As taught in the Economics Departments of universities, devaluing a country’s currency relative to its major competitors’ currencies, brings about an increase in its exports. Often the textbooks are not very clear as to whether “increase” relates to value or volume.

Effects of Pricing on Exports

What is clear however is that the effects of devaluation depend more than anything on how a country like the UK prices its goods in its overseas markets. More generally, when issues of tariffs will be very much to the fore in the forthcoming EU-UK negotiation, pricing after tariffs, if any, will be a key determinant of export success.

Recent Results from the USA

Comparing trade with our two largest customers, the USA and Germany in the second quarter of 2016 just before the latest devaluation, with the first quarter of 2017, we find that for the USA, while UK exports showed a modest 6% rise over the three quarters when accounted for in Sterling (as the Office of National Statistics does), when priced in US dollars (which is what our customers there use to buy our goods), UK export value actually fell significantly by 13%. This suggests that most UK exporters to the USA left the Sterling prices of their products substantially unchanged, thereby handing the devaluation gain to their customers, instead of retaining most of it to finance more investment in new products and improved equipment.

Why do most British exporters to the USA do this? Given that most British export products these days contain materials from third parties so that the costs of these component materials will increase in Sterling terms, there is every incentive to raise your Sterling prices to offset this increase in your costs.

Why not price your exports to the USA in US dollars in the first place? Then if the $ : £ exchange rate reduces (Sterling devaluation) you get more sterling for each sale. If the $ : £ rate increases (Sterling appreciation) you may have to reduce your £ price to keep the $ price the same and so maintain sales, but then your overseas components costs will go down in partial compensation. In fact there is abundant evidence that foreign customers do not immediately stop buying your product if the price in their currency goes up a bit^[1], particularly if your product is machinery or an instrument needed in another productions process.

Recent Results from Germany

These results are of key importance when considering trade between Britain and the EU, which accounts for about 45% of UK goods exports. In Germany, by contrast with the USA, UK goods export values rose in the 2016 Q2 to 2017 Q1 period by around 18% in Sterling terms, but only by 2% in Euro terms, suggesting that in that market most UK exporters kept their Euro pricing intact and took the devaluation gain for themselves, a sensible strategy. German exporters also appear to have protected their Euro prices: while the Sterling value of German exports to Britain rose by about 4% in the period, the Euro value of these exports declined by about 11%. This implies that Germany is prepared in the short term at least, to lose market share when it becomes unprofitable. These figures correspond closely with the actual £ : € devaluation of 15-16%, i.e. from about 1.30 in July 2016 to 1.14 in June 2017 meaning there has been only a small 2% volume increase in value to Germany^[2] accompanying this devaluation.

Effects of Tariffs on Goods Trade: not very great now

Possible EU-UK tariffs and their effect on Britain are an almost everyday item of excitable chatter in the media especially BBC News.

As noted above, British exporters can help themselves a lot by putting their pricing in their customers’ currency. Tariffs on manufactured goods are now almost all much smaller than the recent swings in currency exchange rates which can anyway be hedged against for years ahead^[3].

The goods which Britain actually exported to the EU 27 in 2014 would have born an average tariff of around 3%^[4]. In the light of this and the above, it is clear that for manufactured goods the chief effect of tariffs between Britain and the EU would be the customs formalities. Full customs declarations on the 1.3 million tonnes of freight passing through the UK ports every day would be a much more important impediment to EU-UK trade than tariffs of around 3%.

End Notes

[1] Nor do they start buying more if the price goes down.

[2] Oil constitutes a major part of UK exports to Germany, and as these are priced in US dollars it’s unlikely that there was any increase in oil exports to Germany.

[3] UK Trade and Investments from July 2016, Department for International Trade (Secretary of State Liam Fox), can point any firm to reputable exchange dealers offering this service.

[4] This is much the same as the effective tariff rate on German goods exports to the EU 27 (see Britain’s Referendum Decision, page 51) and also estimate (2014) by the Trade Policy Research Centre.

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