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  • Brexit in a Brave New World

    From project-syndicate.org

    When it comes to bilateral trade, gains and losses are distributed asymmetrically between the larger and the smaller economy. In the best of times, that would be bad news for the United Kingdom as it seeks new trade deals with the European Union and others. And these are not the best of times. Economic theory predicts that erecting new trade barriers hurts both sides. But economic principles also suggest that the larger of the two economies is likely to lose less. In the case of a tariff, for example, lower demand from the larger economy will tend to push down the prices of the goods that it imports. The smaller ... (full story)

The first point is that theory supports the view that free trade creates the potential for gains - it does not guarantee that gains will be made (by either side). Realising the potential depends on the quality of other economic policies (micro and macro). Theory does not distinguish between large and small. History and political realities are relevant, hence the very point that WTO, or like, is necessary.

But there are several examples already of 'small' countries pursuing free trade policies unilaterally and succeeding - New Zealand, Australia, Switzerland. The point is that lowering protection of domestic businesses makes them more competitive in international trade - no matter whether international trade is fully free or not. A large country which increases protection of its domestic industry creates both short term and longer term problems for itself - no matter how large.

It is in this sense that Brexit has liberated the UK. The UK economy will become more competitive in international trade for 3 main reasons: 1) The EU is not a stable union and therefore not a union at all, so staying on board that leaky ship is no longer sensible; 2) Increasingly, individual countries are embracing free trade with all countries (that is the point of WTO) so swimming against the tide (USA, EU) will be increasingly problematic. 3) Countries/regions hobbled by protectionism will fall behind further and further as economic realities shape growth and development where it makes most economic sense.

The UK is being given an early parachute and Theresa May recognises this opportunity (with all of its problems). But, like the decision not to join the single currency, it should prove to be extremely positive further down the road and unintentionally a very good development. Meanwhile the USA is boldly marching into the future - backwards.
Quote:

"The point is that lowering protection of domestic businesses makes them more competitive in international trade - no matter whether international trade is fully free or not. A large country which increases protection of its domestic industry creates both short term and longer term problems for itself - no matter how large."
Please check out my blog at https://from-zero-to-hero . net
Quoting smash1820
Quote: "The point is that lowering protection of domestic businesses makes them more competitive in international trade - no matter whether international trade is fully free or not. A large country which increases protection of its domestic industry creates both short term and longer term problems for itself - no matter how large."
Smash! Welcome back. I thought you had given up!
If you are good at something, never do it for free--Joker
Hey hey, no way! Just took a much needed break ...
Please check out my blog at https://from-zero-to-hero . net
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  • Posted: Feb 7, 2017 2:43pm
  • Submitted by:
     Newsstand
    Category: Fundamental Analysis
    Comments: 4  /  Views: 1,259