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UK Economics

If Brussels forces a no-deal Brexit, EU exporters could give Britain’s economy a boost

Michel Barnier and British Secretary of State David Davis CREDIT: VIRGINIA MAYO /AP


Since the European Commission currently appears to be attempting to engineer a no-deal Brexit crisis in order to educate all EU member states about the benefits of EU membership, it is perhaps a good time to consider certain of the short-term economic consequences of that scenario. Here I want to focus on one narrow set: what economists refer to as “two-way tariff-hopping foreign direct investment”.

That’s a rather intimidating jargon term for quite a simple and familiar idea. If there is no post-Brexit trade deal between the UK and the EU, the EU will impose tariffs and other restrictions on imports from the UK. Assuming that inward investment flows are not restricted in the same way, firms based in the UK may be able to avoid being subject to such import restrictions by relocating to within the EU.

To make the point concrete, suppose that a firm in the UK manufactured dishwashers and half of its sales went to the EU. Then if the EU imposes tariffs on the import of dishwashers, that firm might halve the size of its operations in the UK, replacing it with a manufacturing plant in, say, France.

There has been quite a bit of discussion of this sort of idea, particularly focused on firms in the finance sector, with various insurers already having announced plans to shift certain operations outside the UK and banks talking of doing so if there is a no-deal Brexit. But the idea would apply equally in other sectors as well, such as agriculture, automotive components manufacturing, advertising or legal services.

Now although most of the attention so far has focused on UK-based firms relocating to the EU to avoid EU import restrictions, there would also be similar moves in the opposite direction if (as we should probably assume) the UK imposed mirroring restrictions on imports from the EU.

Just as firms based in the UK may relocate operations to France or Italy, firms based in the Netherlands or Germany will relocate operations to the UK.

Of course, not all business that exports to or from the EU will relocate. If producing in the Netherlands is 30 per cent less expensive and the new restrictions on imports to the UK amount to only 15 per cent extra costs, it will still be better to export from the Netherlands.

Similarly, if the Dutch business produces 85 per cent of its output for the Dutch market and only exports 15 per cent to the UK, economies of scale and scope may mean it is not worth outsourcing that 15 per cent to a UK operation. But there will be some replacement of trading with investment in new operations.

Over the longer-term, such a loss of trade will probably be bad. We import those things from the Netherlands or Germany because they are cheaper or better, so if the operations are relocated here our consumers will lose out – just as the EU consumers will lose out by the UK-based operations shifting to France. But how will the short-term effects play out?

A no-deal Brexit will result in economic disruption of various sorts, so it is perhaps natural to assume that all of the associated economic mechanisms play out negatively in the short term.

But in the case of relocations, it is plausible that things actually go in the opposite direction — that although we will all lose out in the longer term by replacing trade with mutual foreign direct investment, in the short-term the UK will gain, perhaps quite a lot.

Why? The reason is that the EU exports a lot more to the UK than the UK exports to the EU — about £70 billion per year more. Or to put things another way, for every £3 UK-based firms export to the EU, EU-based firms export £4 to the UK.

That means that if there is two-way import-restrictions-hopping investment, it is natural to suppose that will mean quite a lot more extra investment coming into the UK than the investment that leaves — around one third more.

To repeat, over the longer-term that would be bad for our consumers. But in the short-term, it could mean quite a significant boost to GDP from extra foreign direct investment, provided that the government (as one should probably assume) imposes restrictions on imports of goods and services but does not impose any extra restrictions on investment from the EU.

http://www.telegraph.co.uk/news/2017/09/07/brussels-forces-no-deal-brexit-eu-exporters-could-give-britains/

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