Thread by @DmitryOpines

1/ The EU's trade surplus with the UK is often cited as ensuring their crawling hat in hand to plead for access after a No-Deal.

This thread is on why while politicians and commentators often speak about trade in terms of bilateral trade balances, negotiators rarely do so.

2/ Note: For this thread I'm going to set aside my @ne0liberal shill hat which screams "Imports are good, actually!"

(For those wondering, the neoliberal shill hat is like the Hogwarts Sorting Hat, except it summons @Noahpinion to talk you through your comparative advantages.)

3/ Trade flows between major economies are measured in the tens or hundreds of $billions, and figures this large tend to blur out all nuance.

When politicians talk about wanting exports what they generally mean is they want export JOBS... But the correlation is far from 1-1.

4/ In Australia for example, our exports are dominated by mining commodities (eg. coal, ore and natural gas).

Yet at its peak the $230b+ Australian mining industry employed 260,000 Australians. By comparison, tourism is a $130b industry but directly employs 600k.

5/ The heavy footprint of commodities in the Australian export profile means our trade balance fluctuates wildly from surplus to deficit year on year based on the strength of our currency and world prices for coal, iron ore and gas.

Hard to extract negotiating coin from that.

6/ In an integrated market like the EU, things are more complex.

Hypothetical:
JLR imports 5,000 pounds of parts from France to then complete and export a 40,000 pound vehicle to the United States.

Bilaterally, the UK now has a 5k deficit with France but a 35k surplus overall.

7/ If a negotiator tried to make hay of France's surplus in the example above, they wouldn't get far. Tariffs the UK kept would be far more likely to drive JLR to the EU (where it can continue to source widely) than French parts manufacturers to the UK.

8/ In the specific Brexit scenario, a bilateral trade balance also tells us little about the size of the preference gap between the Single Market and WTO MFN.

In some product lines, the gap is colossal with entire industries (like lamb) potentially locked out by tariffs.

9/ In others, like IT equipment for example, the gap is nearly non-existent. The EU (and thus the UK) are parties to the Information Technology Agreement I and II and have thus eliminated most tariffs on IT products from anywhere.

wto.org/english/tratop…

10/ For the vast majority of product lines where tariffs are more modest, there's a question of how much damage at tariff will do.

Will the 8% MFN tariff on twill products from the EU/UK be enough to push buyers into the arms of other twill manufacturers? 🤷🏼‍♂️

11/ For EU negotiators, a big open question is going to be whether the UK plans to liberalize unilaterally.

After all, some prominent politicians have promised lower prices on the shelves and Singapore on the Thames.

If your counterparty is going to do that, why not wait?

12/ An EU negotiator may well make the determination that the UK will drop tariffs on an MFN basis rather than risk higher prices for their consumers souring voters on the government's handling of Brexit.

If they do, the EU is unlikely to offer generous concessions bilaterally.

13/ Those looking to the UK's trade deficit with the EU for proof of its imminent domination in trade negotiations should be cautious.

Measuring the impact of No-Deal on both parties is a hideously complex exercise and the trade balance tells a fraction of the tale. /end