Monday 11 December 2017

Brexit and supply chain trade

Last week I was invited to talk about supply chain trade and Brexit at Sidley Austin in London. They asked me to focus my intervention on the how the rest of the world, in particular the bigger countries, thinks about Brexit in connection to supply chains. My answer was short: on the whole, not so much.

The simple reason for providing this short answer is straightforward if reasoned from an economic point of view. The figure below shows that most global supply chain trade takes place around three blocs of countries, namely one centered around NAFTA and neighboring countries with the US in the middle, one in Asia with China as the lead country, and one in Europe with Germany as the focal point. The thickness of the lines between countries indicates their  level of supply chain trade. 

As one can see, countries clustered around each of these three core countries are mostly trading within their bloc, not between them. The UK, circled in orange, clearly features inside the EU bloc and doesn’t have as strong trade linkages across the other two non-EU groups of countries. Therefore, from an economic perspective, when the UK leaves the EU, on the whole, other countries outside the European bloc are likely to remain unaffected.

Further research using formal economic models underscores this line of thought. In GDP numbers, countries such as China, Japan, Brazil or Korea may not be so much affected after all. That does not mean, however, that changes in trade may take place in several supply chain industries. A reshuffling of trade is likely to happen for some but would simply not be as big enough of an issue to create a serious dent in their economies.

Source: Santoni and Taglioni (2015) with author's addition. 

However, economics is not everything. Especially regarding Brexit. If reasoned from a political economy point of view outsiders in the rest of the world may be a little bit more concerned, as for example regarding food tariff quotas. But the extent to which they are disturbed as part of these re-negotiations is likely to be related to one thing: market size.

For instance, it’s no surprise that precisely a bigger country like the US vocally oppose the tariff quota plan which is a harbinger for what’s coming. If bigger countries come in the position of negotiating a new trade agreement with the UK, the US and other countries such as China, Korea, Japan conveniently have a lot of market weight on their side. Again, this fact hardly gives bigger counties in the rest of the world a reason to be very much concerned.

By the way, fun-fact of the week: when looking at the figure, can you see in which of the three blocs Ireland is placed? Click on the figure to enlarge.