Why having a trade deficit doesn’t mean a good free trade deal.

Something I’ve seen being said a lot is that because the UK a high trade deficit it means the UK can get a good free trade deal with Europe.  The logic behind the statement sounds sound (ayy), that they want to carry on exporting stuff to UK, which they currently do and if tariffs were placed on imports from Europe it would be bad for Europe because it would increase the price of imports of Europe, therefore making them less attractive.  However, it is important to recognize that the demand of what we import might be fairly inelastic to changes in price, something that is especially likely to be the case if there aren’t many substitutes (alternatives) to the goods and services we import, and the alternatives would generally be importing from elsewhere, something that is likely to be more expensive because of higher transports costs, and as of yet no free trade deals negotiated between the United Kingdom and these other countries.

In short: The UK being a net importer doesn’t mean the UK will get a good free trade deal.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s