Tag: trade deal

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The UK economy – facing a double whammy

The LSE’s Centre for Economic Performance has just published a paper looking at the joint impact of Covid-19 and Brexit on the UK economy. Apart from the short-term shocks, both will have a long-term dampening effect on the UK economy. But they will largely affect different sectors.

Covid-19 has affected, and will continue to affect, direct consumer-facing industries, such as shops, the hospitality and leisure industries, public transport and personal services. Brexit will tend to hit those industries most directly involved in trade with Europe, the UK’s biggest trading partner. These industries include manufacturing, financial services, posts and telecommunications, mining and quarrying, and agriculture and fishing.

Despite the fact that largely different sectors will be hit by these two events, the total effect may be greater than from each individually. One of the main reasons for this is the dampening impact of Covid-19 on globalisation. Travel restrictions are likely to remain tighter to more distant countries. And countries are likely to focus on trading within continents or regions rather than the whole world. For the UK, this, other things being equal, would mean an expansion of trade with the EU relative to the rest of the world. But, unless there is a comprehensive free-trade deal with the EU, the UK would not be set to take full advantage of this trend.

Another problem is that the effects of the Covid-19 pandemic have weakened the economy’s ability to cope with further shocks, such as those from Brexit. Depending on the nature (or absence) of a trade deal, Brexit will impose higher burdens on trading companies, including meeting divergent standards and higher administrative costs from greater form filling, inspections and customs delays.

Papers

Articles

Questions

  1. Referring to the LSE paper, give some examples of industries that are likely to be particularly hard hit by Brexit when the transition period ends? Explain why.
  2. Why have university finances been particularly badly affected by both Covid-19 and Brexit? Are there any other sectors that have suffered (or will suffer) badly from both events?
  3. Is there a scenario where globalisation in trade could start to grow again?
  4. Has Covid-19 affected countries’ comparative advantage in particular products traded with particular countries and, if so, how?
  5. The authors of the LSE report argue that ‘government policies to stimulate demand, support workers to remain in employment or find new employment, and to support businesses remain essential’. How realistic is it to expect the government to provide additional support to businesses and workers to deal with the shock of Brexit?
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China to the rescue?

The two biggest world exporters have signed trade deals worth $15bn (£9bn). The Chinese Premier and German Chancellor were targeting an increase in bilateral trade to £178bn over the next five years. Premier Wen has also offered support to some of the European countries struggling with their debt. Despite this offer of support, there is something in it for the Chinese economy. China’s foreign exchange reserves are at a record high, but about 25% are invested in euro-denominated assets, hence China has a very strong interest in preventing the collapse of the euro. Furthermore, it is also interested in diversifying its export market to reduce its reliance on US markets. This is particularly important given the growth in protectionism in the US economy. Mr. Innes-ker said:

“China’s dependence and exposure to the US dollar creates issues for its own economy to the extent that it’s a hostage to US monetary policy.”

China’s interest in the European economies may provide an opportunity for the UK economy, as it is a country with ideal investment conditions and is already one of China’s most important trading partners. David Cameron, in a meeting with Wen, has said he wants bilateral trade to increase to £62bn by 2015. The amount is nothing in comparison to the trade deal between China and Germany, but still a significant potential sum for the UK economy. The following articles consider the Chinese economy and its role in the global environment.

Self-interest in China’s helping hand Asia Times Online, Jian Junbo (30/6/11)
China and Germany ink $15bn trade deals as leaders meet BBC News (29/6/11)
Chinese leader’s visit to Germany ends with large trade deals The New York Times, Judy Dempsey (28/6/11)
China offers helping hand to Eurozone Guardian, Helen Pidd (28/6/11)
Rights, trade to dominate Germany-China talks Associated Press, Deborah Cole (28/6/11)
China promises EU ‘helping hand’ with debt crisis Reuters, James Pomfret and Stephen Brown (28/6/11)
We still don’t grasp how little we matter to China Independent, Hamish McRae (29/6/11)

Questions

  1. What are the benefits of trade?
  2. Why is it important for the Chinese economy to diversify its export market?
  3. What does it mean by the statement that China is hostage to US monetary policy?
  4. Why are China’s foreign exchange reserves at a record high?
  5. What are the reasons behind China’s interest in Europe? Is it more of a ‘helping hand’ or more to do with furthering China’s own ambitions?
  6. What might the trade deal between China and Germany mean for trade between China and other nations? Is the deal to the benefit of everyone?