Dealing with Trade – What Trump and Brexit mean for American and British Trade Deals

Trump and Brexit. “Make America Great Again” and “Take Back Control”. In 2016, both Britain and America took great steps against the development of modern trade norms. Trump wants wants to redesign the bulk of America’s trade deals, from South Korea to NAFTA, increasing import tariffs to encourage domestic industry and derived job creation. Whereas a hard Brexit’s promise to leave the European single market contradicts the economic principle that Free Trade is vital to sustain the theory of comparative advantage.

This is not to say that America and Britain have now entered a period of mercantilism, but rather the rejection of globalisation for a more economic nationalist approach is telling that Trump wishes to “Put America First.” Therefore, both nations must now act quickly to strike preferential trade deals in order to maintain trade and therefore justify their nationalist deviations. Who better to strike a trade deal with than each other?

At the G20 summit in July, Trump spoke of a “powerful deal” in development between Britain and America, stressing that it would be completed “very, very quickly.”

May and Trump

However, the spontaneity of these kind of trade deals may have long term repercussions for Britain’s feasibility to trade with Europe in the future. For instance, currently in the UK, the EU laws and regulations on financial and business services’ export potential has a “trade dampening effect equivalent of a tariff of 30%” (The Economist). Indeed, the recent controversy over American farmers’ potential to export chickens washed in chlorinated water to Britain is also symbolic of the bilateralism between the two nations. The conflicting laws and regulations between America and Britain gives Britain two options. Either, during Brexit negotiations, new British trade regulations can be more weighted towards EU legislation, or American legislation. Either way, this comes at the trade off of sacrificing potential trade for whoever Britain does not align with, as increased border checks and security reduces the attractiveness and ease of trade between nations.

Therefore, it is too simple to say that Brexit and Trump represent a return to isolationism. However, Britain should think carefully of the terms of trade it wishes to conduct with America, as this may come at the cost of losing out in European trade. Currently, British-EU trade accounts for 44% of British exports, whereas British-America exports accounts for 19%. Economists estimate that if Britain were to leave the European single market, then American trade would have to increase by 58% to make up for lost European trade. This is an improbable increase in trade, regardless of whether or not Britain ultimately agrees to allow the import of chlorinated chicken.

The Snapped Election- What The Election Results Mean For The British Economy – CURRENT AFFAIRS

Theresa May’s gamble may have backfired, but where does this leave the British economy?

On the 18th April 2017, Theresa May called for a “snap election”, with the aim of shoring up her own Conservative support within the electorate, in order to allow her to move forward in Brexit negotiations without the hindrance of a high number of Labour seats within government. The Conservative’s original 20% security lead in the polls further gave May the necessary excuse to call this election. A Daily Mail headline quipped that she would be able to “Crush the Saboteurs,” referring to the pro-EU obstacle that Jeremy Corbyn and his party represented.

However, a poor Conservative campaign combined with a lacklustre set of policies, allowed a newly rejuvenated Jeremy Corbyn to target the young pro-EU demographic, ultimately steering Labour to take 12 seats from the Conservatives, and prompting a “hung Parliament” to develop.

A hung parliament screams uncertainty. During the last 12 months, British investor confidence has been shrouded by uncertainty. Uncertainty over whether or not Britain will vote to leave the EU. Uncertainty over whether or not Britain will actually trigger article 50. And now, uncertainty over whether or not Conservatives will be able to negotiate a successful Brexit, after losing their majority. This level of skepticism has meant that Britain has become the slowest growing economy of the G7 since Brexit.

This reduction in short-term growth can be explained by the reduction in investment, as a result of a fall in consumer and investor confidence. Theoretically (assuming ceteris paribus), a decrease in Investment (being a component of AD) will lower the rate of growth of AD, hence relative to other countries, British growth in RNO will be comparatively smaller, which is symbolic of a reduction in short term economic growth.

Within minutes of the exit poll being announced, Sterling value dropped by 2%. This can be explained as the election results represented one step closer to Downing Street for Jeremy Corbyn. Labours policy to increase corporation taxes from 19%-26%, would naturally deter many potential firms from moving their business to Britain, hence demand for the pound shifts inwards, and its price decreases.

These election results represented a growing sense of opposition within the general public against Conservative austerity. David Cameron’s policy of reducing the government debt by cutting government expenditure has taken its toll on the NHS. The public is therefore calling for an expansionary fiscal policy, in terms of increasing Government Spending, yet this represents a policy conflict with Cameron’s aim of reducing the budget deficit. Ultimately however, the disappointing growth results since Brexit call for both expansionary monetary and fiscal policy, in an attempt to kickstart the economy, even at the trade off cost of increased levels of inflation, and a worsening budget deficit.

If Keynes were here today, I think that he would argue that due to the poor levels of consumer and investor confidence (animal spirits), government expenditure can not be fully utilised, as the multiplier effect would have little effect if the economy’s propensity to withdraw was too great. Therefore, at the root of kickstarting the post-Brexit economy, is kickstarting British consumer and investor confidence in our own economic and political institutions. Unfortunately, the surprise result of the snap election has only acted to exacerbate the looming sense of uncertainty that clouds post-Brexit Britain.