Thursday, 14 July 2011

Which interests will prevail in EU trade policy?

A key strategic question is whether Germany still relies on Euro & EU markets for its exports or can rely on China et al.


Different exporters in Germany and the rest of the Eurozone17 have different geo-strategic trade interests: Some prefer the Eurozone, some the opportunities in China et al, etc!


For a large % of Eurozone export & other firms, a EU exit from the WTO would be a blessing (inter alia, it would curb Chinese exports to the EU and its Eurozone that compete with many made in Eurozone products) . For many, a curse. 


Of course, in that scenario, EU trade would be conducted on the basis of existing or new bilateral agreements of the EU with countries (China, USA, India) or groups (eg Mercosur, ASEAN etc)


Which interests will prevail in EU trade as well as other policies (eg the implicit exchange rate policy of the Euro)?

17 comments:

  1. What is difference between EU exiting WTO and trade wars via import duties? I suspect each EU member would feel free to do its own bilateral deal. Wouldn't EU become less important in framing trade deals.

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  2. No, trade policy and thus the naking of bilateral deals/agreements is and would remain the competence of the EU and not of member states, Eg UK cannot do a trade deal with Brazil, only the EU can.

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  3. In event that EU bilateral trade deals are less favourable for EU exporters than now might there be an increased incentive for them to move to outside EU, e.g. to regions with more favourable trade deals with, BRICS?

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  4. The bilateral EU deals with other countries instead of WTO membership will a) rid the EU market of uber cheap non-EU products, especially ones from competitively managed currencies (thus alleviating part of the damage of the uber hard Euro) b) take care of many exporters needs towards specific export markets.
    Do not forget that many/most EZ firms do face extreme and unfair competition due to exchange rate from non-EU as well as some nob-EZ companies.

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  5. PS. You don't think that firms gave moved from Eurozone to non-EZ EU locations (eg UK) in order to escape the uber hard Euro? The problem is not the Euro per se, the problem is the inflation obsession of Bundesbank/ECB that results in uber hard Euro.

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  6. I think you'll find that, for example, many French SMEs moved to UK (many in Kent) to avoid stifling EU employment / tax regulations and at time £ was much stronger than euro. (viz 1.6)

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  7. That was probably before the UK adopted the so called Social Protocol. Of course other factors come into play other than the currency exchange rate in the competitiveness of companies. In a way that is sad about the UK's Euroscepticism: instead of trying to convince the rest of the EU to adopt a less regulated and bureaucratic approach, it wants out.
    The Pound may have been high compared to the Euro at certain periods, but the Bank of England does not have the same anti inflation obsession as Bundesbank/ECB (see recent posts of mine).

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  8. I agree that ECB is shooting itself in foot by not allowing more inflation in EZ. BofE (MPC) knows it has to inflate. Beats me why investors buy UK Gov debt when almost bound to make FX losses. Export businesses don't really care about, say, £:€ FX rates, swings and roundabouts. As you say, social costs, borrowing rates and taxes are more important issues. The trick is to inflate the sovereign debt away without paying more to borrow and simultaneously restructure the economy. EZ as a whole has to do same or break up. French may actually be closer to this view than Germany, but not saying so as banks too exposed.

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  9. You state that "./.. Export businesses don't really care about, say, £:€ FX rates, swings and roundabouts ..". I challenge that statement.

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  10. Exporters (e.g. manufacturers) can choose to price/sell their products/services in any currency acceptable to buyer. So a UK manufacturer might sell in euros to EZ, Dollars to US, and UKP to China, for example. He can hedge if he wishes against FX risk. So (to be more competitive) he might reduce prices to EZ in euros when euros get stronger v pound, but also keeping an eye on any FX exposure on his costs.

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  11. As an MBA I am familiar with these tools, You expect millions of EZ firms to become experts in them? They might as well stop producing products and services and become hedge funds! So let's talk about the terrain reel of business not theory and ivory towers of multinationals, shall we? :)

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  12. I think you might be surprised by the level of sophistication needed to be a successful exporter these days, even in SMEs. Bear in mind that most UK exporters these days are in high tech and have serious science and maths qualifications. Some might have even a few MBA guys around :-) - I had one in marketing who was even totally fluent in 6 languages.

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  13. Tim you say: "I think you might be surprised by the level of sophistication needed to be a successful exporter these days". That is my point too! That level is not realistic, even if an SME employs MBAs who have taken Finance courses or even focused on Finance (as I did). Because even that is not enough to master the tools you described in an earlier comment above.
    Correct if U am wrong, but it seems that what you are trying to say is that exporting from a country/region of an "expensive" or "hard" currency is not a problem if one uses the FX tools you described. I am not convinced. Let me give you one example: The Swiss. The Swiss exporters recently (I remember a Spiegel article) suggested that Switzerland adopts the Euro because it is less expensive/hard than the Swiss Franc!! Now, if the Swiss SMEs cannot use the FX tools you described how can one expect other SMEs to?

    Now, the other side. The imports: The hard Euro (still above 1.4 USD these days) means that Chinese and other products (eg American) can sell very cheap in the Eurozone, thus suffocating EZ firms with comparable products. Same for services like tourism (PIIGS vs non-Euro destinations like Turkey (non-EU), Bulgaria (EU non EZ, Croatia (soon to be EU), etc.

    Consider also the informal barriers to entry that firms have when they try to sell in China, Japan etc which for some reason the WTO cannot address.

    That is why I suggested that the EU (and maybe the US) leaving the WTO and using bilateral agreements instead could better serve the needs of many of its exporters as well as firms that trade only inside their national market or the European Single Market. That is original topic.

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  14. Your arguments don't explain how Germany and Japan, so burdened by strong currencies, are such successful exporters. I agree that Japan and China have many barriers to imports, but they can be overcome with patience and with good competitive products / services. Me too stuff doesn't fly.

    I've heard the same Swiss "let's join the euro" argument used by UK exporters too. Nonsense. Both countries have difficulties managing their exchange rates because of the bloated size of their bank's assets. I seem to remember the swiss even resorted to negative interest rates for depositors in 80s!

    I agree that WTO seems incapable of punishing those who rig their currencies. I never got an answer to that one from anybody. How would you deal with it legally in a bilateral deal?

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  15. Re: Need for SMEs to up their skills. http://sethgodin.typepad.com/seths_blog/2011/07/naive-or-professional.html

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  16. a) Germany & Japan successful exporters: Not an expert on Japan exports but re Germany: 60% of Germany's exports are to the EU/EZ, so Germany world No. 2 on the back of the purchasing power of the EU/EZ including the PIIGS (see eg continued military equipment sales to Greece even since crisis). Of course there are signs that Germany may be trying to replace the EU Single Market or the PIIGS with China. To that: Good luck with the CPC!

    b) "overcome with patience and with good competitive products / services. Me too stuff doesn't fly." Sorry, not buying that, at least for the average European or global exporting firm.

    c) "I agree that WTO seems incapable ... How would you deal with it legally in a bilateral deal?" With the right bilateral agreement and of course bilateral sanctions if the clauses are broken! And the negotiating power an entity with a real internal market of 500 million has! That is what UK seems not to want to "get". Powerful EU at world stage means real internal market of 500 milion (capital, goods, services, people/workers) which means political union. C'est simple. The French "get" it.

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  17. Re Need for SMEs to improve their skills: I do not disagree, but for that to happen SMEs and micros need to operate in a much less bureaucratic, red tape and over-regulated environment. I have worked with a multinational but also with 7 owners of SMEs and seen how flooded they are by the above, so that they have no time or energy to up the kind of skills you propose (FX hedging, etc). FSB (UK's SME fed) study 1-2 yrs ago showed that SMEs spend more time understanding new red tape etc and reporting compliance than actually complying!!!

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