- New economic study assesses the impacts of leaving the EU on Portugal’s mould industry.
- Paper finds that innovation would drop 50% and productivity would also fall.
- Lessons can be taken in Britain as it prepares to leave the EU’s trading area.
- British manufacturing relies heavily on innovation, and productivity is already very poor.
LONDON — Exiting the European Single Market, could lead to both large falls in innovation and productivity in the country, according paper by economist Carlos Daniel Santos.
Santos looked into the potential impacts of leaving a trading area — in this case the EU — on the moulds industry in Portugal, something the country is famous for, in the August issue of the Economic Journal.
Portugal manufactures millions of moulds every year for the creation of casts in plastic, glass and metal. The industry was worth roughly €400 million in 2011, according to Cefamol, the body that represents the mould industry in Portugal.
While that may seem like a lot, Portugal’s GDP is around €200 billion, so the mould industry accounts for less than 0.25% of the country’s total output.
Looking at what would happen to the industry if Portugal were to leave the EU, Santos found that “a 25% increase in trade costs is expected to reduce innovation by half and productivity by 4% for an export-oriented industry composed of small companies, as in the Portuguese moulds industry.”
“The reason for this decline is the fall in market access and a very competitive environment. Since innovation is subject to large ‘sunk costs’, the reduced market access generates a reduction in the gains from innovation. This reduction is larger for industries in more competitive markets,” the paper’s summary argues.
“Trade liberalisation allows the best firms to exploit the economies of scale and innovate,” Santos writes in the paper.
“A potential withdrawal from the EU would negatively affect innovation,” Santos concludes of the Portuguese mould industry.
Santos does not discuss Brexit in his paper, but his findings on this tiny sector of Portugal’s economy could likely be applied to the issues facing the UK right now as it prepares to actually leave the European Union.
This week, Prime Minister Theresa May’s government outlined its official plan to leave the customs union in March 2019 and negotiate a totally “new” customs relationship with the EU, which would “minimise disruption” and be as “frictionless” as possible.
The British side hopes the EU will agree to a bespoke, time-limited customs arrangement, which will protect the UK economy from a “cliff-edge” Brexit and allow businesses to carry on as normal during an interim period, according to the position paper,
What is clear is that Britain will be leaving the European Single Market, which means a total renegotiation of any trade relationship it has with the EU at some point in the future.
Clearly, a sector that accounts for 0.2% of the GDP of a country like Portugal — which has a GDP less than 10% of that of the UK — cannot be used as a like-for-like analogy for the UK’s entire output.
However, if British production as a whole, which accounts for close to £400 billion of the UK’s output, or 15% of GDP, was struck by the same sort of difficulties in leaving the EU as Santos expects would befall Portuguese moulders, that could spell serious trouble for British manufacturing.
Any hit to innovation would likely be acutely felt, given that much of Britain’s manufacturing industry is based on high-tech products like microchips, as well as industries that rely on innovation such as pharmaceuticals, a fact pointed out to Business Insider by German lender Commerzbank’s chief UK economist Peter Dixon earlier this week.
“It is extremely difficult [for pharmaceutical companies] to generate the kind of blockbuster drugs which tend to be successful,” he said. Any loss of the ability to innovate, therefore, would be a huge issue for British manufacturers, it would seem.
Further loss of productivity in Britain would also be a substantial problem given the UK’s already weak picture in this area.
Britain has already endured a so-called “lost decade” as productivity remains at levels seen before the financial crisis and has been unable to recover, as the chart below illustrates:
If this were to get worse, growth could struggle even more than the current slowdown, which has seen the quarterly increase in output of the UK shrink to just 0.3% in the most recent quarter.