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.

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Post-Brexit Trade

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