Friday, 14 October 2016

The Fox Dilemma

There is a curious dilemma at the heart of the Tory government. I've not seen much written about this topic so I thought I'd give it a whirl. Here is the dilemma: the government have been promoting the (BNP) mantra "British jobs for British workers", while also saying they are going to be a "beacon for free and open trade". Taken together these form an economic and political conundrum. It is simply impossible to satisfy both at once.



 If you've stuck with me through my tedious blogging about international trade you will know that free trade deals result in the movement of jobs to workers. This is often referred to as "off-shoring". The EU is quite different to a regular trade deal because it allows workers to freely move to jobs. In my view this is one of the least trumpeted advantages of EU membership over a trade deal like NAFTA (or whatever will be cobbled together after the UK severs its ties with the EEA).

When Liam Fox realises his vision of free and open trade he will slash UK import duties from the low rate they currently have to an even lower rate. Free and open trade, after all, means lowering your WTO trade barriers. Meanwhile, when the UK government turns off the tap of EU workers there will be significant staffing issues at businesses reliant on EU employees. If you run such a business the pressure to move your jobs abroad will become ever greater. There are two forces to stop you doing that. The first is that British workers fill the vacancies without any impact on production costs or quality. I don't see that happening on its own because we need to ask ourselves why UK businesses became so reliant on EU employees in the first place. Now, I don't actually know why that happened but we need to recognise that it did happen and that nothing has materially changed to undermine the circumstances that led us there. The second force is high import duties. High import duties make it more advantageous to manufacture goods on-shore because they can be sold more cheaply than goods that need to pay an extra tax at the border. On the other hand, if import duties are low there is less disadvantage to off-shore production.


I hope I've explained the dilemma clearly. "British jobs for British workers" will require significant trade barriers designed to halt the off-shoring of UK jobs.   "Free and open trade" will require lowering trade barriers, which in turn will encourage UK jobs to move off-shore.

If you're really on the ball you will be jumping up and down and yelling at the screen, "Terry, you fool, you forgot about the low value of Sterling!". That's right, I didn't mention that and it is vitally important. A low value of Sterling encourages jobs to remain on-shore because it pushes down manufacuring costs relative to off-shore costs. Only with a low value of Sterling can the government solve the dilemma. In fact, you could even argue that the market have strongly adopted that view -  I think everyone is aware of the current state of Sterling.


Source: xe.com

I do not believe for a second that the government takes a positive view of the Sterling crash because it will push up the price of all imports. Let's think about this for a second. If you manufacture cars in Sunderland you almost certainly import a lot of component parts: paint, steel, batteries, tyres, ABS systems, electronics, fuel gauges etc. The cost of all these parts will go up as the pound weakens. The more complex your business, the more you are likely to be dependent on importing specific components and tools and, don't forget, expertise.  These purchases will be performed in Euros and dollars.  As a consequence a weak pound is mixed news for business - a balance between higher component costs but lower labour costs.   For employees, however, it is terrible news because a huge chunk of what they buy in the shops will be more expensive. In short, they are still earning the same number of pounds per week but it buys them a lot less. Clearly, the simplest businesses will benefit most from a falling pound because they depend most on labour costs alone. Fruit picking springs to mind. This is not spelling out a vision of a high value knowledge economy, is it? What happens if you run one of those high value knowledge businesses and really need to import specialist skills from abroad? A weak pound makes the UK a far less attractive destination. In summary, if the government's policy is to maintain a weak pound then we just have another dilemma: how will they develop a high value knowledge economy simultaneous with a weak currency? I don't believe they can.  

This is what happens when you lose all the battles but win the war anway.
When the government lies to us I expect the press to sniff that out and expose their falsehoods with gusto and verve. Why is this not happening? When the government are floundering out of their depth propagating confused messages I expect that to be exposed, too. Why does the UK press label people like me as a traitor and whinger and tell us to shut up? Disagree with me all you like (and I do encourage that) but you do need to promote a cohrerent argument.  On the plus side, it turns out I am part of a shadowy liberal elite. Whodda thunk it?

Over and out,


Terry

6 comments:

  1. And there I have been consorting with a member of the dreaded liberal elite... Wait, don't you have to be an out and out liar to be one of them? Oh no, sorry, that's the Liberal Democrat elite, eh Alistair?

    Easy mistake.

    So, I think we can agree that as well as being a pretty odious character... no, a VERY odious character, Mr Fox is also not overly endowed with what Hercule Poirot would have called leetle grey cells. In short he's dim.

    He seems to understand not one tiny bit of any of the tradie stuff that he's supposed to be in charge of. His only idea so far has been the royal yacht.

    I'd venture to suggest to May that she put the guy in the wrong job...unless her idea of trade is book deals with murdering regimes. And only getting a few thousand quid for that is hardly going to make Britain great again.

    None of Brexit makes very much sense to me. Unless yu have a pathological hatred of foreigners, which of course it seems a rather large number of people do.

    The governor of the Bank of England says that things will get harder for poor people with inflation. The rich might be better off becasue of the increase in stocks, though, so remembering the complexion of the government in England, that seems like they are on the right track, at least for them.

    Your analysis seems reasonable to me, and, even if Fox is too dim to see it for himself, you'd have thought that someone in his department might have had the foresight to brief him about it.

    Or maybe, the whole thing in an exercise in making him look even stupider and more disgraced than he was the last time with his young friend.

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    1. The real challenge for the government, as I see it, is unity. Different figures in the government are setting out contrary strategies. Isn't this truly extraordinary? In my lifetime I've never seen such a cacophany of viewpoints to come from the Cabinet, which is supposed to accept collective responsibility and speak with one voice. This is really, really troubling. Unless they all agree to a plan and properly commit to that the outcome of Brexit is entirely random and our negotiating position will be fundamentally weakened by inconsistency. Normally, the feedback mechanism of public opinion and press would rectify this but that system seems to have broken down. Nobody seems able to get a grasp of this at all. Not the press, not the public, not Parliament, and definitely not the government.

      The stupidity of Fox et al only makes this lack of unity worse. It's not just a cacophany but an unbearable cacophany of stupid. Worse than that, a cacophany of stupid from politicans with a proven track record of stupidity and poor judgement and an affliction to backbone or principle.

      I get the feeling that the current crop think that saying something is the same as doing it. If you think that then you can say anything and hail it a success. There is absolutely no analysis to any of this. When the best analysis comes from foreign exchange trades we know we are in huge trouble.

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    2. Bravo. Analysed perfectly I'd say.

      I agree that unity is important, if not for the Brits, at least for foreigners contemplating business arrangements with the UK.

      It's not confidence inspiring if they hear Boris saying one thing (which is clearly nonsense) and Fox saying something else (again clearly another brand of nonsense).

      I don't think anyone would deny that with a market of 50+ million the UK is hard to ignore, but if they don't all sing from the same hymn sheet, people are going to wonder if they spend years negotiating with Fox, will Johnson come along and scupper the whole thing.

      The fact that none of them has any idea about trade agreement or contracts or the obligations of other countries under existing trade deals, is frankly scary.

      I really hope that we can push the interest in independence over the level at which Nicola will feel it safe to go for another referendum. We need NOT to be apart of this Whitehall Farce. Seriously, all they are short of is Brian Rix, and it would run for years!

      In the post you talked about the reliance of UK companies/services on immigrant labour. Of course it's a massive subject with multiple threads. But it might be worth a post some time.

      I've been involved with employment and unemployment over the last 20 years. The notion that the disappearance of EU personnel will soak up the bulk of the unemployed in the UK, is farcical.

      Seriously, at virtually every level, we desperately need EU people. Training up our own doctors, as the idiot Hunt suggested, will have to be replicated for virtually every profession and skill (with the possible exception...in my experience... of law).

      When I set about the serious business of reducing unemployment in a specific area of multiple deprivation, I discovered that the reasons for the situation was complex, but a vast number of the people who were supposedly looking for work, were pretty much unemployable for one of a wide variety of reasons... (or they were already employed on the side).

      Nonetheless, thanks to the information fed to them by the tabloid press, they invariably blamed foreigners for talking all the jobs!

      Incidentally my first foray into this work was in 1997, a good while before Eastern Europe joined the EU. At that point it was Pakistanis that got the blame, although nearly all of them were employed in family businesses and didn't appear in mainstream job market.

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    3. I think you might be a better choice for a post about the reasons behind inwards EU migration. It sounds like you have significant hands-on experience. It is a fascinating topic so I might start thinking about it. The trouble is, I wonder if I've been brainwashed by all the propaganda about the unemployed. It could be said that I live in a bubble world far away from low skills or unemployment, much like almost every press commentator on the topic.

      The UK certainly does have a negotiating position with the EU. It is definitely not all one-way. It just strikes me that they are not going to be very well prepared because they are wasting their time jostling for position. On top of that, they appear to have a slim grasp on the reality of the situation.

      "Brexit, the musical". Starring Roy "Chubby" Brown and Jim Davidson. Someone must be on it already.


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  2. "When the government lies to us I expect the press to sniff that out and expose their falsehoods with gusto and verve." I don't. I would only expect this to happen when the interests of the press proprietors - as understood by their appointees i.e. editors, managing directors etc. - markedly differ from that of the government.

    Some of us, but unfortunately too few of us, have abandoned the myth of an independent press engaged in investigative or crusading journalism and in holding political elites to account.

    As for the supposedly independent, impartial and honest BBC exposing falsehoods, this will only happen if and to the extent that divisions within the establishment over Brexit cannot be easily accommodated within the existing political power structures at the BBC.

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    1. You're absolutely correct there - I shouldn't expect an independent press or an independent BBC. A naive part of my brain still lives in hope.

      I once worked for a company in Scotland that made it to the pages of the Daily Mail. What an honour! Not only did they get the name of the company completely wrong but they also said we we were based in another city. The entire story was a lie, anyway, but even basic information like places, names, times etc were just plain wrong. The complete lack of fact-checking only compounds the problem. Even if we had an independent press they would be incapable of a truthful article.



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