CORNERING THERESA

The Democratic Unionist Party (DUP) are in a powerful position, with the Tories pleading with them to prop up a minority government. As the conservative, pro-British Northern Irish party negotiates with Theresa May, it is likely they could influence the direction and policies of her government.

So what did the DUP put in their manifesto? Here are some key points:

Reform BBC and abolish the TV licence fee. Like UKIP, the DUP wants to freeze then cut or abolish the TV licence and reform the BBC.

In their manifesto, they insist the TV licence fee is a highly regressive tax which was designed for a different era and a world of communication that no longer exists. The success of Netflix and Amazon streaming services shows that subscription based media can and does work.

They advocate setting up an independent Commission to review how BBC is structured and examine the opportunities for competitive tendering of key service.

The DUP advocates a fiscally right wing agenda of reducing tax and regulation to boost investment and growth. They want to lower Corporation Tax to at least 12.5 per cent and cut the VAT rate for tourism businesses.

They also want to introduce a Trade Accelerator Plan including an enhanced range of initiatives to help support both new and existing exporters to explore new markets, abolish Air Passenger Duty, and establish low-tax, deregulated Freeports in economically underdeveloped parts of the UK.

They also hint at slashing regulation in their manifesto, promising to introduce “a new Better Business Initiative that will systematically review health and safety legislation working in concert with sectors such as construction…”

DUP is strongly against any border checks between the Republic and Northern Ireland, and it is unclear if they want to cut or maintain overall immigration into the UK.

Immigration is only mentioned once in their manifesto when they call for an effective immigration policy which meets the skills, labour and security needs of the UK after Brexit.

The party also demands that the rights of British citizens in the EU and those from EU member states living here are safeguarded.

DUP is also in favor of rolling back the size of government and increasing efficiency by giving a greater role to private enterprise and philanthropy.

They want to reduce the number of government departments and Special Advisors, as well as introduce a Civil Service Voluntary Exit Scheme aiming to yield annual savings of approximately £100 million.

The party also proposes exploring the introduction of alternative models of public sector service delivery such as increasing the use of social enterprises. Reforming public services is not solely about realizing efficiencies so that Northern Ireland can live within its means”, they write. “It is also about delivering a more effective public sector and freeing up resources to be spent on priorities like schools, hospitals and policing.

One for all, and all for one! UK now turns to Five Eyes, an alliance comprising Australia, Canada, New Zealand, the United Kingdom, and the United States. These countries are bound by English language, common culture, freedom, and the best standards of living on Earth.

Though it is hard to predict how a bargaining game involving strong emotions as well as economics will play out, we can offer some conjectures about what will happen. These conjectures are mostly based on what we have called the law of distance — the observation that the interactions between two countries are proportional to their sizes (GDPs) and inversely proportional to the distance between them.

Distance, in this sense, is not just physical distance but also cultural distance (e.g., whether two countries have different/similar official languages) and administrative distance (e.g., the absence or presence of a historical colony-colonizer link between the two). The law of distance has been associated with some of the most robust results in international economics, which is why it underpinned the UK Treasury’s generally well-regarded analysis, a year ago, of the long-term consequences of Brexit.

Outside EU, the world is UK’s oyster, and the Commonwealth remains that precious pearl within. UK might be able to gain more from a free hand in negotiating with the Commonwealth — former British Empire states such as Canada, Australia, India, and South Africa — than it might lose in terms of limited access to EU. The GDP of the rest of the Commonwealth is only 55% as large as that of the rest of EU.

UK has a common official language (English) with 91% of the rest of the Commonwealth (on a GDP-weighted basis) and a colony-colonizer link with 99%, versus only 2% on both factors with the rest of EU. Based on estimates that a common language normally boosts trade by 2.2x and that a colony-colonizer link has a multiplier effect of 2.5x, the joint effect of the two (5.5x) in boosting market potential in the Commonwealth is substantial.  UK on its own has the leverage to achieve better terms with the Commonwealth countries than it currently enjoys with the EU. Consider that Britain accounts for only 16% of EU GDP.

Moreover, the tenor of the relationship between the UK and the EU is not good: Compare Britons insisting that the UK could exit without paying a brass farthing versus the EU’s claims for £50 billion or more. Consider the combative personalities of some of the key negotiators. Add in the consideration that Brexit, even if accomplished with a maximum rather than minimum of goodwill, will hurt Britain’s trade with EU for purely technical reasons, and it seems safe to predict that there will be a deterioration of trading relationships with Britain’s largest natural market; the only question is to what extent.

Given that relatively safe prediction, the natural next question is which industries and companies are likely to be hurt the most and therefore face the greatest need to reconsider their current operating models. Brexit is likely to change the most is the administrative distance between the UK and its former partners in EU. This suggests that industries with a high degree of sensitivity to administrative distance are likely to be affected the most — unless, of course, the provisions under which UK-based operations can access EU markets happen to be eased the most for them.

Correlated indicators of administrative sensitivity include industries that are subject to high levels of regulation, produce staples or entitlement goods or services, are large employers or suppliers to the government, include national champions, are construed as vital to national security, control natural resources, or require large, irreversible, geographically specific investments. Other markers of industry sensitivity to Brexit include high levels of scale economies that need to be amortized over international regional markets, rather than just by national markets; high levels of trade-dependence on either the export or the import side; and belonging to the service sector.

At the company level, there are some additional attributes that seem likely to be associated with high degrees of exposure to Brexit. Companies with particularly high levels of export or import-dependency in relation to their competitors are likely to be hardest hit. Small firms that aren’t yet exporters or importers are also likely to be hurt more, at least in terms of a narrowing of their opportunity sets: Such firms typically look nearby for their first international transactions. And even where products or services aren’t flowing across borders, companies that use Britain, particularly London, as their regional headquarters for serving all of Europe (e.g., many U.S. multinationals) are likely to need to reconsider basing that role there — as may, for that matter, companies that use London as their global headquarters, especially if most of their business is outside UK.

The British companies that may have private reasons to cheer are those focused on UK that are trying to hold off regional or even global competitors at home. Which is a reminder of the importance of granularity in forming such assessments — not all companies within the same industry, let alone all industries, will be affected in the same way. Similarly, in terms of what is to be done, once again, the appropriate response will be predicated on the specifics of a company’s situation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s