The European Union is seeking a ‘level playing field’ with the UK after Brexit. One of the key issues concerning the EU is ‘dumping’. It is worried that the UK becomes a super-competitive, de-regulated ‘Singapore-on-Thames’ that undercuts the prices of products produced in the EU, in the same way that China does. However, the opposite is the case. It is the 19 eurozone members that are dumping their goods onto world markets ‒ in particular the UK ‒ because the euro is a structurally undervalued currency.
The global economic and financial community regards the euro as just another currency. However, the euro is not ‘just another currency’.
First, it is an ‘incomplete’ currency. Unlike every other currency, there is no single sovereign standing behind it. Each member state stands behind the euro only to a certain percentage and collectively the member states do not share joint-and-several liability. This makes them ‘sub-sovereign’ members of the eurozone. Second, it is an artificially ‘constructed’ currency, as a consequence of the fixed rates used when it was introduced in 1999 to convert the domestic currencies of eurozone members into euros. This affected not only the internal exchange rates between the eurozone members, but also the international value of the euro.
The net result has been a downward bias in the international trading value of the euro, with the inefficient southern member states dragging down the value of the euro relative to what it would be if all member states were as efficient as Germany and the Netherlands.
The euro is undervalued against sterling on a purchasing power parity (PPP) basis and has been all of the time since its introduction. As a consequence, the UK has almost always run a trade deficit with the EU over the period, but the deficit worsened considerably after the introduction of the euro. Further, the trade deficit with the EU has systematically deteriorated over the period of the euro’s existence.
In 2018, the UK’s trade deficit with the EU was £66bn and the ratio of exports to imports was only 64%: for every £1 of goods and services we buy from them, they only buy £0.64 from us. Particularly noteworthy is the scale of the deficit in traded goods with Germany, mainly in automobiles ‒ more than £30bn. Even allowing for potential quality differences between British and German cars, a key explanation for the size of this deficit is again the undervaluation of the euro. While the UK maintains the close economic ties with the EU that the EU wants, the UK will remain a captive market for German and other eurozone member goods and will be unable to address the structural disadvantage which it finds itself in.
The euro is undervalued against sterling by between 15.2% and 20%. Had the euro been correctly valued, then eurozone exports to the UK in 2018 would have been lower by between £67.2bn and £88.4bn. The UK would therefore be entitled to impose an annual anti-dumping duty on the eurozone in the range of £67.2bn – £88.4bn. The euro acts as a subsidy to firms from within these countries, giving them an advantage over global competitors.
The EU is following a classic ‘beggar thy neighbour’ strategy. This is where a country or trading bloc follows a protectionist trade strategy that adversely affects its trading partners. Typically, this involves tools such as tariffs and quotas. But in this case, the weapon is a structurally undervalued currency.
The UK government has introduced a Trade Bill which will establish a new Trade Remedies Authority to prevent countries from dumping cheap goods onto the UK market, potentially putting key domestic industries, like steel, out of business. The Trade Remedies Authority will enable the UK to conduct its own dumping and subsidies investigations. The Bill may have been intended to target China in particular, but trade remedies can be levied against any World Trade Organisation member, including the EU, whether or not there is a Free Trade Agreement in place.
We are told that the EU ‘holds all the cards’ in the trade negotiations with the UK. European Commission President Ursula von der Leyen says the EU is “ready to design a new partnership with zero tariffs, zero quotas, zero dumping” with the UK. The EU’s current treaty-based proposal for avoiding trade dumping would involve the UK applying EU law, including, extraordinarily (and uniquely in international trade between properly sovereign nations) the application of that law as interpreted by the European Court of Justice. This would have the effect of permanently advantaging Germany and other eurozone members, continuing an arrangement that is demonstrably unfair to the UK.
It is quite shocking that the new German president of the European Commission calls for zero dumping, when her own country is one of the world’s biggest dumpers of goods onto world markets. And she now has the audacity to take the UK to court for failing to act in ‘good faith’ over the Internal Market Bill. This is designed the protect the integrity of the UK’s single market against the EU’s plan to split off Northern Ireland from the rest of the UK, as made perfectly clear by Martin Selmayr, the former Secretary-General of the European Commission, who said “Northern Ireland is the price [the UK will have] to pay for Brexit”.
We know that Germany is desperate for a trade deal with the UK. And we know why. But a trade deal on the basis of the current structural undervaluation of the euro will only entrench the EU’s structural trade surplus with the UK. This cannot be permitted.
A longer version of the paper can be found here:
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.