In the below article, Patrick Minford writes in a personal capacity.
In the latest discussions on the Brexit Withdrawal Agreement and Political Declaration (WAPD), two views have emerged about the UK’s future choices. One, which I will call the lawyer view, is that once signed, the WAPD binds the UK indefinitely; this view is held by many of my friends and Brexit allies who are largely lawyers and as such tend to believe that the letter of the law will prevail. The other, which I will call the realist view, is that it can be ‘evolved’, to use a word popular with some politicians, in line with the mutually evolving interests of the two sovereign parties, the EU and the UK. The latter view is the one generally adopted in the economic analysis of international treaties, as the following quotation from a recent paper in a leading economic journal makes very clear.
At the national level, such conflicts [over payment for/usage of public goods] between individual and collective rationality can be resolved by the intervention of the government (Demsetz, 1967). At the international scale, however, there is no supranational authority that could coerce states into adopting efficient policies if they run counter to national interests. Filling the void are international agreements. Under the terms of the Vienna Convention on the Law of Treaties, a state that ratifies a multilateral treaty chooses partially to surrender its sovereignty and to subject its policies in a specific domain to the rules and prescriptions of the treaty. In so doing, sovereign states agree to coordinate their policies in mutually beneficial ways. By the very nature of sovereignty, however, the agreement is fundamentally non-binding and states can always withdraw from it. Therefore, the fact that public good provision is implemented through an international agreement should not change a country’s incentives to contribute per se — unless the treaty alters the country’s incentives to cooperate in other ways. (Wagner, 2016)
The point of economic analysis of treaties therefore is that a sovereign state only continues as a party to any treaty if it remains in its interests to do so. Therefore one must analyse treaty development over time with reference to how these sovereign interests evolve; and how at any time the sovereigns reach an accommodation based on their mutual interests. The basic reason, as explained in the quotation, is that there is no supranational power that enforces treaties in the way that a national state, with a monopoly of force, enforces domestic law.
The realist view is therefore asserting that once the UK is out of the EU, how it deals with the WAPD is a matter of subsequent choice and negotiation with the EU, which also has freedom of the same sort. Anyone supporting the lawyer view must therefore demonstrate that the WAPD remains an agreement that it is in the interests of both sides to maintain in the same form. It is not sufficient to say that because it has been signed it is indefinitely binding; this would only be sufficient if there was a supranational power that could enforce this, and I shall assume it as obvious that indeed there is no such power. In a recent posting on the Lawyers for Britain website my old friend and longtime Brexit ally, Martin Howe, argues that the Treaty of Utrecht binding Spain into Gibraltar’s status illustrates that treaties bind long-term. However, in fact this well illustrates the point about self-interest. Spain, like the UK, has had a strong interest in Gibraltar not accidentally becoming a casus belli, much as the Falklands, with a population similarly determined to remain British, became, at great expense to both the UK and Argentina. Ceaseless ongoing diplomacy on both sides to accommodate mutual complaints has found the Treaty a useful figleaf.
In the rest of this piece I will discuss what the interests of the UK and EU are and how, if at all, they might evolve, and with them the UK/EU future Treaty relationship. This type of analysis is a branch of game theory, which can involve highly complicated mathematics, as in the paper cited, but fortunately not in this case here.
Current UK and EU interests and the Withdrawal Agreement
Based on economic analysis within a rather standard World Trade model and other models described in Should Britain leave the EU? An economic analysis of a troubled relationship by Minford et al (2015) I suggest the following broad interests of the EU and the UK:
The EU: for the EU the status quo is optimal. The UK contributes 10% of the EU budget. Its food and manufacturing industries sell to UK consumers at 20% above world prices because the Customs Union places trade barriers of this tariff-equivalent value against products from the rest of the world. EU regulations prevent UK practices that would reduce UK costs and so undercut EU competition, driving down margins. Unskilled EU workers can be exported to the UK labour market where their wage is supplemented by the UK taxpayer by about 20%.
The UK: for the UK the optimal policy is abolition of protection against the non-EU; this ‘free trade’ policy eliminates the 20% premium paid to EU producers of food and manufactures and it also lowers consumer prices, pushing up productivity via trade competition. At the same time the UK would want to sign a Free Trade Agreement with the EU that keeps the current free access with zero tariffs between them; nevertheless it turns out that any tariffs or equivalent that are imposed will benefit the UK and be paid by EU traders, because UK prices of both imports and exports are set by world prices, so UK tariffs must be absorbed by EU exporters while EU tariffs must similarly be absorbed by EU importers. It follows that although the UK would be willing on the ‘good neighbour’ principle to sign an EU-UK FTA, it would strictly speaking be better off under WTO rules with no deal.
These descriptions of economic interests take no account of current political pressures. A natural question is: given its interests why on earth did the UK Government sign up to the WAPD? This effectively makes the status quo the most achievable agreement, given that the backstop endows the EU with effective veto power over anything it dislikes; under the backstop the UK effectively stays in the EU as now until the EU deems there to be an agreement.
The only way to account for this is in terms of the votes in Parliament. With a part of the Tory party led by Philip Hammond having a Remainer view of UK interests – that is wanting protection for reasons of preserving current jobs (notice not gaining the most jobs in the long term as would occur under free trade etc), following vested interests like the CBI – the Government of Mrs. May seems to have assumed that only the ‘soft Brexit’ WAPD could get through Parliament. Similarly, it assumed that Parliament would not support No Deal, because this too would sacrifice some current jobs to a free trade strategy under WTO rules; as a result the Government did not prepare for No Deal and so lost its only bargaining counter with the EU so that the WAPD failed to favour UK interests. As a result, the WAPD too cannot get through Parliament because the ERG Conservatives and DUP votes oppose it.
Now Mrs May is trying to get Labour votes to push through some even ‘softer’ WA, with a PD promising EU customs union in some shape or form. Hence the EU have not had any difficulty achieving a WAPD that favours its interests, because of parliamentary politics. Add to this that the EU was in any case determined – due to its own politics – to show that exiting countries get a bad deal, to discourage others. It is clear that the politics of the divorce situation was bound to produce a bad deal from the UK viewpoint. One does not need to go further and accuse Mrs May of being a closet Remainer, which she may well be, to account for what has been agreed.
The Economic Analysis puzzle
How those Remainer ideas took hold in the face of strong economic arguments to the opposite effect, as set out above, for the long-run gains of Brexit, is rather baffling. As I explained in a recent paper in World Economy, Remainers and their economist allies (e.g. Breinlich et al, 2016) used ‘gravity theory’ to argue that leaving the EU would be damaging to the UK and that gains from free trade with the rest of the world would be small. However, the ‘gravity models’ they used did not obey the canons of good general equilibrium modelling, in which all causal factors are simultaneously analysed for the effect of a major policy change like Brexit. All the gravity models were ‘partial equilibrium relationships’ in which trade, GDP, FDI and productivity were separately related without any overall inter-linking.
This approach was originally – in 2016 – also adopted by the Treasury; but at the end of 2017 the Treasury for this reason finally abandoned it, in favour of a full general equilibrium model, the GTAP model, bought in from the Purdue University Trade Modelling Project. This was used to reevaluate Brexit in the Cross-Whitehall Civil Service Report of that time. Given the strong Whitehall bias against Brexit the new model was given assumptions that produced similar negative results to the previous ones. These consisted of a) few and limited FTAs with the non-EU world; and b) large border barriers, even with an EU FTA, between the UK and the EU.
However, plausible alternative assumptions reverse the Brexit effect on GDP under a WTO No Deal for example from highly negative (-7%) to firmly positive (+3%).These assumptions are that the UK uses FTAs with the non-EU to eliminate all trade barriers on goods against them while also gaining wide market access; and that it signs an FTA with the EU that prevents any new barriers, or if it goes to WTO rules then only tariffs spring up at the border, other interferences being illegal under WTO obligations.
As this debate has unfolded between our critique and the Treasury, academic economists espousing the previous gravity methods have stayed strangely quiet while the Treasury dropped their methodology. Meanwhile we published another paper in which we tested a full ‘Computable General Equilibrium’ (CGE) model with gravity mechanisms against a plain Classical CGE trade model without them, to see how well each matched the UK trade facts. Using an elaborate and thorough Indirect Inference test we found that the gravity version was strongly rejected while the Classical one fitted the facts. Furthermore when we did the Brexit policies on the Gravity version the effects were much the same as with the Classical, our main tool; this was because Brexit gives gains with the rest of the world while not much disturbing our relations with the EU and so stirring up the negative gravity effects. Therefore it is clear that the anti-Brexit claims based on the gravity approach are invalid.
Unfortunately in the present fevered atmosphere, calm academic debate cannot take place; it is reminiscent of wars of religion where each entrenched side only wants to hear confirmation of its prejudices. One of the side benefits of Brexit occurring is that people may move on to normal technical discussions about optimal UK policies.
The way forward in Parliament
There are now three main parliamentary scenarios. In two of them, one or another WAPD – Mrs May’s or some even softer one agreed with Labour – gets through Parliament. The UK then leaves the EU in these two scenarios, initially for the transition period, as soon as either gets through.
In the third, there is no WAPD agreed and the possibility strengthens of a second referendum with Remain on the ballot paper, leading to either no Brexit or a renewed demand for Brexit. This third scenario is one in which Brexit uncertainty continues for a year or more, with unknown political consequences, given that the Leave voters in the first referendum would feel betrayed. This third scenario will only be welcomed by Remainers determined to reverse the democratic referendum decision. From a Brexit viewpoint, the only hopeful outcome would be a new Conservative leader and government determined to change the WAPD and get it through Parliament before exit. But how could this be achieved without an election to change Parliament’s composition? Also, what would be the odds on the Conservatives winning such an election, given the fury of the populace with the Conservatives for failing to deliver Brexit? Such hopes look forlorn.
Scenarios 1 and 2, if Brexit occurs: What of UK and EU interests post-Brexit?
In this section I ask what, given we have a WAPD as described, opposed widely by Brexiteers, is likely to occur if, as seems probable, Mrs. May steps down and is succeeded by a Brexiteer Conservative leader? Such a leader is likely to agree with my account above of UK interests. If so, what can such a leader do, if saddled with the WAPD?
Under the realist view espoused by economic analysis, this leader’s government moves to re-open bargaining with the EU. This would be done via normal diplomatic processes, in which the EU would face a possible general lack of UK political cooperation in a wide array of areas, including key ones like security and military matters; also the WTO option would be reactivated as a ‘walk away’ trade strategy, should the EU be unwilling to move away from its status quo aims.
The UK having left the EU after resolving basic administrative issues such as citizens’ rights, aviation/transport/visa agreements, there would probably be little appetite to revisit these issues; and the focus should be on the trade relationship quite narrowly. Nevertheless were it to be widened, the new government would make active preparations for a breakdown in these areas.
At the same time the UK would proceed to negotiate FTAs with non-EU countries, informing them of their aims on EU relations. These would be widely welcomed, as we already know.
How would the EU/UK bargaining go from here? We can think of the ‘game’ now as a series of proposals and counter-proposals. Start from the opening WAPD ‘proposal’ for the status quo. This violates UK interests radically, breaching its basic ‘red lines’. The UK counter-proposal is to walk away to WTO rules and No Deal. This UK counter-proposal damages EU interests radically, as we have seen: they face world prices in the UK market and tariffs in both directions are paid by EU traders. In order to counter this the EU now offers an FTA: Canada+ which consists not just of zero barriers on goods (Canada) but also the plus of mutual recognition in services where EU interests are served by free trade, given a wide reliance on UK service industries. The UK wants either Canada or Canada+ more or less indifferently as its service industries are all highly competitive around the world. As noted earlier, while No Deal gives strictly better gains, the UK is likely to agree to this proposal for the sake of neighbourly relations.
The bargaining round, which may well take a few years to play out, is therefore likely to be resolved by Canada+. We can essentially rule out any other resolution because all other alternatives leave one side unacceptably badly off – beyond its red lines – or can be improved on by one side without making the other worse off.
What I mean by ‘unacceptably’ is literally that it will not accept it in the long run, when by walking away or co-operating it can avoid it. The EU can avoid No Deal by co-operating. The UK can avoid the status quo by walking away.
All this is illustrated in the following diagram: the top line shows how the UK ranks all options, with No Deal the best; the second line shows the EU rankings, with the status quo the best. Each side’s red lines of unacceptability are marked out on each side. Any resolution must be inside these. Canada+ within these is better than Canada for the EU and an equals with it for the UK. So Canada+ gets chosen.
Notice that all this diplomacy is carried out between ‘consenting sovereigns’. Neither will bring in outsiders because no outside power has jurisdiction or indeed wants it. In so far as third parties have preferences, they tend to favour the UK as they typically want to agree FTAs with the UK. As for the WTO, it allows states to negotiate FTAs freely; and in general favours all agreements that in net terms reduce trade barriers, just as will occur under the EU-UK renegotiation.
The need for a new Conservative leader and government
In order for this new diplomacy based on the UK’s true economic interests, not sandbagged by Remainers within the tent like Hammond and Co., there plainly needs to be a new Conservative leader and government, fully seized of the Brexit case for free trade and so on. The current leadership/government has proved that it has neither the understanding nor the will to pursue the UK’s true interests. Without it changing no progress along the lines discussed here is possible.
It is now very likely that the Conservative Party will change its leadership, if only for reasons of pure survival. With the agreed extension, the Conservatives face carnage in the local elections and if the European elections take place, annihilation in those. This will inform the party of how unpopular its failure to deliver Brexit has made it. Its best hope then is for Mrs. May to go and for a new leader to chart a new direction, while making it clear that the new government rejects and regrets the old government’s failed Brexit agenda.
What are the implications of the realist view for parliamentary votes?
MPs now have some time for reflection during their Easter recess. They need to ponder the effects of their votes. Any MP that wants to avoid the chance of that third scenario of possibly No Brexit needs to consider voting for one or other WAPD. With either of them, Brexit occurs and the renegotiation can be launched under a new Prime Minister.
An ERG Brexiteer will prefer Mrs May’s original WAPD since it does not contain extra ‘soft’ commitments put in to satisfy Labour. These become yet another element to be renegotiated. In principle that too will be jettisoned; but it adds complication.
A DUP Brexiteer will remain nervous about the backstop in Mrs May’s WAPD; and could be less nervous with a softer one including a customs union because with that the backstop does not come into play. Nevertheless a DUP MP should reflect that none of these will survive renegotiation and should not therefore be unduly concerned. What it really needs from Mrs May and her potential successors is a guarantee that whatever is renegotiated it will never include differential treatment for Northern Ireland, or indeed any other devolved part of the Union. But they should feel confident on this: the Conservatives have been robustly and consistently a unionist party.
It should be noted by both these groups that in opposing any WAPD they are playing the role of ‘useful idiots’ to Remainers who want no Brexit, leading to a second referendum.
When one turns to Labour MPs and Mrs May, both involved in negotiations over a softer WAPD, they should reflect that their new WAPD causes both sides difficulties – Mrs May because it infuriates most Conservatives, Labour because it will infuriate the substantial Labour group that wants a second referendum rather than any sort of Brexit; but at the same time achieves no extra long-term ‘softness’ in the outcome, as the added-on soft elements will simply be the first to go in the inevitable renegotiation.
Reflection on all sides should therefore have the effect of terminating the May-Labour negotiation while logically inducing ERG and DUP Brexiteers to push the May WAPD over the line.
The realist view of post-Brexit affairs clearly implies that the UK, once it is out of the EU will behave like any other sovereign power and see that its foreign relationships evolve to suit its interests. So far, these have been stitched up in talks with the EU due to a Remainer group of Tories who have opposed the Government’s Brexit policies in favour of industrial vested interests, in alliance with Labour opponents, and undermined its bargaining position vis-à-vis the EU which was in any case politically determined not to agree a good trade deal. No sovereign state could put up with this sort of stitch-up in the long term. This piece has described how a new government, fully seized of the UK interest in free trade and domestically set regulation, besides control of borders and the ending of budget transfers to the EU, will have both the incentive and the scope to achieve a logical renegotiation that reaches an EU agreement tolerable to both sides.
Under this view the key aim for Brexiteers should be to get the WAPD in some form – it does not much matter what form – over the line, so that Brexit definitely happens as demanded in the referendum. Policy in the future will then evolve to meet UK interests.
The British people were told during the EU referendum that a vote to Leave would be a move towards isolationism, that the EU was Britain’s gateway to prosperity and that we should not turn our backs on the rest of the world. Given Britain’s proud history as a seafaring nation and commitment to global trade prior to the establishment of any European Community or Union, this argument fell on deaf ears.
In fact, it was joining the European Union that closed Britain off from the world in many respects and cut ties with allies around the world. With a renewed independence and freed from the shackles of one of the largest bureaucracies on Earth, Britain can embrace the wider world.
The Commonwealth of Nations
Advocates of closer ties with Commonwealth countries are often disregarded as nostalgic for the British Empire. Whilst it is true that the vast majority of member countries were former colonies or dominions of the Empire, the Commonwealth today is a modern and flexible gathering of 53 countries with significant cultural, diplomatic and historic bonds. This community of nations now represent a third of the world’s entire population, with some of the fastest-growing economies in the world.
Where the Commonwealth differs significantly from the European Union is that, despite the impression that having a monarch at the head of the organisation may give, there is nothing authoritarian about the Commonwealth. The Commonwealth lacks the rigid structures of the EU and instead is valued by members because membership invites – and does not force – closer ties.
Commonwealth countries are respected as autonomous; sovereign nations voluntarily agree to work together on various areas of policy. These policies are discussed at the annual Commonwealth Heads of Government Meeting (CHOGM), which have thus far focused on shared goals on climate change, human rights and the promotion of peace and democracy.
Britain’s membership of the EU has overshadowed its commitment to collaborating with Commonwealth nations. With such a strong emphasis placed on diplomatic relations with the European Union in recent decades, many young Britons are unaware of the UK’s leading role in the modern Commonwealth.
Trade with Australia, CANZUK and the Commonwealth
Before joining the European Economic Community in 1973, Britain enjoyed a close trading relationship with Commonwealth countries, as natural allies and partners. When the news reached Australia that Britain was turning its back on the Commonwealth in favour of the EEC, there was a strong backlash and sentiment of betrayal. In the decades since, both of our countries have changed. Britain has become eurocentric in its thinking and trade – and has allowed the European Union to take decisions on her behalf. Australia has turned to Asia, with over 66% of its exports going to the region. Given that so much has changed for both of our countries, can Brexit restore the friendship that once was? Can Britain now re-engage with Australia, and with the wider Commonwealth The answer, I hope, is yes.
The UK is right to prioritise trade negotiations with the EU at this early stage, but once that arrangement is settled, there will be a huge opportunity for Britain to pursue free trade agreements with countries with whom Brussels has failed to negotiate a deal. Trade negotiations don’t need to take as long as EU talks traditionally do, because most agreements don’t require the approval of 27 nation states. In fact, the US-Australia FTA, for example, was concluded in less than two years.
A free trade agreement with Australia isn’t just a possibility, but something that our governments are working towards. On a visit in London, former Foreign Minister Julie Bishop declared that both the British and Australian governments “stand ready to agree a free trade agreement as soon as circumstances allow.”
Other Commonwealth countries such as Canada and New Zealand have also expressed an interest in a Free Trade Agreement with the United Kingdom, and there have been proposals for a free trade area or zone between the United Kingdom, Australia, New Zealand and Canada. Unlike a customs union, a free trade area between CANZUK countries would remove trade barriers internally without binding the four nations into a collective external tariff or customs policy. Britain would still be allowed to negotiate its own trade deals with other countries, whilst improving trade relations with its closest allies.
Whilst negotiating deals with Australia, Canada and New Zealand would be the obvious starting point, because of the political goodwill shared between nations, there are also longer term opportunities for agreements to be made with other Commonwealth countries with fast-growing economies, such as India and Singapore. Although many of these countries are at a distance geographically, some researchers have noted a ‘Commonwealth Effect’, which is a phenomenon describing the uniquely strong trading relationship that exists between member countries. A report by the Royal Commonwealth Society concluded that:
“The value of trade is likely to be a third to a half more between Commonwealth member states compared to pairs of countries where one or both are not Commonwealth members. This effect can be seen even after controlling for a range of other factors that might also explain trade patterns.”
It’s important to point out that advocating a closer trading relationship with Commonwealth countries doesn’t imply that these trade agreements would act as a replacement for Britain’s important trading relationship with Europe. Britain can and should aim to continue a close trading relationship with the EU, whilst also seeking opportunities elsewhere. In the long term it must be considered that growth forecasts for EU economies are in many cases quite dire, whereas the majority of Commonwealth countries are set to see their GDP ranking rise.
It’s also crucial to recognise that these opportunities are only possible if Britain leaves the EU’s Customs Union. An ideal arrangement would be a Canada plus model, whereby the UK Government leaves the EU with a similar Free Trade Agreement to the Canada-EU FTA, but maintains Britain’s independence from the EU’s Single Market and Customs Union.
Uniting the Anglosphere to fight terrorism
It is often forgotten, and somewhat ignored by history lessons in Britain (which now prefer a more European centric version of events), that in two World Wars Commonwealth soldiers – including thousands from my home country of Australia – crossed the seas to come to Britain’s defence. The established peace in Europe rests on the shoulders of many of those soldiers, whose stories have been left out of the European Union’s propaganda about being the sole custodians of the peace in Europe.
The European Union, which was formed many years after this peace was secured, did have a role to play in establishing a good trading relationship between countries on the continent. But it was not a trading arrangement that defeated the Nazis. For a period of time Britain and her Commonwealth allies stood alone to face down Germany, with the help of the United States and Russia. When the threat of the Soviet Union seized the continent, it was the United States, Canada, and individual Western European nations that established the North Atlantic Treaty Organisation – not the European Union.
Those who attempt to position the EU as the sole defender of peace in Europe are disingenuous historical revisionists. In fact, there is an argument to be made that moves towards federalisation and the encouragement of mass immigration has fuelled divisions within European countries. There is a growing dissatisfaction and anger amongst citizens on the continent, and increasing civil unrest, in response to the EU’s handling of the migrant crisis and on the further centralisation of democratic powers. Far-right parties are gaining traction in countries such as Hungary, Germany, Sweden, Poland and Italy.
Mainstream political parties are losing the faith of voters because they are invariably pro-EU and refusing to address concerns about immigration. These mainstream politicians can’t advocate EU membership without a recognition that there is nothing a national government can do to change its immigration policy, which is fuelling the popularity of extreme far-right political parties. The EU parades as the saviour of Europe but contributed nothing to peace settlements or NATO, and is in fact fostering divisions and tensions in member countries by asserting dominance over national governments.
However, the greater concern to Britain is the establishment of a European Defence Force. Britain has signed up to several agreements with the EU which would obligate the UK to pool defence resources with EU countries after Brexit and, even if withdrawn from these agreements, it is still of great concern to the Anglosphere that the EU are persisting with a defence union that would duplicate, and essentially undermine, NATO.
It appears that in response to the United States urging European countries to meet their NATO spending requirements, the EU has decided instead to divert funds into a defence union excluding America. Britain must be resolved to separate itself from this vanity project, and encourage the EU to instead call on member countries to meet NATO spending requirements.
Of course, Britain’s closest and longest lasting security partnerships have been with Commonwealth and Anglosphere nations. The Five Eyes Alliance – one of the most comprehensive alliances of its kind – is an intelligence sharing network bringing together security agencies from the UK, US, Australia, New Zealand and Canada, who together represent over 40% of global defence spending.
This high level of trust and co-operation on intelligence matters is reliant on an incredibly close cultural bond and commitment to a set of shared values. At a speaking engagement in London on the future of the Five Eyes Alliance, Former Prime Minister of Australia John Howard said:
“It’s hard for me to think of five countries in the world that comfortably relate to each other, when it comes to fundamental democratic values… There is something about the intimacy of the relationship and it rests on the fact that when the chips are down, the Five Eyes participants trust each other on a political and cultural level. Beyond the level of trust that is found with other countries.”
Leaving the EU is an opportunity to strengthen this important partnership without interference from European partners. The former head of the CIA, General Michael Hayden, noted in 2016 that the EU often ‘gets in the way’ and, and the UK must be mindful that any commitment or obligation to collaborate on intelligence or with the European Defence Force could jeopardise the exclusive and restricted nature of the Five Eyes relationship.
When it comes to tackling extremism, the Commonwealth Heads of Government meetings have discussed further collaboration; the 2018 April CHOGM Communique encouraged member countries to “actively share expertise and best practice” in countering violent extremism, which is certainly a welcome start. But with Brexit bringing into focus Britain’s role as a global power and leading voice in the Commonwealth, these annual meetings could be an opportunity to set clearer and more ambitious goals for defence and security co-operation.
The vote to leave the EU wasn’t about turning inwards, but a decision taken about who is in charge of Britain’s destiny. Outside the EU’s Customs Union, it will be up to elected British politicians to decide which countries to pursue free trade agreements with, and provided the UK is not tied to the new European Defence Force, it will be Britain – not the European Union – that decides which allies to collaborate with on matters of defence and security. These opportunities are within reach, if only those who believe in an empowered Commonwealth and an empowered Anglosphere continue to advocate them.
This article is an extract from Clean Break, Bright Future: Leaving the EU, Rejoining the World, published by the Freedom Association’s Better Off Out campaign
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The current political turmoil and constitutional crisis has so many twists and turns that it makes House of Cards look pedestrian.
Of course the real issue comes down to what happens when – rather than if – the proposed deal is voted down on tomorrow, 11th December (or even dropped).
Here there is a clear gap opening up between media reports and hard legal reality – what the actual effects are of the political manoeuvring of Dominic Grieve, Sir Keir Starmer and their merry conniving bands. There have been desperate media reports that ‘no deal’ is off the table, when it is actually remains the ‘default position’ as Andrea Leadsom told Radio 4 just last week.
Let’s assume Conservative MPs think there is enough turkey on Christmas menus not to be part of the required two-thirds majority needed to vote for a General Election, and that the EU have indeed ruled out any major renegotiation.
The bottom line is that the various options being desperately pushed by those who want ‘anything but a true Brexit’ are just not viable. There is:
- ‘Norway Plus’ – even worse that the slavish EEA, which adds back membership of the customs union, thereby killing all future UK trade deals, and with no control of immigration, no say over EU laws, and large payments;
- A ‘Second Referendum’ – with its totally confused offer: ‘tell us if this final 2,000-page deal is better than staying in the EU when we’ve already left. Oh, and by the way you will have to join the euro and lose the rebate’. Pointless too in that Leave is predicted to win again; or
- Extending Article 50 to allow more muddle time – which will either mess up the EU by landing the Brexit issue right in the middle of European Parliament elections in May or mess up all the groups, chairmanships and procedures of the European Parliament in the farcical situation of British MEPs being elected for a few months.
But all such amendments to the motion are not legally binding anyway – they can only be advisory. They might bring political pressure, but they do not have legal effect. As the Commons Chief Clerk, Sir David Natzler, confirmed: whatever MPs vote on by way of motion “has no statutory significance”, as they do not constitute “a vote on whether to accept or reject no deal.” That requires new legislation. The actual law – in the EU Withdrawal Act – states clearly that we will leave on 29th March 2019.
Given that reality, and bearing in mind how rash it is to try to indicate a way forward in this maelstrom, this is what I propose now as the best next steps:
1) Assuming the vote fails on 11th December, or is put off, I believe the Government should make a statement immediately saying that preparations for a ‘no deal’ option – better called a ‘Clean Global Brexit’ or ‘World Trade Deal’ – will go into SuperDrive. Sorry, but defer Christmas!
Where there’s a will, there’s a way: in the Falklands War, the Ministry of Defence managed to put together a task force of 100 ships in just 48 hours. We can manage this process, and thousands of civil servants have been on the case for years. Like the Millennium Bug, claims of Armageddon and planes falling out the sky gave way to nothing happening on 1st January 2000.
2) The UK should then go back to Brussels, not to renegotiate this current draft Withdrawal Agreement, but to agree a pared-down, bare bones emergency series of bilateral agreements covering only the essential ‘must haves’: aviation, customs, citizens’ rights, medical products, European Investment Bank assets etc. The beauty of this is that if one agreement falls, then the others are not lost. The DUP’s Arlene Foster has proposed bilaterals. These bilaterals could be agreed by Westminster and the EU by March, and would any sane MP or MEP dare to seek to derail any such vital preparation in these circumstances? They should hold all further Westminster business, such as the Immigration and Trade bills, that may be hijacked.
3) The UK should also formally advise the EU that it wishes to accept the offer made not once but three times by the EU: that of a SuperCanada/CETA+++ Free Trade Agreement with 100% tariff- and quota-free access to the EU Single Market plus comprehensive services (first offered by Donald Tusk on 7th March), and which we could start negotiating from the day we become a ‘third country’ – 30th March next year.
We can build on the three pages on trade in the more appealing draft Political Declaration, but drop all notion of a ‘Single Customs Territory’ – the UK must firmly leave the EU’s Customs Union and Single Market. We are in a unique position to negotiate an FTA fast – as all our laws are convergent at present and we don’t have to spend years wrangling over which tariffs to keep or get rid of, as others do.
4) Having initiated moves to agree a SuperCanada FTA, the UK and EU can now jointly notify the World Trade Organisation (WTO) that in the light of working to agree a comprehensive FTA and future Political Declaration, we are invoking Article 24 of GATT (the General Agreement on Tariffs and Trade).
This is important because Article 24 allows us to maintain the same tariff-free access to both our markets without breaching WTO discriminatory Most Favoured Nation (MFN) laws. Article 24 allows “an interim agreement leading to a formation of a free trade area” and allows “a reasonable length of time” – up to 10 years – to negotiate it.
So, we whilst we will need customs declarations under WTO, we will be able to maintain the same zero tariffs as now with the EU – the free trade area will remain. EU exporters to the UK would save £13 billion in tariffs (and our consumers too) and UK exporters £5 billion. We will also be free to lower tariffs for other trading partners as we wish – something specifically excluded in the Backstop. Nor should there be any Non-Tariff Barriers (NTBs) either under WTO agreements.
We can also enact the WTO’s Trade Facilitation Agreement which recently came into force that obliges the EU27 to adopt measures like authorised economic operators (trusted traders), which are part of the solution for the Northern Ireland border issue along with electronic declarations and remote checks away from the border.
5) As a sign of Britain’s free trade intent, we can now immediately initiate full and unfettered negotiations with international trade partners such as the USA, China and India, without these deals being torpedoed by being tied into the EU Customs Union, Chequers or the Backstop. The picture would be clear at last, and not be delayed by unending years of transition. Similarly, we will seek to build on current work to ‘roll over’ the benefits and obligations of existing EU trade deals such as that with South Korea.
6) So, on 30th March the UK can be cleanly out of the European Union and back into the world, with an acceptable and managed World Trade Deal option in place, free of years more wrangling over transitional arrangements, cost demands, alternative models and heightened business uncertainty – and with negotiations underway for a closer SuperCanada trade deal. We can reallocate much of the £39 billion payment lost by the EU to compensate UK-based companies legally in terms of R&D, regional aid and transport infrastructure – helping to stimulate our economy.
Like an operation we know needs doing, let us get on with the surgery quickly and speed up the recovery process.
This is indeed a Clean Global Brexit. Brexit could be over in a few months, rather than drag on for years on end.
And, for all our sakes – both Remainer and Brexiteer – let’s just get it done.
The post How to get Brexit back on track when the Withdrawal Agreement is rejected by MPs appeared first on BrexitCentral.
For some, a key plank of the support for Brexit at the referendum was the impact of uncontrolled immigration into the UK where voters worried about the associated negative impact on their access to public services provision in terms of housing, GP medical appointments, stresses on educational provision, social care and effects on jobs availability. It is often the poorer communities which are at the sharp end of all of this.
The immigration issue is thus central to the fundamental notion that Brexit is about “taking back control” of our borders, our monetary contribution to the EU’s (unaudited) Budget, the right to strike independent trade deals and freedom from subjugation and compliance with EU law and prescriptive EU regulatory requirements. Indeed, concerns about uncontrolled immigration are just not exclusive to the UK as across the EU, there has been a dramatic change in the political landscape in many countries where voters are saying “no” to uncontrolled immigration and “no” to established political parties in Germany, Italy and Sweden to name just a few.
As far as the Remainers are concerned – and as part of the continuing negative drip feed of Project Fear propaganda to thwart the wishes of the Brexit referendum result – immigration control can only result in labour shortages and massive economic disruption as a variety of sectors seemingly dependent on migrant labour, such as the NHS, will come to a halt. Economists for Free Trade (EFT) research has shown that it is uncontrolled, unskilled migration which imposes costs on local communities as well as imposing a cost on the UK’s public purse.
The Remainers tend to conflate the economic effects of skilled and unskilled migration as many studies produce results that rely on the effects from skilled, better-educated and more highly-paid migrants. The EFT research shows the cost of wage subsidies (20% of wages) are paid to uncontrolled, unskilled EU migrants. As Esther McVey, the former Work and Pensions Secretary, correctly pointed out, the Remainers cannot simultaneously argue that Brexit will produce economic Armageddon and mass unemployment while also arguing that the UK will need migrants to fill jobs. For skilled labour, there should be no particular impediments subject to existing arrangements for entry into the UK – and from an economic point of view no dispute about the positive impact of skilled labour in contributing to the UK economy.
Research I have authored for EFT found that in a region like Leicester, which has the densest immigrant population in the UK, the burden of unskilled immigrants costs £287 every year or £6 a week. This equates to around 1 per cent of average UK household disposable income per head. I found that from a national economic viewpoint, it costs £3.5 billion to support unskilled EU immigrants (£3,500 per year per adult immigrant), but “from the local populace viewpoint it is a proportionately bigger cost per resident – one that we are unwilling or unable to compensate for”.
As Brexit negotiations become more fractious and Theresa May’s Chequers Plan seemingly a “dead duck” as it totally transgresses what Brexit is about, any deal – should there be one – needs to be clear on the immigration issue.
The Prime Minister’s obduracy and unwillingness to consider the “World Trade Option” or “Canada+ deal” is remarkable. But you do not need a trade deal to trade. The EU’s biggest trade partners such as the US and China do not have trade deals with the EU and half our trade is under WTO rules anyway. Our biggest trade partner is already the US. We do not have a deal with the US, and such a deal would be ruled out by sticking with the EU, who rule out any independent trade deals under the EU Treaty.
A no-deal on trade would bring a number of economic benefits, saving the so-called £39bn “divorce bill”, freeing the UK from EU protectionism and reducing prices on goods from non-EU countries to the benefit of UK consumers. Professor Patrick Minford has estimated that the net effect of leaving on WTO terms would provide a net boost to the economy of at least 4% of GDP. This would give fiscal space to the perennially gloomy Chancellor of the Exchequer Philip Hammond to deliver a “Brexit bonus”.
The EFT found that by securing a Canada + deal or a World Trade deal with the EU, the poorest households in Britain will be a massive 15 per cent better off due to “a combination of above average falls in their shopping basket prices, the elimination of the costs of sustaining the unskilled immigrant families, and the reversal of the fall in their unskilled wages.”
Thankfully, it seems that the Cabinet is starting to get the message on immigration though, and has agreed in principle that EU migrants will not be given preferential treatment in a post-Brexit world with government plans aiming to reduce low-skilled migration into the UK. Failure to do otherwise simply from a political point of view would mean the Government paying a price at the next election, with the same applying to Labour if it fails to satisfy its Brexit-voting Northern constituencies where uncontrolled immigration is a sensitive issue. Some reports suggest that there might be an element of “horse-trading” where so called “free movement of labour” is traded in in order to obtain a trade agreement. The risk, of course, is that any bending of “red lines” ends up in an unacceptable concession or runs into vetoes from the rest of the EU.
The Migration Advisory Committee (MAC) has just published its final 140-page report on the immigration issue and recommendations for the UK’s post-Brexit immigration system. MAC recommends moving to a system in which all migration is managed with no preferential access to EU citizens but with a less-restrictive regime for skilled workers who typically do not put any downward pressure on average earnings in the economy, subject to the minimum wage, and make a clear positive contribution to the UK’s public finances.
In particular and quite importantly, MAC’s report focuses on the need for a more restrictive policy on lower-skilled migration with a guideline subject to a minimum annual salary as defining “low-skilled” (£30k although this might end up being nearer £20k). This would mean ending free movement but this would not make the UK unusual, as a country like Canada does not have a free movement agreement with any other country yet has managed to secure a trade deal with the EU without being totally subject to the terms and conditions that the EU would like to impose on the UK.
MAC’s report emphasises that the problem with free movement is that it leaves migration to the UK solely up to migrants, with UK residents having no control over the level and mix of migration. In addition, MAC’s empirical findings note that between 1983 and 2017 the ratio of working age EU immigrants to working age UK-born population increased from 1.3% to 7.9%, leading to the report’s conclusion that EU immigration over this 34-year period has reduced the employment rate of the UK-born working-age population by around 2 percentage points compared to a scenario with no EU immigration.
There is evidence of differential impacts across different UK-born groups with more negative effects for those with lower levels of education. Similar effects are found on the earnings of UK lower-skilled workers. A 1 percentage point increase in the EU-born working age population ratio can reduce UK-born wages for the lower-skilled by up to 0.8%. The EFT report The Economics of Unskilled Migration estimated the cost to the average UK worker of supporting EU unskilled migrants at £3,500 per annum with the cost rising further in areas of dense migrant population. Limiting these costs to the public purse relies on controlling unskilled, uncontrolled migration. This is why uncontrolled immigration is a key economic issue, never mind a political one.
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What is going to happen if the Prime Minister’s Brexit deal fails to secure parliamentary support? Are we really facing a catastrophic “no deal” scenario? Very probably not. “No deal” – at least in its extreme form – is so obviously in nobody’s interest that it is very unlikely to happen.
It is much more probable that Brexit will go ahead on 29th March 2019 but that – pending the outcome of further negotiations – common sense and practicality will prevail. Most existing arrangements for trade and other forms of co-operation will continue substantially as they are for the time being. Albeit with some disruption, negotiations to find workable solutions for the future will continue.
Parliament and the UK generally – and the EU27 – will nevertheless have to make up their minds what they are aiming for. So far, the main ways ahead – both for Parliament and maybe for the electorate, if we have either a general election or even a second referendum, have been portrayed as a choice between reapplying to re-join the EU, accepting some variant of Chequers, or “crashing out”.
Not nearly enough has been heard recently of Canada+++. This could be a big mistake because – especially in the new situation in which we may well find ourselves – Canada+++ has very substantial advantages over other options.
First, it has always been the most obvious way of fulfilling the result of the EU referendum and all the promises about honouring its result that were made at the time, thus abiding by the critical democratic decision taken in the June 2016. This approach is very much in line with the policy laid out in the Prime Minister’s Lancaster House speech, before the Brexit negotiations got side-tracked into Chequers by the outcome of the 2017 General Election.
Secondly, with caveats about the Irish border discussed below. Canada+++ is an option which the EU27 have repeatedly offered to us – not least by Donald Tusk in March this year and by Michel Barnier again just recently. It is easy to see why the EU27 should favour this approach. If the UK is out of the Single Market and the Customs Union, the integrity of these crucial components of the EU structure would not be compromised or destabilised. This has always been a primary – and understandable – aim of the EU27 negotiators.
Thirdly, Canada+++ would supply Leavers with pretty well all that they thought they were voting for in 2016, while also providing Remainers with an outcome with which at least the more reasonable among them ought to be able to accept, especially if trade between the UK and the EU27 was on the widest possible free trade basis.
Trade would not be quite as frictionless as “free movement”, but pretty close to it. Supply chains would not be disrupted. It is worth bearing in mind that although 36% of the bought in components for the UK car industry come from within the EU, 21% arrive from outside, imported into the UK on WTO terms.
Fourthly, Canada+++ has a better chance than any of the alternatives of providing the UK with a stable long-term relationship with the EU, reducing differences of opinion and approach to Europe from being a constant source of friction and disharmony, distracting our MPs and many other people from addressing the many problems faced by the UK other than our relations with the EU27.
Fifthly, Canada+++ may provide us with a way of dealing with the Irish border issue. In a new negotiating environment, we would no longer be under the obligation to go along with the concessions made by the UK in December 2017. The UK could then agree unilaterally not to have a hard border, to implement electronic pre-clearance as soon as practical for larger companies, to provide local traders with exemptions, and to recognise that there might be some slippage to start with. If there are no tariffs to collect, this seems a small price to pay to overcome an otherwise intransigent issue.
The reason why Canada+++ has slipped down the agenda is because the Parliament elected in 2017 had no majority for any arrangements which left us outside the Single Market and the Customs Union. Now that everyone can see that trying to leave the EU while staying in either one or both of these constraints simply does not work, the advantages of a free trade deal with the UK outside both of them are increasingly obvious.
Of course, Canada+++ is not absolutely ideal from every point of view. Nothing ever is. But from the perspective of both the heavily divided Conservative and Labour parties, it now looks like a much better option than anything else on the horizon.
The post It is time the Conservative and Labour parties united in support of a Canada+++ deal appeared first on BrexitCentral.
The Today programme on BBC Radio 4 recently gave coverage to Japanese Prime Minister Shinzo Abe’s statement that Britain will be welcomed into the Trans-Pacific Partnership with “open arms” after it leaves the EU. In a bizarre turn of phrase, the BBC presenter described this as a ‘tonic for Brexiteers’.
The referendum – that decisive, once-in-a-generation ‘People’s Vote’ – took place on 23rd June 2016. Whether you voted Leave or Remain is now moot. To quote one MP: ‘We are all Brexiteers now’. The people of this country gave their clear instruction and the Government must deliver on it. Therefore, the BBC was incorrect. What Prime Minister Abe stated was not a tonic for Brexiteers but a tonic for the whole United Kingdom.
Yet from spring 2018 onwards we have witnessed a co-ordinated and unrelenting media assault on Brexit by multinational companies and their confederations. Day after day, the British public and its Government have been subjected to thinly-veiled threats from those corporations and interest groups with most to gain from the status quo. Their arguments about the dangers of Brexit have been allowed to percolate freely down into our national consciousness without any analysis or rebuttal. We presumed the battle was won and thus have surrendered the business argument.
Suddenly Brexit had stopped being a cut and thrust of differing opinions and become a torrent of carefully orchestrated negativity. What was missing was the voice of businesses that were positive and optimistic about the future of a sovereign Britain – the hundreds and thousands of smaller businesses with no lobbying power and fragmented representation who saw opportunity from Brexit as a catalyst for change. So it was that the Alliance of British Entrepreneurs (or, like the Japanese Prime Minister, ABE for short) was founded out of frustration by me and Ed Harden.
ABE set out to give those smaller businesses a banner under which to gather and a mouthpiece to amply their voice. Our great aim was to remind both the Government and the British public that business does not start and end with Airbus and the CBI. In late September, 200 of our business supporters wrote an open letter to the Daily Telegraph in support of a Canada-style free trade deal. We have since, in true entrepreneurial style, grown explosively, nearly doubling in size in a couple of weeks.
We are often asked why we refer to our business supporters as entrepreneurs. In our mind’s eye, it is easy to imagine an entrepreneur as a certain type of person. Someone involved in the tech industry perhaps. Someone modern, disruptive and metropolitan. Indeed, we have a number of supporters who fit those criteria. However, for ABE, being an entrepreneur is about a mindset. To us, entrepreneurship is characterised by adaptability and a positive outlook coupled with a firm sense of self-belief and a willingness to take responsibility. This definition transcends background, sector, geography or gender. As such, we are proud to have the backing of hundreds of entrepreneurs: from the sole traders in the West Midlands to the CEO of a London-based asset manager and all the family businesses, manufacturing firms, haulage companies and fishing boats in between.
Whilst we have had some initial success, we face two great challenges. The first of these is apathy.
Brexit didn’t end with the referendum. That vote was the first shot in a battle that is now being fought hand to hand in the mud with both sides dug in. The public at large are tired by years of political wrangling and are perplexed as to why it is taking so long. Even amongst those small businesses and entrepreneurs who feel passionately about the future of this country many are too busy running their day-to-day activities – investing, training and expanding – to devote time to campaigning. We have tried to counter this by doing their campaigning for them. Seeking their views on a light-touch basis and then doing the leg work to get them heard as one of a hundred voices singing the same tune.
The second great challenge was communication. SMEs don’t have corporate PR firms on eye-watering monthly retainers. Indeed, most don’t even have a separate media department. Even where there was the will to share their view, this was drowned out by the lobbying and closed forums of the big business and establishment set-up. We knew we lacked the resources to broadcast at a conventional level. Instead, using the power of social media and specific, targeted correspondence we have aimed to create enough noise to be heard. Our short-term goal has been to disrupt and interfere with the prevailing message of the big lobby groups. Every time they have a press release ready, we’ll be there putting one of our entrepreneurs forward with a counter that relates to their own business, hitting their statements with real world, real business rebuttals.
We admit that our entrepreneurs don’t and can’t always speak for their thousands of employees. But as the strategic decision-makers for those firms, they have looked at the future and seen a Britain that prospers outside the EU: a free-trading, dynamic Britain whose regulation stays lithe and reactive to changes in the global economy; a Britain that looks resolutely outwards and unrelentingly seeks out new global alliances and partnerships. This Britain cannot exist under the Chequers proposal. ABE will continue to lobby for a Canada-style free trade deal that respects the referendum and allows British business to once again take its place at the top table of global trade.
This great and noble opportunity must not be squandered.
Find our more about the Alliance of British Entrepreneurs at their website
Much of the current narrative regarding the Brexit negotiations goes something like this:
“Brexit is likely to damage the economy in the short term. Even its advocates accept that. They said that even if there is a good free trade deal with the EU we should expect the economy to take a few years to adjust, sacrificing perhaps two or three percent of GDP growth in the process. Now, they hope to get that back over the medium to longer term — Gerard Lyons talked during the Referendum campaign of a ‘Nike tick’ effect. But only a small set of economists, even amongst those that favoured Brexit, denied there would be short-term losses even if we do a good free trade deal with the EU.
“Well, then, if even a deal leads to short-term losses, how much worse must it be going to be in the short-term if there is no deal? That surely must be very bad indeed! Perhaps it could be so bad that it would undermine the Conservatives’ reputation for macroeconomic management, ushering in a Corbyn government in 2022?”
I think it is fair to say that some version of this narrative is near-universal. Even those keenest on no-deal are largely arguing that although no-deal is worse than the best sort of free trade agreement, at least in the short-term, that is worth doing through some combination of political gains and not sending the EU £40-odd billion we don’t owe them.
I think everyone’s wrong here, and I want to explain to you why. A good free trade agreement (something like a Canada+ deal) would be the best outcome for the UK economy over the longer-term — indeed, I cannot believe anything other than a Canada+ type Free Trade Agreement is sustainable for more than a few years. And if we do do a Canada+ deal, then I agree with those that say they expect the short-term impacts on GDP to be negative — we’ll sacrifice 2 percent or so of GDP growth by around 2022.
So, a deal is better than no-deal over the longer-term, and a deal will mean a short-term loss of GDP growth. But where the discussion goes wrong is in assuming that no-deal means bigger losses of GDP in the short-term. What would actually happen is (after we got through the first few weeks, say one quarter, of disruption, which might well include a non-trivial dip in GDP), GDP would grow faster in the short-term (say, the following 12-18 months) than if there had been a deal. Just because no-deal is undesirable for the economy in the longer term, it does not follow that that means we make bigger short-term losses.
Let me explain why. Let’s step through some of what will happen in the economy, once we leave the EU, and compare how that plays out in the event of a deal versus no-deal. First, let’s list some of the effects there will be, as per the following table.
We can see various ways UK imports will be affected, but it should be pretty uncontroversial that increased barriers to imports from the EU post-Brexit will mean fewer imports into the UK, at least in the short-term, as more of UK demand will be met by UK firms and less by EU-based firms exporting into the UK. Over the longer term, perhaps we will do more trade deals with non-EU countries or unilaterally strip away barriers to non-EU trade, and imports will end up unchanged or even higher. But in the short-term, it’s pretty clear we should expect imports to drop. It should also be pretty clear that in the event of no-deal, we’d expect imports to drop by more than if there is a deal.
Again, it should be pretty uncontroversial that Brexit will mean fewer exports to the EU, and probably fewer exports overall in the short-term, and that the impact will be larger if there is no deal than if there is a deal.
So, fewer imports and fewer exports, in the short term. Which effect will be bigger? Well, the UK is a larger net importer from the EU. We import about €4 worth of goods and services for every €3 we export. So if barriers to exporting and importing are fairly similar (as UK policy-makers would surely ensure they would be in most areas), the expected net impact will surely be a larger drop in imports than exports. So from this source, we’d expect a short-term boost to GDP, as net imports fell and the UK’s trade deficit improved.
Next, let’s consider capital flows. There is a great deal of press discussion of UK finance firms or car manufacturers relocating some activity into the EU to avoid barriers to trade. Perhaps there will be some of that (though so far it seems to be mainly talk), but even so, that is part of that €3 of exports going out. What we do not hear about are all the EU-based firms that would relocate activities into the UK to avoid barriers. Since there are €4 of those for every €3 coming in, we should expect that more EU-based activity has an incentive to relocate into the UK than in the opposite direction.
This is not quite so unambiguous as the imports/exports effect. Some firms exporting to the UK will also export to other EU markets and may face economies of scale losses in relocating into the UK, and it is arguable that economies of scale impacts may more often tend to affect EU-based than UK-based producers’ relocation decisions. So there is some interplay between inward flows, reduced imports and domestic investment. But the difference between €4 of exports and €3 of imports is so large that we should probably expect the effect to be positive nonetheless. And we should expect net inflows to be bigger if there is no deal than otherwise.
Next, effects on consumption. These depend upon whether consumers expect the long-term impacts to be positive or negative for GDP, and the extent to which they react to that in the short term. This one is difficult to call. I would guess there would be little change in the event of a deal and a slight drop in the event of a deal.
Last, domestic investment. This includes firms whose investment plans have depended upon our relationship with the EU that will do less investment or even liquidate investment. It also includes firms whose plans depend upon expansions in UK or non-EU activity. I believe it is natural to imagine that, even if the net impact on domestic investment is fairly balanced over the medium term, that will consist of a drop in domestic investment initially, as EU-dependent projects are cut back or liquidated, and the capital then only later being re-allocated to new UK-based or non-EU projects.
That drop in EU-dependent domestic investment is the main reason I expect there to be slower GDP growth in the event of a deal being done. If there is a deal, I’d expect fairly modest impacts on imports and exports in the short-term, and relatively modest short-term changes to capital flows, so the drop-off in domestic investment will probably be the dominant short-term impact, meaning slower GDP growth.
But if there is no deal, these other short-term impacts will be larger. Net imports will fall much more and there will be much larger inward and outward capital flows. So if there is no deal, I would expect those effects to dominate, outweighing the drop in domestic investment in the short run.
Overall, what does that mean? It means that, even though we should expect slower GDP growth in the event of a deal, and even though a deal is better for the economy over the medium term than no deal, if there is no deal then in the short-term we should expect GDP to grow faster, not slower.
I emphasise again that this would be after the first few weeks of drop-off in GDP associated with no-deal disruption. But it would be more than simple catch-up from disruption. It is a reflection of the basic dilemma that net importing countries always face. Free trade is good for economies over the medium to long term, but if a country is a net importer then it tends to gain output, in the short-term, in protectionist scenarios with greater trade barriers. There is no good reason to believe that this long-established basic economic truth should not be expected to apply to the UK in the case of Brexit as well.
The post Why the UK economy should grow faster in the short term if there is no Brexit deal appeared first on BrexitCentral.
Fiscal activism underpinned by a resilient and sound economy was the main message of this Budget. In recent months it became clear the budget deficit had turned the corner and was on a credible improving trend. The Chancellor has taken advantage of this not to pay down debt and achieve a balanced budget sooner, but rather opt for what he called a balanced approach to the public finances. This means spending more, not raising net taxes and instead allowing the budget deficit to persist, albeit at low levels. This fiscal year the budget deficit is 1.2% of GDP and is projected to be 0.8% by 2023/24.
Despite this, the Budget was trying to be all things to all people, and heavily interventionist, with 86 new tax and spending measures.
The Budget confirmed a sizeable net £103.5 billion fiscal boost over the six fiscal years from 2018/19 to 2023/24. Of this, £98.5 billion was increased spending, the vast bulk being the previously announced boost to NHS spending. For four of the six fiscal years, net tax cuts were announced, and these will be particularly large next year at £4.2 billion, led by an increase in personal tax allowances.
The Chancellor stressed a “Double Deal Dividend” but was unable – probably because of the ongoing negotiations – to focus on saying whether there will be any Brexit Dividend. Brexit was the elephant in the room. Of course, it is not just Brexit, but what you do when you leave the EU that is key and that will help deliver this dividend.
I agree with the idea of a Deal Dividend in that once there is clarity about what lies ahead then this will trigger a rebound in investment. Uncertainty over the last two years is likely to have dented or delayed investment plans. The Double Deal, as the Chancellor called it, is that he is keeping back some fiscal fire power in case he needed to act and boost demand in the event of a No Deal. But it is the Brexit Dividend – including how to spend domestically the sizeable sums we send to the EU, as well as delivering a pro-growth economic agenda that is key.
The economy has suffered from a lack of demand. But it also needs a supply side agenda too and the Chancellor was right to acknowledge this. Given this, the economic and fiscal numbers were credible.
The good news is that the budget numbers are on an improving trend. As long as the market believes the projections are credible, and borrowing rates stay low, then the current economic environment provides a powerful dynamic in which the budget deficit can fall further, as it did post-war when public debt plummeted from 240 per cent of GDP. Last year’s debt of 85.2 per cent of GDP was a peacetime high and is projected today to fall to 74.1% by 2022/23.
This Budget was partially aimed at showing austerity is over. The trouble is, there is no clear definition of this, but you tend to know it when you see it. For many, it will mean an end of the squeeze on departmental budgets – and we will have to wait until next year’s Comprehensive Spending Review to see what will happen, particularly to the previously non-ring-fenced areas.
While I am an advocate of fiscal activism, the reality is that the UK needs to save in good times to be able to spend in bad. It did not do this and the financial crisis blew the fiscal numbers off course. Not only did austerity restrain demand at a time when the economy needed it, but also the government then missed the opportunity to borrow at record low rates to fund necessary infrastructure. Now, one could argue tax cuts should be high on the agenda, hence it is welcome that personal tax allowances were raised from next year.
Ending austerity should not mean unlimited public spending. There clearly needs to be ongoing reform, including regional wage policies. Ending austerity should not mean keeping taxes high to fund spending. It also does not mean sacrificing capital spending to fund current expenditure. Thankfully the Budget showed both a desire to avoid further tax hikes, an aim for cuts and to protect capital spending plans.
It is important to appreciate that the margin of error on these one year ahead fiscal numbers is huge. Thus, we should resist the temptation to aggregate forecast changes over the next five years, as it makes little sense to do so. The key is: what happens to growth?
The trouble is the UK’S economic picture is one of low growth, low inflation and, presumably, low interest rates. The UK’s trend rate of growth has previously been revised down since the global financial crisis. At this Budget the growth forecast was tweaked lower by the independent Office for Budget Responsibility (OBR), to 1.3%, and higher from 1.3% to 1.6% for next, and averaging around 1.5% up to 2023.
This leaves the UK vulnerable to any global setback. Vital is what happens to productivity growth and this would be boosted by increased investment and innovation – and it is helpful there were incentives to try and boost these. I would not be surprised if UK growth in 2019 is higher than expected: as consumption could be boosted by rising wages, higher employment and the announcement of an increase in personal allowances from next spring, while a Brexit deal would likely boost investment.
The most striking aspect is that the OBR projects a further 800,000 jobs by 2023, bringing to 4.2 million the net new jobs since 2010. This puts to shame Project Fear’s misplaced projection of massive job losses in the wake of a vote to leave.
Previously I have described the EU as like the Titanic. Despite warnings of impending problems and the need to reform, it will not change direction and we are lucky to be jumping ship. The trouble is, after a Budget like this, and with a Chequers Deal pending, the UK is in danger of becoming like the Marie Celeste – in touch of the new world, it is being left to drift with no-one at the helm. One hopes that once a credible deal is agreed the sense of direction will be clearer.
What about a no deal? Clearly we want to avoid a no deal, but a valid question is that the implied threat on the eve of the Budget that if there was no deal then the Chancellor would have to take action to make Britain universally competitive – including cutting taxes and easing the regulatory burden on firms, as well as to use fiscal policy to provide support to the economy – was a bizarre one. It must surely have been aimed at our EU neighbours, to encourage them to reach a deal.
But one wonders why this is couched in a threat and should it not be the focus of policy now – deal or no deal? Of course, the Chancellor is constrained from pushing this, while the negotiations are ongoing, but it should highlight that the UK should be in a better position once it can determine its own post-Brexit destiny. Of course, this makes it vital we do not box ourselves in with a Chequers-style deal and instead edge towards a free trade agreement like Canada Plus.
Photocredit: UK Parliament/Jessica Taylor
The post Brexit was the elephant in the room as Philip Hammond presented his Budget appeared first on BrexitCentral.
The Chequers proposal had two aims: (1) ensuring frictionless trade and (2) solving the Irish border problem. Its proposal to keep the entire country (not just businesses that trade with the EU) perpetually locked to EU standards in which we have no say, and from which we cannot depart to enable us to agree trade deals with other countries, was totally condemned by both Leavers and Remainers.
The ‘common rule book’ was rejected by the EU for ‘cherry picking’ and undermining the Single Market; and the ‘combined customs territory’ was rejected by the EU which, justifiably, refuses to delegate its tariff collection to a third party. So Chequers was on life-support. The addition of “temporary” all-UK membership of the Customs Union is unacceptable to us without a time-limit and unacceptable to the EU without a backstop-to-the-backstop that could ultimately separate Northern Ireland from the UK. Finally, the idea of an extended transition (that wouldn’t necessarily solve the Irish border problem) has been universally rejected by all wings of the Conservative Party.
Even if Theresa May managed to pile in enough further concessions to solve the Irish border problem (if it really is a problem, not just a political device), that wouldn’t be the basis for a deal unless we were prepared to sign the Withdrawal Agreement and contract to pay £39 billion with no understanding of the nature of any future trading relationship (since Chequers has been rejected by the EU). Not even Mrs May – surely – would do that?
So, fortunately, through her successive and futile concessions to the EU, Mrs May seems to have put the final nail in the coffin of the Chequers plan, and left the way open for a fresh and possibly more sensible approach.
Boris Johnson’s Plan B or Canada+++, or whatever you want to call it, has been dismissed by critics, including Mrs May, as ‘fantasy’ because it does not solve the Irish border problem. Up to now, Mrs May has been able to claim that ‘only my plan can solve the Irish border problem’. That argument is now demolished.
So now a “no-deal” seems increasingly likely. There are some potential upsides: we will save most of £39bn (not all, because legal obligations will be honoured) and be free at once to negotiate Free Trade Agreements around the world. Downsides include the cliff-edge in March 2019 (although the Government is now, belatedly, making serious plans for no-deal); trading with the EU on WTO terms until a free trade deal is agreed with them; potential UK/EU border friction (at Dover, etc); and having to deal with the Irish border.
The exact wording of the backstop agreed in December 2017 was:
“In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”
As Boris Johnson and David Davis were reportedly told, this wording and the implied definitions were pretty narrow and meaningless, i.e. that “those rules” which apply to goods exported from the UK to the EU across the Irish border must be aligned with EU regulations. That is seemingly obvious… and harmless. There’s not a word about Northern Ireland staying in the Single Market or having to follow the EU rule book for everything. “Those rules”, it says, not “all rules”. What the EU has been demanding is something far beyond what they agreed with the UK last December.
It must be perfectly plain that we will not allow the EU to try to split Northern Ireland from the rest of the UK (any more than they would expect Spain to split off Catalonia or France, Corsica or Normandy).
If there is no deal, the Irish border will still exist, and neither Ireland nor the EU will want to invoke a hard border. Britain certainly won’t. So some kind of pragmatic monitoring/enforcement arrangement would have to be agreed between the respective customs authorities in the event of a no-deal.
By offering one concession after another Mrs May is just manoeuvring herself and us further and further into a tight corner. Much simpler to say “no”, we won’t play your game, it’s no deal.
With no-deal, the EU will have to tolerate what they consider to be an unsatisfactory border arrangement and forgo their £39 billion. Why would they allow their intransigence force us into that situation when they could do a deal under which they tolerate – temporarily – that same unsatisfactory border arrangement and pocket their £39 billion?
So the choice for the EU becomes a simple one: do you want a no-deal-style Irish border arrangement with or without £39 billion?
As to future trading arrangements, Mrs May must be persuaded that the Canada-plus formula offered by the EU is the most favourable for the UK. While entirely frictionless trade would be very nice, the price she is proposing to pay – EU regulations imposed on all UK businesses including the more than 80% that trade only domestically or with non-EU countries; no say in regulations or trading standards or ability to challenge regulations that especially damage British businesses; no ability to innovate; no ability to negotiate trading standards as part of FTAs; cumbersome tariff reclaim procedures – is simply too high as an alternative to accepting some friction but minimising it. When encountering friction, you don’t scrap the machine, you apply oil: trusted-trader status for regular just-in-time supply-chain consignments; number-plate recognition that opens barriers at designated trusted trader lanes. Where is the friction?
Where are the obstacles? There is only one – the need for a firm negotiating stance.
Last Thursday, the same day that we read “Theresa May to trigger full-scale parliamentary no-deal planning ‘within three weeks’”, we read of Guy Verhofstadt brazenly insisting there’s a 0% chance of a deal unless we agree to the EU’s Irish border demands, apparently blind to the consequences to the EU – a no-deal Irish border problem and a £39 billion financial black hole.
On the other hand we have seen Wednesday’s news: “France threatens to block Calais port to the UK if we refuse to pay £39bn divorce bill”. The EU persists in making unjustifiable and unconscionable demands regarding the Irish border, aimed solely at keeping us in the Customs Union and so preventing us from entering into global free trade deals.
Their insistence on their childish game of chicken is getting beyond ridiculous. Is this how intelligent adults behave? Don’t intelligent adults just sit down and agree new feasible cooperative arrangements that will be to their mutual advantage? It’s called an amicable divorce.
The post We must stop playing the EU’s games and be clear we are willing to walk away with no deal appeared first on BrexitCentral.
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