of course this was at a time when defense department specifications were not as uniformly established throughout NATO nation equipment. However the concept of specialization still exists and can be very much dependent upon specifics rather than quantity. The cost to produce to a more limited specific requirement is not as dependent upon the size of the overall economy.
The question then is what are the talents, sentimentalities, and specific experience that would provide a more unique, or a one sided advantage to Britain.
The language of commerce is more favorable to the English Language.
Banking and Investment oversight is more closely associated with the UK.
Government over centuries is perceived to be more stable than other European nations.
Entertainment and sports are at least on a par if not more profitable than the rest of the EU
The UK has large energy reserves.
Economic and cultural ties to the largest economy in the world are more assured than the rest of the EU.
If we were to add up the intangibles that make up the ingredients of an economy, I think it would be difficult to assume that BREXIT is as dangerous to the British economy as might be assumed based only upon GDP.
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M M Feb 7, 2017

If QVII triggers article 50 and embarks on this divorce journey with the EU, she and many European leaders won't be in power in 2 years time to see the outcome of any deal, if at all with the EU, whether relating to trade or otherwise (the issues with the EU go back decades and decades it shall take to untangle them). With the EU, the U.K. has a lot to loose, and soon the British people will get asked to pay more taxes, or to earning less in order to compete with the Chinese and others, there will not only be cries but screams all over the place. QVII and her predecessor should have handled the EU and the Brexit referendum differently, one can only hope that it is still not too late to correct past and some current mistakes.
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