A shaky Brexit hope from a major Labour donor and euroskeptic

Frances Coppola has a number of interesting observations in a column criticizing the ideas advocated by "businessman and self-styled economist John Mills," who she identifies as being on the left politically. Mills is a major donor to the Labour Party. (Louise Armitstead, Rich, private school, Oxford. Meet John Mills, Labour's biggest donor Telegraph 09/15/2013.

Coppola writes:

John Mills is also a long-standing supporter of Brexit. Like many left-wing Brexiters, Mills thinks that leaving the EU will create an opportunity to rebalance Britain’s economy away from finance and other service industries and towards manufacturing. Britain’s manufacturing decline long pre-dates the Brexit vote: business investment has been low by comparison with other countries for decades, manufacturing productivity started to fall long before the 2008 financial crisis, and Britain has run a persistent trade deficit since the early 2000s.

For Mills, that trade deficit is the UK’s biggest problem. “We have a major problem in our financial relationship with the other EU countries,” he says, laying out a table showing the UK’s trade position. Indeed, it does look bad: his figures (from the Office of National Statistics, 2016) show the UK running a total trade deficit (goods and services) of £37bn, of which £71bn is with the EU. No, that is not a typo: the UK runs a trade surplus of £34bn with the rest of the world, mainly because of its dominance in services. [emphasis in original]

Mills argues that Britain could benefit greatly from devaluing the pound sterling. Coppoola describes his argument; " artificially depressing sterling's exchange rate would create a big export boom and encourage manufacturing." But, she notes, devaluing the currency for boosting exports is prohibited by the rules of the IMF, of which Britain is very much a member:

Nor can the UK afford to ignore the IMF's rules. John Mills's assertion that sterling is not a reserve currency is very wrong. It is not only a major international reserve currency, it is one of only five currencies currently in the IMF's SDR basket. Countries with international reserve currencies all benefit to some extent from "exorbitant privilege" - namely, the ability to borrow externally long-term in their own currency at low interest rates. Giving up this privilege would be costly.

Of course, Mills might argue that losing "exorbitant privilege" would be worth it for a better export performance. [my emphasis]

She explains why the idea that exchange rates determine the trade deficit/surplus is a historical, with arguments like this:

The long fall of sterling from its 1981 height was due to the U.S. dollar, which soared due to the combination of very high interest rates with enormous fiscal stimulus. In 1985, there was an international agreement (known as the Plaza Accord, because it was made at the Plaza Hotel in New York) that central banks would act in concert to dampen the US dollar. Because of the dollar’s dominance in the sterling trade weighted index at this time, the Bank of England’s participation in the Plaza scheme forced sterling’s exchange rate to rise significantly. ...

These charts demonstrate a serious problem with the "strong sterling causes trade deficits" idea. 1981 was the peak of the trade surplus. But it was also peak sterling. So the UK not only recovered from a sudden stop in 1975, but delivered its best ever trade performance while sterling was rising to a post-war high. And when sterling fell back in the early 1980s, the UK’s trade surplus shrank. If the exchange rate was determining the balance of trade, as Mills asserts, we would expect the reverse. [my emphasis]

And she calls attention to the effect of the current economic-globalization regime:

There is also another possible explanation for the UK’s rising trade deficit in goods since 1999, and that is the entry of China to the World Trade Organisation (WTO) and the general opening up of Asian countries to trade. In the US, China’s accession to the WTO is blamed by many for the loss of manufacturing jobs. There is little evidence that UK manufacturing jobs significantly went to Europe – but they have without doubt gone to the Far East. When manufacturers offshore production, the contribution of their goods to the trade balance switches sign. So, for example, ever since James Dyson moved manufacturing to Malaysia, his goods have shown in the UK's trade balance as imports, not exports. His decision, like that of other manufacturers, to move production to cheaper locations, thus contributes to the UK's trade deficit in goods.

In theory, a large depreciation of sterling could improve export competitiveness enough to encourage the likes of Sir James Dyson to bring manufacturing back to the UK. In practice, though, it is not that simple. Dyson now has extensive supply chains in the Far East. Relocating to the UK would be disruptive and costly, not least because unless those supply chains were also relocated to the UK, Dyson's input costs would rise as a direct result of the devaluation of sterling. There are two sides to exchange rate changes, after all: what benefits exporters is harmful to importers, and vice versa. In the UK, most manufacturers import raw materials and components, and all manufacturers are dependent on imported energy (since the UK is not self-sufficient in energy). Sterling devaluation may not benefit manufacturing nearly as much as Mills thinks.  [my emphasis]

Coppola also points out that his won export business creates an incentive for Mills to view currency manipulation as a desirable national policy: "Mills is a major UK exporter. No wonder he wants a better exchange rate. But I fear that in his desire to benefit his own business he has failed to take into account the terrible political risks associated with using the exchange rate as a source of competitive advantage. The IMF's articles of agreement prohibit exchange rate manipulation precisely because of the risk of tit-for-tat retaliation."