UK car manufacturing, imports and exports puzzle - a possible explanation.

From the European Automobile Manufacturers Association, shortly before GBP fell with a corresponding boost to exports/fall in imports:

80% of the UK’s automobile production is exported, of which 52.8% (worth €14.6 billion) goes to EU member states. The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

In very round numbers and to exaggerate a bit, all cars manufactured in the UK are exported and all the cars we drive are imported. There is a huge amount of churn involved. This has been bugging me since Mrs W bought a new Ford Kuga last year which was shipped in from Spain, not made in Dagenham (any more).

A possible explanation occurred to me recently.

1. Different people want different kinds of car.

2. In olden times, there were lots of smaller manufacturers in each country, making lots of different models, so the chances were you could find something you liked made in your home country.*

3. There has been a lot of consolidation in the car industry, there are just a few very big manufacturers left.

4. Big manufacturers like big factories. Instead of having small factories dotted around Europe, they prefer making all their cars in the same place. So each country ends up with a handful of huge factories, each making a narrow range of cars. (We all know that Germany punches above its weight here, but even their manufacturers have shifted a lot of production to Spain or their eastern neighbours to keep costs down.)

5. So nowadays, wherever you are in Europe, if you want a Fiat, it will be made in Italy; if you want a Nissan or a Honda, it will be made in the UK; if you want a Ford, it will be made in Spain; if you need a car to bully people on the motorway, it will be made in Germany, and so on.

In other words, more specialisation leads to more trade (obviously) and vice versa.

This is thus also a distant cousin of comparative advantage, I suppose. The effect works on a national, continental and global level. The UK (like most EU Member States) exports far more cars to places outside the EU than it imports from outside the EU.

Or to put it another way, European countries are the best at car manufacturing, that's the Premier League, but within that Premier League, the UK is in mid-table and all the teams above it are German.

* The old rules still seem to apply to really low volume niche cars, like Noble, McLaren, Spyker, Pagani, Koenigsegg etc. Those are still dotted around across the continent, and if you have more money than sense, you'd probably go patriotic and buy one made in your own country, I know I would.

The disadvantage of trade deficits

I don't subscribe to the mercantilist "imports bad, exports good" world view, but this comment by Dinero a couple of days ago is not quite correct:

It's worth noting that the partner that is running a deficit in bilateral duoploist trade partnership is the one that is running an advantage as they are receiving goods in return for IOUs.

I explained the downside of the UK's trade deficit (from the UK populations point of view) here.

The UK's trade deficit is about £100 billion a year. What do the foreign exporters do with the GBP they accumulate? They like buying up things in the UK which will provide rental/super-profits/unearned income: shares in UK companies, commercial land and buildings, 'privatised' utilities, high-end London residential, student accommodation and things that will entitle them to government-guaranteed payments (Sizewell B, farmland, UK government bonds etc.

This is a vicious spiral of course. Every year the UK as a whole is poorer by the amount of rent which seeps abroad, enabling foreigners to buy more UK rental streams ad infinitum...

As ever, this is a job for LVT-Man:

So what would happen if we got rid of these subsidies; started taxing rents/monopoly income more and production/wages less; and reduced public sector deficit to zero? Foreign manufacturers and farmers will still be happy to sell us stuff, they are geared up to producing and selling as much as possible.

What will they do with the GBP they receive for what we import? They are welcome to buy land, but most of the value will go back to the UK Treasury as tax instead of seeping abroad as rent. So they will spend much more of their GBP on UK produced goods and services. Or maybe they will sell us less stuff while buying the same amount from us. Either way, it would do wonders for the balance of trade.

The UK: A house price based economy with a house price based currency (2)

From The Telegraph:

Professor Mody, who led the EU-IMF Troika rescue for Ireland, said the pound had been driven up to nose-bleed levels from 2011 to 2015 by global property speculators and the banking elites acting in destructive synergy, causing serious damage to Britain’s manufacturing base and long-term competitiveness...

“It was essentially a bank-property nexus, and the rest of the economy was left to suffer. It is stunning that just 1.4pc of all loans were going to the manufacturing sector,” he said. The country was suffering a variant of the ‘Dutch Disease’, although in this case the problem was over-reliance on finance rather than commodities.

“Britain was borrowing 5pc to 6pc of GDP a year to buy imports and live beyond its means. The strong pound was great if you wanted to buy a Mercedes Benz of take a holiday in Spain, but the prosperity was an illusion, borrowed from the future,” he said.

Prof Mody said the pound was 20pc to 25pc overvalued in trade-weighted terms before the Brexit campaign got underway, based on classic IMF measures of the real effective exchange rate (REER). This currency distortion would have inflicted deep damage if it had been allowed to continue for another five years.

I pointed out two years ago that GBP and house prices tracked each other very closely from 2004 to 2014, I ought to update that chart and see if it still holds, but as a generalisation it does: "Brexit fears" have clearly been a fairly direct cause of high end London land prices falling (fewer foreigners want to buy here) which in turn reduces demand for GBP and hence leads to GBP falling.

The UK's trade deficit is about £100 billion a year. What do the foreign exporters do with the GBP they accumulate? They like buying up things in the UK which will provide rental/super-profits/unearned income: shares in UK companies, commercial land and buildings, 'privatised' utilities, high-end London residential, student accommodation and things that will entitle them to government-guaranteed payments (Sizewell B, farmland, UK government bonds etc.

This is a vicious spiral of course. Every year the UK as a whole is poorer by the amount of rent which seeps abroad, enabling foreigners to buy more UK rental streams ad infinitum.

So what would happen if we got rid of these subsidies; started taxing rents/monopoly income more and production/wages less; and reduced public sector deficit to zero? Foreign manufacturers and farmers will still be happy to sell us stuff, they are geared up to producing and selling as much as possible.

What will they do with the GBP they receive for what we import? They are welcome to buy land, but most of the value will go back to the UK Treasury as tax instead of seeping abroad as rent. So they will spend much more of their GBP on UK produced goods and services. Or maybe they will sell us less stuff while buying the same amount from us. Either way, it would do wonders for the balance of trade.

Can anybody understand that British Retail Consortium letter?

From the related BRC press release (I can't find the letter itself):

While UK retailers have been very successful in insulating consumers from the cost of rising business rates and labour, the recent devaluation of the pound in relation to our most important trading currencies is compounding economic headwinds, while years of deflation have left little margin to absorb added cost from import tariffs and administrative burdens.

There is of course a huge cushion to absorb these extra costs, it is called "rent". As long as rents go down in line with the extra costs, retailers in general will be just fine (successful tenants will replace inefficient owner-occupiers). But that's not the weird part:

Moreover, failure to strike a good Brexit deal by 2019 would have a disproportionately severe impact on retailers and their customers, because if the UK fell back on to World Trade Organisation rules the new tariff rates that the UK would apply to imports from the EU would be highest for consumer staples like food and clothing.

For example, the average duty on meat imports could be as high as 27%, while clothing and footwear would attract tariffs of 11-16% versus the current zero-rating for all EU imports.

Falling back on to WTO rules would also increase the cost of sourcing from beyond the EU. The import cost of women’s clothing from Bangladesh would be 12% higher, while Chilean wine would be 14% dearer for importers. This contrasts with duty rates that would apply to raw materials and semi-finished products, many of which would be zero-rated or attract rates of duty of below 10%.

Hang about, I thought that the WTO has a system of maximum import tariffs which a country can impose (subject to loads of silly exceptions), not minimum tariffs?

They way they say it, the UK would have to impose higher tariffs on certain things. Can this possibly be correct? Can't WTO members just unilaterally abandon import tariffs?

Economic Myths: The UK economy is "reliant on trade"

From the City AM editorial:

ONE should never read too much into any one set of numbers, but yesterday's batch of global economic indicators was grim. America, China and Germany are all slowing sharply, suggesting that world growth is dipping again. For economies such as Britain's, which are reliant on trade, this isn't good news...

Good grief.

a) All economies are reliant on "trade", it's the only way of measuring it and "economy" and "trade" are more or less the same thing anyway. The bulk of wealth is created by specialisation, the flip side of which is that there has to be more exchange (or "trade") between specialists. Work you do for yourself is difficult to measure or value, as is barter (even though all "trade" is ultimately barter, "money" is just a unit very handy unit of measurement).

b) Whole countries don't export to or import from each other. Some people make stuff and other people consume it. If you buy oranges in the UK, then they are "imported", if you buy oranges in Israel, they are "domestic"*. And if an Israeli tourist in London buys an orange then the Israeli farmer counts it as export and the UK wholesaler counts it as import, but spending by Israeli tourists in the UK counts as an export from the UK's point of view and as an import from Israel's point of view. It's still just orange growers selling oranges to people who like eating them.

c) As a matter of common sense and observation, the larger an economy is (more people or higher GDP), the smaller is the share of imports and exports as a fraction of GDP. For example, if all the countries in the world were merged into a single country, the sum total of exports or imports would be precisely $nil. And if Scotland becomes independent, all the sales to and purchases from "rest of UK" which hitherto counted as domestic will now show up as imports or exports, even though nothing has really changed. So assuming that he means "imports and exports" when he says "trade", then "trade" is inversely proportional to GDP or population size.

d) The UK is a relatively large economy and using regression analysis, we would expect imports and exports to be about 40% of our GDP. As it happens, the UK is also an island which is not at a convenient spot on the international trade routes and our imports and exports are "only" 32% of GDP.

So misleading crap as per usual.

* I've no idea whether the Israelis still grow and export oranges. They did when I was a lad.

UK imports of goods, VAT

Another thing that appeals to people about VAT is that it acts like a kind of import duty, thus appealing to protectionist instincts. I don't agree with protectionism, but even if I did, then following their logic, VAT must also discourage people in the UK from trading with each other, thus dampening the economy quite significantly. So clearly, getting rid of VAT has to be top priority once we've left the EU (who say that we have to have it).

On a tit-for-tat basis, however, and seeing as UK exports to other countries are probably liable to import duties in other countries, or to VAT at point of sale in other EU Member States, could we do the honest thing and replace VAT with import duties alone? According to HMRC Trade Info the total value of imports in the eleven months to November 2011 was £366 billion, which rounds up to £399 billion for a full year (out of which around £50 billion is oil).

As it happens, forecast VAT receipts for the current year 2011-12 are £97 billion (from PSFD), which means that we could replace VAT in its entirety with a flat 24% ad valorem import duty on all imported goods. Imports of services are a quarter as much again (from here) (i.e. around £100 billion for a full year, but it's much more difficult taxing those).

As it happens, 24% is not far from the average import duties, sales taxes or VAT to which UK exports are liable when they are sold in other countries.

Just sayin', is all.
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It would be interesting (but difficult) to work out how such a tax would compare with the actual VAT payable when imported goods are sold in the shops; the main rate of VAT is 20% but this applies to the entire purchase price, which is usually a large multiple of the amount paid to the factory or farmer abroad. So if a telly is imported for £100 and sold for £300, a 24% import duty on the £100 is actually far less than the 20% VAT on the £300; but if beans are imported for 50p and sold for £2, clearly 24% of 50p is 12p and there is currently no VAT on basic food and groceries, so the import duty would be more.