Leaving the EU will matter a great deal for trade, writes Pierre-Louis Vézina. He argues that in time, Brexit will surely hurt UK exports

Vézina, Pierre-Louis

LSE Research Online

2017-5-9Brexit will inevitably hurt UK exports, slowly but surelyblogs.lse.ac.uk /brexit/2017/05/09/brexit-will-inevitably-hurt-uk-exports-slowly-but-surely/Leaving the EU will matter a great deal for trade, writes Pierre-Louis Vézina. He argues that in time, Brexitwill surely hurt UK exports.Most experts are convinced Brexit will hurt UK exports. That’s because we’ve learned from pastepisodes that removing trade barriers does actually boost trade. On average, bilateral trade isaround 40% larger after trade agreements are signed. But we don’t really know about the reverseeffect, that of undoing a trade agreement. It hasn’t really happened before. It’s probably not minus40%. Trade agreements bring about new trade relationships, they create new business links, andthey allow firms to introduce their products in new markets. These relationships persist. It takes timeto find the right supplier, the right products, to write up contracts and establish trust relationships. Firms would rathernot do this too often. So undoing a trade agreement probably does not destroy as much trade as signing a new onecreates.The dismantling of colonial empires actually tells us a bit about the persistence of defunct trade agreements. Whencolonies gained independence in the 1960s, trade with the metropole did not suddenly collapse. It did erode slightly,but colonial empires actually still shape today’s trade patterns. So, will Brexit reverse all the trade gains broughtabout by deep EU integration? Probably not. It will hopefully hurt trade only slowly and it won’t undo everything fromone day to the next.And there’s even another reason why trade patterns should persist, at least in the short run. It’s because foreignmultinationals, who trade a lot, don’t want to move. Many are part of clusters, like car plants in the West Midlands,and agglomeration forces are hard to put in reverse gear. Industries like banking, fashion, and technology haveclustered in parts of London and now benefit from a dense talent pool and a constant flow of ideas. This hasbecome such an important locational advantage that industries don’t dare to move yet. Few firms have announcedmoves to France or Germany. It will take a very hard Brexit to undo those clusters.Also, Britain can’t defy gravity. The EU is not only an ex-partner, it’s also a neighbour and the largest market in theworld. Exports to the EU will continue to be sizable. Large deviations from such gravity forces require sanctions orembargos. Even a hard Brexit shouldn’t have that pull, hopefully.1/2Don’t you mean freedom fries buddy? Image by Señor Codo, licenced under (CC BY-SA 2.0)So the emergence of good old tariffs and other trade barriers will probably not harm as much as liberalisationhelped. But there will be blows. In particular, the deterioration of Britain’s image abroad, and not just in EU countries,should hurt its exports. This is what happened to French exports to the US when France decided to vote against thewar in Iraq. France-bashing became mainstream and ubiquitous across US cities, French fries became freedomfries, and French exports to the US fell by 15%. The same thing happened to German car sales in Greece when theGerman government bullied Greece over debt payments. Flagship products like Minis or Burberry scarves could behit. Consumer boycotts do hurt trade. The lowered opinions of Europeans about the British could further reduceexports. Economists have shown that bilateral opinions, captured by the Eurobarometer public opinion surveys oreven by Eurovision voting patterns, have a relatively large effect on trade. The confrontational British government atodds with EU counterparts could aggravate the problem as even political skirmishes sometimes reduce trade. Whenthe Japanese government brought back a history textbook that ignored Japanese war crimes of World War II, theChinese government got really upset and Japanese firms doing business in China lost much market value. So if thedivorce gets hostile, exports could be hurt badly.There’s another issue we need to pay attention to. The hostility towards immigrants could also have a large effect ontrade. Migrants have been identified as key to trade between countries . They know how to do business with theirorigin country. They have market knowledge, they speak the language. They can navigate through the bureaucracy.The French who work in banks in London are the ones making the phone calls to French companies and that go tomeetings back home to establish contacts. This leads to trust relationships that foment trade. Migrants also like toimport nostalgia from back home. The retired British in the South of France order from Marks and Spencer. Mostworryingly, migrants do not want to live in a country where the government is openly anti-immigrant and wherecrossing the border is a painful experience. They thrive on an open world. Loudmouthed officials and border agentscould deter not only immigration but also business travel, even if new visa restrictions are not imposed. Lessbusiness travel means fewer face-to-face meetings and fewer deals. Across US States business-class air travel isdirectly related to the volume of exports, especially in sophisticated products.Brexit could thus be quite damaging for UK exports in the long run. The drop of the pound has already mirrored thisbleak future. Thankfully this may attenuate the other negative Brexit effects by making exports cheaper and givingthem a slight boost. But the damage done could be long-lasting.This post represents the views of the author and not those of the LSE Brexit blog, nor the LSE.Pierre-Louis Vézina is a Lecturer in Economics at King’s College London.Copyright © 2015 London School of Economics2/2

Brexit will inevitably hurt UK exports, slowly but surely

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