From Brexit to protectionism – what are the impacts on the global economy?

What is the practical impact of protectionism for businesses?

Protectionism limits access and increases costs to businesses trading internationally. Drastic protectionist moves have the potential to dramatically decrease the value of a currency, as seen with sterling,following the vote to leave the EU. Sterling fell below US$1.35 a 30 year low following the 23 June 2016 Brexit vote.Importers should consider working with a currency specialist, such as OFX, to consider using tools such as forward contracts. Tools such as these allow businesses to lock in the current rate of exchange, to mitigate the risk of currency volatility as a result of protectionist events.

But hasn't protectionism been the historic norm?

Out and proud protectionists,such as Trump's former advisor Steve Bannon, point to the fact that in the19th-century global trade boomed and the world economy grew rapidly, even though tariffs were very high.If then why not now? What this ignores, though, is that protectionist tariffs are just one part of the overall cost of trade:in those days a small one, but these days quite a big one. What really set trade a light in the Victorian age was the collapse in the costs of transportation due to the development of reliable ocean-going steamships.Today, the costs of transporting valuable goods are tiny compared with previous eras and the level of tariffs, and the impacts of non-tariff barriers, are much more critical.

Is protectionism always bad?

Not always. Many countries have introduced protectionist measures to protect strategic industries on national security grounds, for example, or to protect emerging sectors that might otherwise get snuffed out. In general, though, economists believe that protectionist measures ultimately damage businesses and hurt consumers.

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To see why, consider an important emerging sector that is currently in the news: the solar panel industry. Last month, theUS International Trade Commission (a quasi-judicial US government agency which regulates trade policy) ruled in favour of two US companies that accused China-based producers of unfair competition. The ruling (which is advisory,pending government approval) sets the stage for a range of tariffs, quotas and minimum prices designed to protect US solar panel businesses. You might expect these protected businesses to be delighted. Infact, they are mostly pretty teed off.

Why are they annoyed?

Because, as in so many industries and sectors, the supply chains in the solar panel industry are complex and transnational. Every producer is also a consumer,who stands to lose from higher input costs up the value chain if foreign suppliers are frozen out. Moreover, the higher prices all along the chain will eventually hit the end-user,causing demand to fall and threatening the industry as a whole. It's a similar story with steel, a mature sector where demands for protectionist policies are frequent and loud .But for every British steelmaker struggling to turn a profit and blaming Chinese dumping' of steel, there are many more UK manufacturers giving thanks for low-costinputs that means they can break even and pay next month's wage bill.

Who would lose most from rising protectionism?

It would depend on the specifics of what unfolds, but both emerging economies andrich industrialised nations stand to suffer. In Trump's first week in office, he pulled theUS out of the Trans-PacificPartnership, dealing a massive blow to southeast Asian economies, including Vietnam and Malaysia. He also vowed to list China as a currency manipulator' and slap a 45% tariff on imported Chinese goods, although China has actually been intervening in markets for years to prop up its currency, the yuan, not push it lower. But he has not yet followed through on campaign promises to impose 35% tariffs on US companies relocating to Mexico or 45% tariffs on goods from China. Meanwhile the threat of steel restrictions poses a particular risk to the EU and Canada. As for the UK, any growth in protectionism in the US and more broadly would obviously be a highly unwelcome development as it tries to put in place post-Brexit free trade deals.

Ask the expert

Jake Trask, FX research director at OFX

Much of the world sees Brexit as a protectionist move. Is it?

The main point for many people who voted in favour of Brexit was to re-gain control of the UK's borders; therefore protecting the interests of UK citizens, particularly, when considering jobs and employment. The vote in favour of Brexit is, therefore, clearly protectionist.

Does the pound have further to fall, or is worst-case Brexit factored in?

The pound could definitely fall further should the UK fail to make progress on a free trade agreement with the European Union, by the time of the EU Leaders December meeting. Sterling has been supported recently by comments that the EU is going to discuss amongst it selves, how a future trading arrangement with the UK would work. Firm support and confidence for sterling would be added by December, if the "divorce bill" has made sufficient progress and allows the UK to partake in the discussions. A no deal' and default to the World Trade Organisation's rules would see sterling dramatically drop. Recently we saw moves in GBP/USD to around 1.35, which saw a flurry of clients calling in to lock in dollars by way of a forward contract, which can be used to exchange funds over the next 12 months.

How important is it to strike a good trade deal with Europe?

Vitally important. Europe accounts for around 50% of the UK's current trade so it is essential to protect UK interests, that a comprehensive trade deal is reached. OFX clients who are worried by the thought of a no deal' scenario are looking to use forward contracts mitigate their risk and lock in the current rate of exchange, to protect against further depreciation of the pound.

Will it be difficult for Britain to make a trade deal with the US under Trump?

As long as the proposed European Union (withdrawal) Bill is passed without too many amendments (which looks like being far from a done deal, given the amount of amendments/changes being proposed by MPs) then existing EU legislation will be copied across to UK law meaning it will be easy to make trade deals with other nations. The passing of this legislation is essential and will make the process of future trade deals simpler, even with protectionist foreign governments. Donald Trump's administration has previously claimed they would be keen to strike a deal with the UK. Although, claims it could be completed in 90 days, seem overly optimistic!

Isn't the desire to protect your own industries completely normal?

Yes, however, recent moves have been seen as more extreme than before. For example, the US's exit from the Trans-Pacific Partnership and efforts to reform North American Free Trade Agreement (NAFTA) highlight some of the more extreme measures taken in recent times.

What might rising protectionism mean for currency markets?

Those economies dependent on exports may be tempted to lower interest rates to keep their currency weak (and therefore, exports cheap). A more extreme measure that could materialise is central bank interference in the foreign exchange markets; selling currency in an effort to drive down its value. It has been seen previously; in Switzerland, during the worst of the Eurozone crisis. With its status as a safe haven, investors flocked to the Swiss Franc, dramatically pushing up its value and forcing the central bank to intervene.

Is the idea of each nation having its own currency inherently protectionist?

It could be perceived as being protectionist, however having a domestic currency has been a way of trading and growing an economy for millennia. A domestic currency combined with monetary policy tools is an effective way of nurturing economic growth, ensuring price stability and assisting employment.

Are British businesses worried about protectionism after Brexit?

The protectionist move already occurred with the Brexit vote.UK businesses should be far more concerned about the UK's future trading relationship with the EU. Once the UK leaves the bloc and sees out any transition period that may be implemented, should the result be a no deal', this could cause significant damage to the UK economy, the effects of which could be felt for several years.

Does China deserve to be called a currency manipulator'?

By controlling the trading range of renminbi, each day, China manipulates its currency to ensure it doesn't appreciate (or depreciate) too much. It uses far more control than the majority of western governments and given its status as the world's largest exporter of goods, ensuring an artificially weak exchange rate is hugely beneficial to the domestic economy. The last time China substantially devalued its currency was August 2015. The move saw a huge sell off in equity markets around the world as concerns grew that the economy was in worse state than previously thought, rattling investors.

Could the rise of ecommerce help limit the effect of protectionism?

The rise of ecommerce and the opportunities that accompany it, could well limit the effect of protectionism. Opening up to foreign markets via selling online may offset potentially damaging effects seen by import tariffs being imposed. OFX offers online sellers foreign currency accounts that can be used to collect revenues generated in EUR, USD and several other currencies, which can then be converted, allowing online sellers the flexibility to exchange their funds at an optimum time and rate.

For more information from OFX on protectionism and other money matters, please click here