SWF Diversification

Apparently the US government has seized fine art held by Malaysia’s sovereign wealth fund. I guess the next question is whether these paintings were part of an asset diversification scheme: football teams, real estate, equity, so why not art?

I can just see it now: a Miro retrospective at the Tate Modern, presented by the Kingdom of Saudi Arabia.

SWF Diversification

Post-Brexit Trade

The French president, Francois Hollande, has reiterated what I expect to be a standard line among EU leaders: no common market without free movement, which stands in stark contrast with the Leave campaign’s pipe dream of full common-market access and no movement. Intuitively, the solution to this bargaining game will lie somewhere between these two points.

Patterns in liberalization (or, for that matter, protection) that are likely to emerge will reflect lobbying by groups both within the EU and UK, assuming the Norway solution is out of the picture (it’s not, but other potential outcomes are a bit more interesting at the moment). In most cases, these forces will come from producers, but may also arise from consumers, although for some industries in the UK, consumers may be viewed as having voiced their stances through the Brexit vote (because just about everything is getting read into that; if someone said UK citizens rejected climate change 51-48%, I wouldn’t be surprised).

What might this mean for the topography of trade policy? European products with clear UK substitutes are likely to face trade barriers at the border. For example, much of the British shoe industry is based around Northampton (the county was 58% for Leave), and domestic brands (Joseph Cheaney, Church’s, Crockett & Jones, Loake, John Lob, etc.) can rely on domestic materials while competing with foreign brands (Ferragamo, Gucci, Bruno Magli, Magnanni, Santoni, etc.). There is a fair amount of product differentiation within the industry (UK designs are typically more conservative and chunkier than continental designs), but there will be domestic lobbying efforts for protection on finished shoes within the UK.

This can be contrasted with Britain’s nascent watch industry, which relies heavily on imported movements and movement components from Switzerland and East Asia. Cases, dials, and hands can be manufactured domestically, but investing in highly specialized machinery and materials required for minute components like hairsprings is well beyond the means of most manufacturers (even in Switzerland). Sourcing movements and other key components has become more difficult in recent years simply because of ETA’s (the largest movement producer) restrictive policy towards non-affiliated brands. Rather than worrying about import competition on finished watches, the British industry will focus on maintaining open access to the inputs they need to continue to produce new watches and service existing pieces. Product differentiation again plays a role here, as the most prominent British brands don’t necessarily have a direct substitute from outside the UK, and there tends to be more brand and design awareness in watch-purchasing decisions than with shoes (Bremont creates very rugged watches with classic designs, probably most closely competing with Breitling; Christopher Ward focuses on the value end of luxury watches, competing most directly with Frederique Constant, but with a different design language).

Moving outside manufactures, the financial sector is probably the most directly impacted by potential changes in trade policy (both finance and hospitality will be lobbying for retaining some form of open immigration). UK efforts to retain financial access to continental markets will be bolstered by lobbying from London as well as financial-service providers keen on not having to move existing offices and staff and being able to serve both UK and EU markets from one location. Efforts at introducing protection may be driven by German leaders with aim of building financial clusters in Frankfurt and other cities.

Agricultural negotiations will be interesting to watch, as Britain imports much of its food. Leaving the common market means domestic producers will compete with those supported by the Common Agricultural Policy. A replacement domestic policy would be expensive to implement and maintain (and would not assist a significant portion of the British population). A politically and fiscally more efficient solution would be to implement trade protection on a range of imported agricultural products, but it is difficult to identify exactly which products will receive protection and which won’t. This is, after all, the sort of environment where US apple producers lobbied for import bariers to be imposed on bananas, because ‘cheap bananas could lead people to stop eating apples’.

In any case, any tariffs imposed on European imports to the UK will not exceed the WTO’s most-favored-nations (MFN) rates; the bigger issue is the potential imposition of non-tariff barriers, such as sanitary and phytosanitary measures to restrict food imports. If these become excessive, many UK residents will have to become acquainted with higher bills.

Post-Brexit Trade

Brexit, two weeks out

As expected, the last two weeks following the UK’s EU referendum have been marked by significant political and economic volatility. Both major English political parties are in a state of upheaval: within Labour, Jeremy Corbyn dramatically lost a vote of confidence, yet refuses to resign (it recently appeared that he would retain popular support in a leadership election, although it is impossible to say how the recent swell in Labour membership registration would impact this; Corbyn assumes it will add to his support); among the Conservatives, Theresa May now appears to be the front runner for David Cameron’s replacement, after enough in-fighting among the Leave campaign’s leaders to make British politics appear to be a modern-day recreation of Game of Thrones. Leave’s wall of false promises came tumbling down remarkably quickly, and all of its most prominent leaders have disappeared from the scene. Scotland has begun to negotiate its status with both the UK and the EU.

Economically, the pound sterling has dropped even farther from its initial post-referendum plunge, hitting lows against the US dollar that have not been seen in three decades. Unsurprisingly, importers (particularly in the tech sector) have begun to increase prices on products sold in the UK. Property prices have dropped, while the Bank of England has been very active in implementing its post-referendum plans (perhaps the only government body to actually have one). One aspect of this has been to loosen regulations covering bank lending, which may promote consumption and investment, but also runs the risk of further weakening the financial positions of the banking sector, reducing resiliency in the face of another shock (such as, say, the actual triggering of Article 50).

Looking ahead, obviously a great deal of uncertainty still remains. What is clear, is that if the British government does begin to move forward on the task of disentangling its laws and regulations from those of the EU, the task will require the hiring of a large number of skilled workers, most of whom will have to come from outside the UK, potentially increasing net immigration.

Two recent political developments are especially noteworthy. First, a lawsuit has been filed with the aim of ensuring the government abides by constitutional rules which would require full Parliamentary debate over triggering Article 50. Most MPs favor remaining in the EU, so many will face the issue of balancing personal ideologies with electoral concerns (particularly in districts with heavy Leave support), along with lobbying interests. Business lobbies are heavily skewed towards remaining in the EU and broadly represent the most internationalised and productive industries in the UK, so while little regulatory oversight applies to these activities, their influence cannot be underestimated. The financial sector can be expected to publicly pursue both voice and exit options, balancing demands to retain access to EU markets with threats (at the very least) to move staff and positions to the continent. It is likely that if Parliament votes against triggering Article 50, it will have to come with policies along the lines of implementing the concept of embedded liberalism: improving the lot of globalisation’s losers through policies aimed at improving job training, infrastructure, and attracting investment to British cities outside of London and Manchester, many of which have experienced significant economic decline over the last several decades. If Parliament does trigger Article 50, then the pound is likely to fall farther, and the British economy will face a very extended period of little or no economic growth.

The second is the emergence of May as potential PM. As a (somewhat tepid) Remain supporter, she is better positioned to negotiate effectively with EU officials than anyone associated with the Leave campaign. This may be partly down to The logic of two-level games in international bargaining may apply here, but the application is a bit messy (or not as set out in the seminal research on the topic). If there is a second referendum (unlikely), the expectation of a slight majority of Leave votes places May in a relatively good position to extract concessions from the EU (Britain’s negotiation position overall is fairly weak). It is more difficult to predict the potential impact of Parliament as a veto player, as the weights placed on constituent support versus overall welfare or lobbying support by individual MPs (or the average of these across Parliament) is something that, for now, can only be guessed.

Brexit, two weeks out