TORY-DUP GOVERNMENT DEAL EXPECTED TODAY

Arlene Foster has hailed the discussions representatives of her Northern Ireland (Ulster) based party have been having with Theresa May’s Tories, expecting an official pact between the parties today.

Hoping to form a parliamentary pact with the DUP after the Tories’ collapse in seats following last week’s snap general election, Tories have been hammering out a deal with the ten-MP group.

DUP boss Arlene Foster praised the progress, and gave insight into the areas over which the agreement was being made. She told us: We’ve had some very good discussions again today, and these discussions continued into the afternoon. I hope we can reach a conclusion sooner rather than later. It won’t surprise anyone that we’re talking about matters that pertain to the nation generally, bringing stability to the UK government, in and around issued around Brexit, obviously around counter-terrorism.

As for what she expected in return for supporting the Conservative government, Foster said she had discussed “doing what’s right for Northern Ireland with respect to economic matters”.

This remark could refer to points within the DUP manifesto that aim to make Northern Ireland more competitive for businesses than their southern neighbour, the Republic of Ireland. Amongst those initiatives is a cut of corporation tax to 12.5 per cent — well below the Conservative goal of 17 per cent and the present figure of 19 per cent.

More outlandish is the establishment of “freeports” — tax and customs free trading areas — in “economically underdeveloped parts of the UK”, a sure euphemism for Ulster.

Other ambitions laid out within the DUP manifesto while red-meat for traditional conservatives have caused consternation amongst Britain’s political left. The manifesto promise to “freeze then cut or abolish the TV licence”, and the possibility it may be a price demanded by the DUP for supporting the government, has so worried Labour deputy leader Tom Watson he was motivated to appeal to the Conservatives Tuesday that they would pledge not to scrap the licence fee.

Writing to Culture Minister Karen Brady, Watson said: “The DUP’s manifesto includes a commitment to ‘freeze then cut or abolish the TV licence’… I urge you to fight hard to ensure that this pledge is not included in any agreement, formal or otherwise, between the Conservative Party and the DUP,” reports The Guardian.

Slamming the BBC’s main source of income, a levy on all homes which have a working television set whether they watch BBC programming or not, the DUP manifesto said: “The TV licence fee is a highly regressive tax which was designed for a different era and a world of communications that no longer exists. The success of Netflix and Amazon streaming services shows that subscription-based media can and does work.”

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