The EU is following a classic ‘beggar thy neighbour’ strategy with the UK by exploiting the euro’s structural undervaluation
Michel Barnier is refusing to negotiate with the UK on the future trading relationship until the UK agrees to the EU’s idea of a ‘level playing field’. One of the key issues concerning the EU is ‘dumping’. It is worried that the UK will become a super-competitive, de-regulated ‘Singapore-on-Thames’ that undercuts the prices of products produced in the EU, in the same way that China does. However, the opposite is the case. It is the nineteen EU member states operating a single currency, the euro, in the Eurozone (EZ), that are dumping their goods onto world markets ‒ in particular the UK ‒ because the euro is a structurally undervalued currency.
The global economic and financial community regards the euro as just another currency. However, the euro is not ‘just another currency’. First, it is an ‘incomplete’ currency. Unlike every other currency, there is no single sovereign standing behind it. Each member state stands behind the euro only to a certain percentage and collectively the member states do not share joint-and-several liability. This makes them ‘sub-sovereign’ members of the EZ. Second, it is an artificially ‘constructed’ currency, as a consequence of the fixed rates used when it was introduced in 1999 to convert the domestic currencies of EZ members into euros. This affected not only the internal exchange rates between the EZ members, but also the international value of the euro.
The net result has been a downward bias in the international trading value of the euro, with the inefficient southern member states dragging down the value of the euro relative to what it would be if all member states were as efficient as Germany and the Netherlands.
The euro is undervalued against sterling on a purchasing power parity (PPP) basis and has been all of the time since its introduction. As a consequence, the UK has almost always run a trade deficit with the EU over the period, but the deficit worsened considerably after the introduction of the euro. Further, the trade deficit with the EU has systematically deteriorated over the period of the euro’s existence.
In 2018, the UK’s trade deficit with the EU was £66bn and the ratio of exports to imports was only 64%: for every £1 of goods and services we buy from them, they only buy £0.64 from us. Particularly noteworthy is the scale of the deficit in traded goods with Germany, mainly in automobiles ‒ more than £30bn. Even allowing for potential quality differences between British and German cars, a key explanation for the size of this deficit is again the undervaluation of the euro. While the UK maintains the close economic ties with the EU that the EU wants, the UK will remain a captive market for German and other EZ member goods and will be unable to address the structural disadvantage which it finds itself in.
The euro is undervalued against sterling by between 15.2% and 20%. Had the euro been correctly valued, then EZ exports to the UK in 2018 would have been lower by between £67.2bn and £88.4bn. The UK would therefore be entitled to impose an annual anti-dumping duty on the EZ in the range £67.2bn – £88.4bn. The euro acts as a subsidy to firms from within these countries, giving them an advantage over global competitors.
The EU is following a classic ‘beggar thy neighbour’ strategy. This is where a country or trading bloc follows a protectionist trade strategy that adversely affects its trading partners. Typically, this involves tools such as tariffs and quotas. But in this case, the weapon is a structurally undervalued currency.
The UK government has introduced a Trade Bill which will establish a new Trade Remedies Authority to prevent countries from dumping cheap goods onto the UK market, potentially putting key domestic industries, like steel, out of business. The Trade Remedies Authority will enable the UK to conduct its own dumping and subsidies investigations. The Bill may have been intended to target China in particular, but trade remedies can be levied against any World Trade Organisation member, including the EU, whether or not there is a Free Trade Agreement is in place.
We are told that the EU ‘holds all the cards’ in the trade negotiations with the UK. European Commission President Ursula von der Leyen says the EU is ‘ready to design a new partnership with zero tariffs, zero quotas, zero dumping’ with the UK. The EU’s current treaty-based proposal for avoiding trade dumping would involve the UK applying EU law, including, extraordinarily (and uniquely in international trade between properly sovereign nations) the application of that law as interpreted by the European Court of Justice. This would have the effect of permanently advantaging Germany and other EZ member state beneficiaries of the EZ’s structural lacuna to the detriment of the UK, continuing an arrangement that is demonstrably unfair to the UK.
It is quite shocking that the new German president of the European Commission calls for zero dumping, when her own country is one of the world’s biggest dumpers of goods onto world markets. Equally shocking is the deafening silence of influential organisations in the UK, like the Treasury, the Bank of England, the Confederation of British Industry, and especially the BBC, which has enabled the myth that the EU holds all the cards to be perpetuated for so long.
Michel Barnier, please stop dumping on us!
A longer version of this article is here.
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