Brexit and Industry Sectors

I was at a talk yesterday, where the speaker made the observation that, amongst those that had spoken out in favour of Brexit, there were quite a high number of UK engineering firms. 

This is interesting, because it reveals something about the issues that the UK faces with Brexit and how any significant change tends to have winners and losers.  In fact, even if Brexit turns out to be detrimental to the UK as a whole, many UK manufacturing companies may be better off.

This comes down to the differences in trade and trade barriers between industry types.  One of the key concerns that UK trade economists have over Brexit is that it will have different impact on trade in services and in goods.  Outside of a single market, trade in goods can be effectively supported through trade agreements.  There may be additional costs to trade in the form of tariffs, or through increased bureaucracy, but these may not be so great when put in the context of potential exchange rate movements.

Trade in services, however, is much more susceptible to non-tariff barriers, particularly if tied in with restrictions on the free movement of labour.  This matters particularly to the UK which has relied on strong export performance in services to maintain favourable terms of trade.

So if Brexit turns out to be detrimental to the UK's export capability, it is likely to hit service exports much more than export of goods.  Why might this be good news for exporters of goods?

Put simply, this is because exporters of goods and exporters of services are competitors as sellers of foreign exchange.  And if an external event hurts your competitors more than it hurts you than you can end up better off.

Here, this is to do with what happens to the exchange rate.  If the UK's general export capability is damaged (or if people simply expect this), then this will lead to a depreciation of the exchange rate, (as appears to be already happening).  However the depreciation itself helps exporters.  It allows exporters to sell more and raise their domestic denominated prices thereby raising (domestic denominated) profit. 

The depreciation offsets to some extent the damage to export capability.  But, if you are in one of the industries that is least affected by the external shock, then you have all the benefits of the depreciation with little of the downside.  This is the position potentially facing UK manufactures.  A hit to UK service exporters could boost manufacturing profits, even if it's bad news for the UK overall.

Of course, it is no clearer now what Brexit will entail, than it was before referendum result.  Only time will tell what sort of trading status the UK is able to negotiate and what this will mean for its terms of trade.  Who the eventual winners and losers are is yet to be decided.