Friday , January 15 2021

Trade Deals: The EU-UK deal is the least important.

The objective of Trade Deals is to increase bilateral trade without creating large or future deficits.  In the context of the huge escalation in UK debt during COVID the avoidance of future deficits is crucial.

The current round of trade negotiations involve two types of deal.  The first is emergency deals to ensure foodstuffs and other essentials are available at similar or lower costs to those at present after January 1st.  The second is to create long term deals that will benefit the UK.

The most important emergency deal will be that with New Zealand.  January 1st will coincide with the NZ summer harvest and will allow the replacement of EU produce.  Although NZ produce is a minor threat to the viability of some areas of UK agriculture the overall effect of a UK-NZ Trade deal will be small given that total current trade (imports+exports) is only $6bn.  An interim deal with Australia will also be important.

Long term trade deals must be approached with caution.  Especially those with the USA, EU and Japan.

The UK has a high volume of trade with the USA, totalling £221bn in 2018 (imports+exports).

Despite intense media interest in a UK-US Trade Deal it will have very little effect on GDP (0.7-0.16% rise).  Full liberalisation of trade (scenario 2) is a very bad idea because it creates a trade deficit where previously there had been a surplus.  Given that the UK Current Account is almost £90bn a year in deficit the last thing we need is a UK-US Trade Deal that increases this deficit.  The Current Account Deficit leads to borrowing overseas with consequent interest payments so a Trade Deal like “Scenario 2”, that intends to create a trade deficit, is intending to swap 0.16% growth (c. £3bn) in UK GDP for £2bn+ a year  increase in UK total debt.  This is madness.  In all truth tariffs are low and the UK is not going to benefit hugely from a UK-US Trade Deal, Scenario 1 looks fairly harmless but would need to be monitored for balance.

The EU is the UK’s biggest trade partner and the UK trades with the EU at an eye watering deficit of £80bn a year. (See Note below).  The trade deficit is largely due to Eurozone ownership of UK industry, not poor export performance by UK companies (See The Eurozone Trojan Horse).  The UK-EU deficit is the largest component of the UK Current Account Deficit and, by requiring continuous borrowing, is the major source of the continuous decline in UK credit worthiness.  There is an urgent need to substitute EU products with domestic products and with lower cost overseas products to stem the deficit.  £20bn of the UK-EU Deficit is in foodstuffs so an FTA with New Zealand and subsidies for British producers in 2021 will be needed.  We can only hope that the current draft agreement with the EU does not get ratified.

The UK-Japan Deal is another clear indication that trade negotiators are not being instructed to avoid an increase in national indebtedness.  According to the DTI: “In the long run, the trade costs reduced by the UK-Japan CEPA are estimated to drive an increase in UK exports to Japan by 17.2% or £2.6 billion and UK imports from Japan by 79.9% or £13 billion when compared to 2019 levels.”

Most of the other Trade Deals under way are fairly minor. The rollover deal with Canada, concluded last week is most important – also see existing trade deals with non-EU countries.

The trade negotiators must be instructed that a headline of “jobs to be increased by trade deal” is a hollow achievement if most of these jobs are purchased with borrowed money because they involve trading at a deficit.  The people of the UK are in this country forever, they and their descendants will reap the consequences of uncontrolled escalation in debt.  We must not allow fly by night economists and journalists to talk the Government into short term benefits when long-term pain will be the outcome.

Note: The Primary Income Account of the Balance of Payments has traditionally balanced the trading account so that trade deficits are funded by financial surpluses. Since the Financial Crisis this is no longer the case and every pound of trade deficit is a pound borrowed from overseas by a bank on behalf of a UK consumer. Click on Primary Income Balance EU to see the ONS graph of how massively in financial deficit we have become.  The UK is reduced to selling its property, land and businesses to fund the deficit like a common bankrupt.

This post was originally published by the author on his personal blog: https://pol-check.blogspot.com/2020/11/trade-deals-eu-uk-deal-is-least.html

 

About John Sydenham

Dr John Sydenham has worked in International Pharmaceuticals and for one of the "big four" International Consultancies. He ran a successful company for 15 years and after selling the company devotes his time to travel, science, black labradors and freedom.

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