Economics | The Knowledge Dynasty


Japan and EU expected to sign trade deal on Thursday

Shinzo Abe to meet Donald Tusk and Jean-Claude Juncker in Brussels but UK exporters likely to see no gain due to Brexit.

The European Union and Japan are on course to sign a trade deal on Thursday, after talks gained impetus in the wake of Donald Trump’s threat to put up barriers to international commerce.

Cecilia Malmstrm, the European trade commissioner, announced she had reached a political agreement with the Japanese foreign minister, Fumio Kishida: “We ironed out the few remaining differences in the EU-Japan trade negotiations, she tweeted. We now recommend to leaders to confirm this at summit.”

Japanese prime minister Shinz Abe will meet Donald Tusk and Jean-Claude Juncker, presidents of the European council and commission respectively, for a one- day summit in Brussels, before the G20 gathering in Hamburg.

The timing is no coincidence, as Germany plans to make free trade one of the summit priorities.

In a sign of high hopes, Malmstrm and Kishida exchanged Daruma dolls, armless, headless round figures associated with persistence and luck. A part of Zen Buddhist culture, people typically paint one eye when they make a wish and the second when the goal has been reached. Malmstrm and Kishida posed for the cameras, as they coloured in the second eyes on two dolls emblazoned with the EU and Japanese flags.

But officials might be looking for divine intervention to overcome the final hurdles.

Despite a likely agreement on Thursday, the sensitive subject of a court system to settle investor disputes remains open. Japan has not accepted the EUs preferred alternative to the investor-state dispute settlement (ISDS), a system for resolving trade disputes that has been criticised by unions and activists for giving too much power to corporations. Under pressure from NGOs, the EU proposed a new kind of trade court, where judges would be appointed by governments rather than disputing parties. But Tokyo has not come round to this idea.

EU sources declined to speculate on how quickly the deal could come into force, but fine-tuning and translating the legal text, as well as getting it agreed by all EU member states could take many months.

It took the EU and Canada three years to sign a final text, following the agreement in principle in October 2013, which parallels the latest EU-Japan milestone. The Canada deal almost collapsed when a Belgian region threatened to veto the treaty. Now mostly in force, the EU-Canada deal still needs to clear the final hurdle of ratification by at least 38 national and regional assemblies.

The timetable means it is likely the UK will have left the EU by the time the Japan treaty comes into force.

When negotiations began with Tokyo in 2013, Britain was one of the biggest cheerleaders. The then UK trade minister described talks as an important step towards liberalising trade between two of the worlds largest economies.

Following the Brexit vote, Theresa May has vowed to leave the customs union, meaning British exporters are unlikely to see any benefits from the EU deal.

The deal means Japan will drop tariffs on many valuable European imports, including chocolate, pasta and some types of cheese.

In return for liberalisation of Japans highly protected dairy market, Europe has compromised by agreeing to lower tariffs on Japanese imported cars, although new rules will be phased in to help European carmakers deal with the change.

Services and an array of technical standards are also covered by the treaty, which negotiators say goes far further than old-style tariff-cutting agreements.

Read more:

Brexit and the UK economy one year on – BBC News

Image copyright Getty Images

Before last year’s Brexit vote, there were warnings from many economists that the UK would suffer a catastrophic economic shock and be catapulted into recession by a Leave vote.

As it turned out, those predictions were a touch pessimistic.

But one year on, what do economists and businesses think of the aftermath of the vote? And what do they think the future holds?

Image copyright Getty Images

‘Wheels coming off’

David Owen, chief European financial economist for Jefferies, still thinks the UK could be in for a rough ride.

“For six months or so after the Brexit vote, the UK economy as a whole also held up surprisingly well, helped by the significant monetary easing announced by the Bank of England last August and the move down in the currency,” he says.

“But recent weeks have seen growing signs of the wheels coming off the UK recovery, with real incomes squeezed by the decline seen in real wages.”

UK wage growth slowed down this year and started to lag behind inflation in May. Prices are rising in the shops faster than people’s wages are going up, meaning the amount people have to spend is going down in real terms.

In the future, “much will depend on what deal the UK ultimately manages to strike with the rest of the EU, but with Brexit discussions now commencing, uncertainty and political risk will dominate discussion,” he adds.

Image copyright Getty Images

Slow down

Last year, not all economists thought the shock to the economy would be so profound. Martin Beck of Oxford Economics said then that although the Brexit vote would hit the UK, it would avoid recession.

Since a majority of voters chose to leave the EU, it was “not obvious” that business and consumers would cut back on spending immediately, he says.

However, he now believes that UK growth will indeed slow down, partly because of “uncertainty over Brexit negotiations and uncertainty as to what the outcome will be”.

After the Brexit vote, the pound dropped sharply against the euro. It is still trading about 14% down against the dollar.

As a result of that devaluation, UK consumers are starting to be squeezed by price inflation.

However, exporters are feeling the double benefit of a weaker pound and no change to tariffs to the EU at the moment, Mr Beck says.

What happens next to the UK economy “depends on the deal” that the UK government manages to come up with.

Research done by Oxford Economics “suggests a long-run hit to the economy” with a gradual cumulative effect. By 2030, the UK will have missed out on 3% to 4% of growth, he adds.

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Brexit bonanza?

Last year, some economists were positively gung-ho for Brexit.

Prof Patrick Minford of Cardiff University is a member of Economists for Free Trade, formerly known as Economists for Brexit.

Prof Minford says that “the consensus was for a recession”, but “we thought it [the UK economy] would be pretty much unaffected”.

However, he says Economists for Brexit “didn’t get the scale of the devaluation right” for sterling.

They thought devaluation would be about 6% and it turned out to be more like 15%. However, this isn’t necessarily a bad thing, he says.

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Trading places

“Having a devalued pound boosts demand for exports,” Prof Minford says. Businesses invest more money because they can sell more easily abroad. “And more expensive foreign goods encourage consumers to buy British, giving an extra push for business investment,” he adds. The devaluation is “likely to remain for quite some time” because of the length of the Brexit negotiations. He says that the eventual agreement is likely to be a compromise between soft and hard Brexit. If negotiations are derailed, this may be positive for stock market sentiment, as the UK could move towards free trade agreements faster. “But the economy will probably move towards having more of an emphasis on free trade gradually,” he adds.

Mr Beck of Oxford Economics also says that being outside the customs union with the EU may bring benefits. “Trade with the EU may not be as important as building trade links with rapidly growing large economies such as China and India,” he says. Even before Brexit, exports to the EU had been falling relative to other markets. “China and India are ‘growing very quickly’, whereas European countries are wealthy and so are growing more slowly as a market,” Mr Beck says.

Image copyright Getty Images

Boom, bust, boom?

Some economists have a completely different take on where they think the economy is heading.

Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research, said after the Brexit vote that he expected a boom. “But now there will be a hit to the UK economy due to uncertainty and a fall in immigration. The creative industries fuel a large chunk of the UK economy,” he says, “and without immigrants to stimulate new ways of thinking, business will be hobbled.”

“The real benefit [to immigration] is that skill bottlenecks are solved,” he says.

Eventually, the UK will “change what we make and sell” in the longer term. But he expects negative effects on the economy to outweigh positive effects until 2030.

Business view

Business lobby group the CBI says that growth in the UK economy will “shift down a gear” in the short term as household spending slows down.

“The less likely a Brexit deal starts to look, the harder it will be for firms to recruit and retain talent as well as push the button on big investment decisions. We must get Brexit right,” says CBI director-general Carolyn Fairbairn.

Big firms such as Rolls Royce have said they want as little change as possible after Brexit.

And car-makers are worried about a trade “cliff edge” if tariffs are suddenly imposed on EU imports and exports.

People power

Finally, what do people in the UK think about Brexit?

Joe Twyman from pollsters YouGov says that in the main, they haven’t changed their mind from how they voted last year.

“Nothing has changed, because nothing has changed,” he says. “Negotiations have just started.”

“One interesting twist is that 26% of the population that voted Remain believe the UK should go ahead with Brexit, because that’s how the majority voted,” he says.

However, he adds that the political situation is “very fluid”, and depending on how the negotiations go, those opinions could easily shift.

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Great Barrier Reef valued at $56bn as report warns it’s ‘too big to fail’

Deloitte Access Economics report says reef underpins 64,000 jobs and contributes $6.4bn to economy each year.

A new report has valued the Great Barrier Reef at $56bn and warns of vast economic consequences for Australia unless more is done to protect it.

The Deloitte Access Economics report says the world heritage-listed reef underpins 64,000 direct and indirect jobs, and contributes $6.4bn to the national economy each year.

But without ramped-up protection efforts, it warns much of that could be at risk as the reef suffers from repeated mass coral bleaching events, poor water quality and climate change.

“The reef is critical to supporting economic activity and jobs in Australia,” says the report, prepared for the Great Barrier Reef Foundation. “The livelihoods and businesses it supports across Australia far exceeds the numbers supported by many industries we would consider too big to fail.”

Of the 64,000 jobs linked to the reef, 39,000 are direct jobs making the reef a bigger employer than the likes of Telstra, the Qantas Group, National Australia Bank and the oil and gas extraction industry.

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