PAPER

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CURRENCY DECLINES LOSE EXPOR,T PUI{CH

/ 3 Cu "t \'-'r 7

U.K. is test of how global supply chains lessen gains from devaluations

Bv CsnrsropurR WrurrALL AND Mu<r Bmp

For decades, economics textbooks argued that suddenly weaker currencies are a boon to growth, because they make a country's exports more competitive or profitable on the global stage, which in turn boosts do- mestic production and employment.

What if that theory no longer holds? Economists and government officials Etre

increasingly wondering if that effect is di- minishing, especially among advanced West- ern economies with shrinking manufacturing

capacity and supply chains increasingly inter- woven with the rest of the world. The new idea is that much of the benefit from a falling currency is offset by the higher prices paid for components imported from overseas.

The U.K. is emerging as a test case for whether globalization has diminished the ef- fect. Although its currency has been battered . Wlgt!.r or how the re,ia- by the finan"cial crisis, the Brexit vote to tior:ryP between a currency,s leave the European Union-which took place :l|9pt and economic growth a year ago June 23-and the country's fresh ::11holqs has ramifications for bout of pgliq.rt_*certainty, its exporting mternatiolal nolitics. In the

p.werlasrrt responded as .,J*ril?f$HHTr#Hi:tttextbooks might sugsest. . ;;'l ,Iran, doilar. president qn.t*:[l'fl1;.,,"i1#., r":j l^":,,, iE;;;;,'',..,,.d ractory in Middreit-.",d'l;; ifIT #j.ililf :l#:1;fii ffi:'* ffixl,'#.ffiffiilff tt u+riiii,i us"ll,o,*rail in sterring, J;ffi; *"r,r]if* H?#:Hi.r;**lbeefed-up value of tIr..*r.r_ b.;ll, ,lr_.-"ra oiilrat yearcies used to buy those€oods lf*rr ilr. U.K. crashed out ofoverseas. Higher costs

19, iT: il." frropean exchange rateported materials, however, aII *f=.h.rrrrrn_, precurior tobut erased that idvarilq:., iil;;i* rhat required a stron_'1ffe have a huge

'i|919:; r.r;rrrd- than the govern-pendency on international fi.ni.ould sustain. The U.K. iln1f;',',il;flii*ffifl 9$i ffil*r,hen went onan ex_ pany exports more *,1^.ifr- fftr#il,yyiU##*;lf:of its products and imports ffilrrr-started a recovery.ffi:lll1fil:k1,.il,f.,?-

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-99und rer by nearry

says, "isn't revolutionr.?r1; nt 2.5o/o against the currencies of

nritisrr Lusffi#;i::l_ H.H,g#;r,ffirritlf*ffrom car makers a ,r*"rI-T #;;;.."vered, sparking opti-cessors to lumber mills- are il; in gor.r*ent that ex_discovering the same ,-rl po.tr^*o,rrd rise. In zotz,rhen_Adam Poseq president g._,h. ilJi:" d..rrrry chief deorgepeterson Institute for Interna- Oil;rne targeted an increase intional Economicg and a mem- .rp"ri, t" €l-trillion by_iozo,ber of the Bank of Engtand,s affi e+gg b1lion tt rt v.i. ryrate-setting monetary nolicl iirl".r'i'.o f zor',exports hadcommittee between zbo^g "nd il;i;r, st E,4zbiltion.z}tz, says the enects-ii"cur_ -'-wil"rr. arr. currency tookfff..f#?tr:.Hp?nf#T: ,,o,iJJ' beating arter the

ciarcrisisinz-qqffi,s;,.# ifix[,y*,*j.'#,'*,u:;depreciation didn;t,."rfi i, tfr. ili# #,pickup in exports ,,we wourd Bo%

", lilrn:.8-t:lr expo,rtshave expected," he sayi.

"ouu]'o...-o.',_'F -vehicles, helps

,#"tjUfil#:,Ul if:-,Hlil,,;*..,,?**.; used to,,, said Mr. posen

'-\ ls a Declining Pound Good for the U-.K.? The post-Brexit decline in the British pound has fueled inflation. Economists believe

an export-related

boost to the economy is unlikely to materialize.

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The British pound has fallen since the Brexit vote...

Pound vs. the dollar

2.2 dollars per Pound

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Exports have risen, but so

have imports... Total trade in goods. \

f40 billion

...leading inflation to begin increasing. Consumer price index

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...in part because many U.K. companies rely heavily on global supply

chains... lmport content of exports

Chemicals and r#I*r+4+lrtilrt*,ld 33%

Machinery and 1'+'++il+tl't+irr 34% equipment BY' Motor vehicles, flfni,ifjiiiit.iix{ifft 45%

Food products, i,iiil;l+r+$rfr.ir+ 27lo

Agriculture, hunting, ili"lliiltiiitiitll:::,;; AY' forestry, fishing lAo/o

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...calling into question whether the U.K. economy wilt see the kind of sterling'related bounce it has

fi:il:l,ffi|r'rt:r. as a percentase of GDp after past sterrins depreciations 3o/o

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oL2 456789101112 QUARTERS AFTER STERLING BEGAN TO DEPRECIATE

'!excluding extremely volatile items

Sour,.r, iactSet (currency); U.K.'s gffice For National Statistics (CPl, exports vs. imports); Pantheon

Macroeconomics (depreciation); 0rganization for Economic Co-operation and Development (import content)

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THE WALL STREET JOURNAL.

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sportS cars sold in New York i;i g15o,ooo would bring i,,o*. f,100,000' With the

""*a now at $1.27, such sales

iring an extra t18,000' But over half the car's compo- nents must be bought-from abroad, blunting the effect'---

"Duiing the Past decade' a

Iot of auto suPPliers have moved offshore," saYs Aston

Martin Chief Executive AndY Palmer. "In consequence, You don't get the benefits'"

In iecent months, sterling has recovered from its Post iii.ot lows and is currentlY ao*n fSZ" against the dollar and

igz" "g"irsf

the euro' AnalYsts

;Aril Pessimistic about the .*t.n.v as Britain heads for airor.u ftom its largest trading

Brexit vote

S lmports

partrt-er, the European Union. The pound felll7% on Friday

after Frime Minister Theresa Mafs ruling Conservative Party failed to secure enough seats in a snap general election to alone form a government.

Global economists are debat- ing how much exchange rates affect trade for developed na- tions. Two recent papers, from tre World Bank and the Organi- zation for Economic Coopera- tion and Development, found movements in exchange rates had a declining impact on trade in several advanced economies.

The OECD paper said a plunge of sterling in 2008 and the yen's decline against the dollar in2012 had little impact on trade. The study said evi- dence suggested companies had become more embedded in global supply chains. Be- tween 1995 and 2011, the im- port content of exports rose from L4.9o/o to 24.3o/o among OECD nations.

In May, the Bank for Inter- national Settlements published

new mathematical models for estimating real effective ex- change rates, one measure of the strength of a currency. It said without taking into ac- count deep global supply chainq standard exchange-rate models "are increasingly be- coming obsolete."

Academic debate Other economists have re-

sisted the idea, including a team at the International Monetary Fun{ which came to a different conclusion and found "little evidence of a weakening in the effects of ex- change rates over time.,,

In its analysis, the IMF sug- gests a significant currency depreciation-where curren- cies weaken by at least l}o/o in advanced economie s, or ZO% in emerging ones-results in a 10% rise in export volumes over five years.

The IMF had some caveats. The paper argues the impact

example following a recession. It also suggests that financial crises dent companies, ability to take advantage of a depreci- ation, because of the lack of available credit.

'tn general, however,, the au- thors conclude, .,the role of flex- ible exchange rates in facilitat- ing the resolution of trade imbalances remains sighificant.,,

Since Britain,s vote to leave the EU, consumers abroad have been bulang more British products. In the six months through April, the most recent month for which the U.K.,s Of- fice for National Statistics has published data, goods export volumes increased B.t% from the year-earlier period. Over that same period, import vol- umes rose even more, by 4.9%.

"We are not yet seeing a notable narrowing of the [trade] deficit," the Office for National Statistics noted in its latest report.

For some exporters such as Scofland's whisky industry the pound's fall has been pure good news because most of what goes into a bottle of whisky is produced locally. The Scotch Whisky Associa- tion says exports increased 4% last year to over f4 billion.

Most U.K. manufacturing in- dustries, however; can no lon- ger rely on domestic supply chains. In 2015, manufacturing represented 9.8% of the U.K.,s gross domestic product, doltm troml4.7o/o in 2000. tn the U.S., by comparison, manufacturing represented lZ.Bo/o of the GDp in 2015, andLS.So/oin 2000.

As U.K. manufacturing de- clined, seryice industries grew and now are responsible for 79o/o of GDP. Those industries are less sensitive to changes in exchange rates. In the services sector, the U.K. runs a trade surplus that grew to 5.4% of GDP at the end of last year. For London's huge financial sector, sterling,s tumble has Iittle benefit because business is often denominated in other

currencies and demand for service industries tends to be lgss price sensitive.

Trade in goods, however, is an entirely different story. The U.K. deficit in that area has ballooned froml.6% of GDP in 1995 to 6.4% last year. It has kept risilU despite imports be- coming more expensive and exports more competitive. This year's goods deficit, +Iernrrcrh Anril ic CAr 9, hillinn

---Sonre economists have lbng been skeptical of the idea that trade can be shifted bY cur- rency depreciation in the lon- ger ter1n. As a currencY weak- ens, the price of imPorted goods rises, raising inflation.

"Don't believe that Britain is going to depreciate itself out of its current account im- balances," says Willem Buiter, chief economist at Citigroup Inc. and a fbrmer member of the Bank of England's rate-set- ting committee.

Expensive Fish To make matters worsg,

Britain has become so reliant on imports to stock its stores that a weaker pound has in- creased inflation, making life more expensive and curbing consumer spending.

Britain now imports more than 60% of its fistr. The pound's fal trigeered a 15% overnight jump in prices for t}te crates of cod and haddock that Mike Woods buys from the,docks of Grimsby, in northern England. That cost his food Processing company, Albert Darnell Ltd., an additional t15,000 a week.

Like other food manufactur- ers, Mr. Woods is passing on that increased cost to consum- ers. Fish and chips have be- come more expensive at the St. James Fish Restaurant in the center of Grimsby. 'We get people complaining now," saYs waitress Eve Barrow.

Retail prices of cars, shoes and potato chips have risen. Last October, an increase in the price of Marmite, a stickY Yeast spread beloved by the British, triggered front-page headlines. Economic growth in the U.K. slowed in the first quarter of the year, with higher Prices hurting consumer sPending.

While more expensive im- ports should presdnt oPPortu- nities for British manufacflrers and suppliers to step in, it will take time for industry to adjust.

Around 80o/o of the timber used in U.K. construction is unported mainly from Scandi- naviA according to the Timber Tr4de Federation. It isn't easY for Britain's construction in- dustry, which is resPonsible for around 7o/o of GDB to shift quickly to domestic suPPliers.

Keith Ainslie of James Jones & Sons Ltd, the U.K.'s largest sawmill, says the firm's main plant in Lockerbie, Scotland is already "working full tilt." Pro- cessing more logs would mean brrilding another sawmill, a