Brexit could boost UK manufacturing profit regardless of May’s trade route

17 March 2017

17 March 2017

The chair of Economists for Free Trade has concluded that ′whatever route [UK Prime Minister Theresa] May takes to free trade, the car industry and manufacturing in general can look forward to a profitable transition to a more productive future.’ 

In an article published in the Financial Times, Patrick Minford, also professor of applied economics at Cardiff University, added that ′the on-off prospect of a [preferential] trade deal with the EU [post Brexit] makes little difference.’ He says that the EU’s current manufacturing tariffs, which he factors into his calculations with colleague Edgar Miller of Cass Business School, average only 2.5%. He says this is more than outweighed by the benefits of Brexit, which in the short term are due especially to the devaluation of the pound. 

Minford expects productivity to be pushed higher in the post-Brexit UK, and that the result that emerges from a standard world trade model, as opposed to the regulatory-burdensome EU model, would be ′a long-term gain to consumers and gross domestic product of about 4%, together with a fall in consumer prices of 8% and a 7% rise in Treasury revenues. 

He says that UK manufacturing and the car industry in particular are not what they used to be, and have now shifted up the value-added chain towards high-tech processing, giving UK manufacturing an advantage. He points out that ′half of [Britain’s] manufacturing exports, and 60% by value of its car exports, are sold on markets outside the EU. 

Minford says the exchange rate, with the pound declining by 15% against the dollar and the euro since the Brexit referendum, has further boosted exports. He adds that the potential to access ′competitive world supply chains without any tariff cost’, which could be struck with new UK trade deals, is a further factor giving the UK industry an even greater competitive advantage. The UK could strike trade agreements with countries the EU collectively struggles to agree with. 

He deduces therefore that ′when one adds all these factors together, it turns out that manufacturing and the car industry will be much more profitable than before over the short and medium term.’ He and Miller ′estimate that profits in manufacturing could increase on average by about 16% of value-added and in car manufacturing by about 14%, mostly due to the fall in sterling.’ 

Minford concludes: ′This provides these industries with a large boost to profitability as they raise productivity over the long term. It also explains why UK manufacturing, far from reeling from Brexit uncertainty, is firing on all cylinders, with the latest purchasing managers’ index recording growth in the sector.’