Prime Minister Boris Johnson has already made it clear he will urgently look for a trade deal with President Trump. From a purely political viewpoint, this clearly makes sense in a world where the EU is mortally afraid of what President Trump might do next to it. However, there is also an economic logic to it which is worth spelling out, both for those embarking on the US deal at this end and for those seeking an EU response to our offers of a trade deal.
What a US trade deal would do would be to open up our markets to US goods, both food and manufactures, in return for UK tariff-free access to US goods markets and easier access into US services markets, where we already operate fairly freely in practice. From the EU viewpoint it is the former that matters: US barrier-free supply of food and manufactures into the UK market would mean that UK prices would fall sharply in response to the more or less infinite (relative to the UK market) availability of supplies from efficient and large US suppliers at best world prices. Effectively UK home prices would fall to world levels, a drop of some 20%, this being the scale of EU tariff and non-tariff protection against world competition. From our trade viewpoint this would therefore operate like unilateral free trade, lowering consumer prices and forcing competition on our home suppliers, who would have to meet it by raising productivity. The gain to UK GDP and welfare of even half of this would, we calculate, be around 4%; double that if it all goes through. This makes a US trade deal highly desirable for us in its own terms.
Of course this deal will be fought tooth and nail by all the usual business and protectionist lobbies – the CBI etc. Ministers must be ready for the full litany of objections; they should be in no doubt that for this deal to go through, they must rebut the whole stable of these stale arguments, whether it is the preservation of jobs (read ’existing jobs’ for that – new jobs are constantly being created by our economy); the collapse of manufacturing (only if it cannot raise productivity, which it has done relentlessly for three decades); the disappearance of our farm industry (but it too can raise productivity and will be helped by our new farm support policies); the pollution of food standards (by higher-standard US food?); and so it will go on.
Assume our new government has the determination to get this through. What then happens to EU attitudes? Already no doubt ‘softened up’ by worries about losing the £39 billion promised in the Withdrawal Agreement, these attitudes are now transformed by the new economics of failing to do a trade deal, that’s what. Suppose now no trade deal so that tariffs go up both ways between the EU and ourselves. EU sales to us are bigger and on higher tariff items, so our tariff bill on these would be £13 billion a year. On our sales to the EU their tariff bill would be £5 billion a year. But more importantly, who ‘pays’ these tariffs, in the sense of being worse off to the tune of these amounts? Once a US trade deal is in place and UK prices are at world levels, the apparently surprising answer is that all these tariffs, both ways, are paid by EU traders.
Consider why. First, EU export traders, to sell in the UK market at these world prices, will have to match them; they cannot raise prices when the tariffs go on, or they risk selling nothing at all. So these EU exporters must absorb the tariffs. The UK Treasury will thus receive its £13 billion direct from EU exporters.
Second, EU importers of UK exports. UK exporters can sell their products at home now at world prices, so they will not take less for EU exports; hence EU importers will not be able to ‘pass back’ the EU-levied tariffs to UK exporters. Instead they will add them into EU prices. Will this reduce UK exports to the EU? No, because remember EU prices are above world prices by 20%, the effect of EU protection. So in effect EU importers can well afford to absorb the EU tariffs on UK exports (which average about 5%, much less than that overall 20% world protection inclusive of non-tariff barriers), and still be cheaper than other EU competition. So what all this means is that the £5 billion tariff revenue of the EU is simply taken from EU businesses.
So overall, a failure to do a trade deal will cost EU businesses £18 billion a year in lost profits. £5 billion of this will go to the EU in extra revenue, £13 billion to the UK Treasury. From the EU’s internal viewpoint, these are non-trivial costs to business; the fact that some of it is directly levied by the Commission will add to its unpopularity with business opinion, which is the biggest Brussels lobbying voice. Total gross profits in the EU27 are around €4,000 billion, of which some two thirds is capital depreciation, giving net profits of about €2,500 billion, so implying on a normal dividend payout ratio dividends of about €500 billion. So we are talking here of a significant hit to company dividends in the rest of the EU from a no trade-deal Brexit.
Up to now, the assumption in EU circles has been that no trade deal would be unpleasant in some parts of the EU but the worst effects, such as in Ireland, would be manageable, through some sort of compensation to this small economy. With the UK still a protected market with high prices, EU producers would not face tough competition and so could possibly pass on UK tariffs to UK consumers without too much loss of market share. Meanwhile UK exporters would absorb EU tariffs with their alternative market only being the limited home market or much lower-priced world exports.
This all changes, as we have seen, once a US-UK trade deal is signed. The EU trade deal arithmetic is transformed to a nasty corporate loss across the whole EU business sector.
There is more. When the UK signs the US trade deal, the direct effect on the prices the EU can sell at in the UK market will be a fall of 20%, even with no change in UK tariffs. Similarly our exporters to the EU will now sell to them at those 20% lower (now world) prices, assuming no EU tariffs. As we import some £100 billion a year more from the EU than we export, this 20% price fall will cost the EU £20 billion – even before any action on EU-UK tariffs. This will also come directly out of EU business dividends.
So when we sign a US trade deal, the EU will lose £20 billion at once, and a further £18 billion if there is no UK-EU trade deal so that mutual tariffs are levied – a total of £38 billion a year, nearly 8% of EU corporate dividends. This implies that the EU will be anxious to dissuade us from making a US trade deal by being more obliging in its negotiating approach over Brexit. Of course, in doing this they will risk annoying President Trump; nor is our new Government anyway likely to be dissuaded from such an important strategic deal.
But it all goes to show that the route to getting sense at last from Brussels lies through Washington and President Trump. It is good to see that Mr. Johnson is planning to take this route in short order.
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Only a credible non-cooperative strategy that cannot be blocked by either the EU or Parliament will get us out of the EU by 31st October 2019. And that strategy needs to be executed with ruthless conviction and commitment by the new Prime Minister. To demonstrate his support for Global Britain, his first trip abroad should be to the US to kick-start the UK-US Free Trade Agreement.
As the largest ever list of candidates to offer themselves as the next British Prime Minister has been whittled down to the final two, it is clear that we are in grave danger of validating Einstein’s definition of insanity – doing the same thing over and over and expecting a different result.
Between them, Boris Johnson and Jeremy Hunt have said that they will: renegotiate the Withdrawal Agreement (WA) and the backstop; leave the EU with a ‘deal’ on 31st October; and get parliamentary approval for their new improved deal. They both claim to be skilled negotiators, implying that this makes them ideally suited for the most important job in their career. There are differences, however: Johnson recognises that the WA as a whole is dead and just wants to lift some of its acceptable features, such as on citizens’ rights; while Hunt is prepared to delay leaving the EU for ‘a short while’ to achieve a ‘better deal’.
The naivety of the candidates’ positions is breath taking. Have they not observed how easily the EU has run rings around our current ‘skilled negotiators’? Are they like the Bourbons and learned nothing and forgotten nothing?
The new Prime Minister needs a credible negotiation strategy
It is going to be déjà vu all over again, unless the new PM has a clear strategy to leave the EU on the basis of what game theorists call a non-cooperative solution. That is one that the EU cannot block if it is not willing to cooperate in producing a solution that makes both sides better off.
This means that the starting point for any negotiations with the EU cannot be the WA. The EU says that it will not renegotiate this and it remains completely unacceptable to the vast majority of the British people. As Chairman of Lawyers for Britain, Martin Howe QC, says:
‘I can’t think of any clause in the WA end-to-end which is actually in the interests of the UK. The only neutral part of the agreement is the reciprocal rights of UK and EU citizens, in which the clauses on substantive rights are acceptable. However, even those are surrounded by completely unacceptable requirements that the treaty must perpetually have direct effect and must (as interpreted by the courts) override future UK Acts of Parliament in our own courts, and must be “interpreted” by the European Court of Justice for about 10 years by direct references and thereafter via a back-door mechanism in an international arbitration clause’.
His devastating criticism of the WA is here: Avoiding the Trap – How to Move on from the Withdrawal Agreement. How a British Prime Minister could collaborate with the EU to produce this document and how so many MPs could subsequently vote for it is beyond me. The WA is nothing less than a venus flytrap. It therefore needs to be avoided at all costs.
In any case, the WA does not offer a ‘deal’ about a future relationship in any meaningful sense. For example, there is nothing on services which account for 80% of UK GDP. Trade in services will be negotiated after the UK leaves the EU. It is completely bizarre for MPs to object to leaving the EU without a deal, when the WA itself involves leaving the EU without a deal.
A non-cooperative solution requires the UK to specify both the terms under which it will leave the EU and the terms under which it will trade with the EU in the future. And to do so in a way that the EU cannot block.
Theresa May specified the leaving terms very clearly in the Lancaster House speech in 2017. They were to leave the Customs Union, Single Market and the jurisdiction of the ECJ. In other words, a clean Brexit. This was a clear deliverable strategy that did not require EU cooperation. But then Remainer Philip Hammond stepped in and said there needed to be a transition period which would require EU cooperation and this was the beginning of the backtracking that led to the toxic WA and the equally toxic Political Declaration (PD).
The non-cooperative solution involves three steps. And each one has to be credible to the EU
The first step is for the new PM to restate that the clean Brexit set out in the Lancaster House speech will be implemented by 31st October 2019. This is credible and does not require EU consent.
In parallel with this, the new PM should immediately inform the US President that the UK will enthusiastically take up his long-standing offer to negotiate rapidly a US-UK Free Trade Agreement (FTA). This also is credible and does not require EU consent once we leave. During the few weeks that remain before 31st October, the UK can make much progress in setting the stage for post-Brexit negotiations – a task that the International Trade Secretary, Liam Fox, has consistently dragged his feet in doing. This will send an electric shock to the EU that will tilt every aspect of subsequent negotiations with the EU in our favour. The prospect of us concluding an FTA with the US when the EU has been struggling for years to achieve this will motivate the EU to conclude an FTA with us. They will fear the fact that the UK would be able to import virtually all of its requirements from the US and at lower world market prices. This would signal to the EU that we can leave them behind if necessary.
The second step is to set out in a new Departure Statement (DS) how the principal issues involved in departing from the EU will be implemented: citizens’ rights, the financial settlement and the border between Northern Ireland and the Republic. The PM can guarantee the rights of EU citizens living in the UK without granting them the special status of the WA. He can agree to pay our financial obligations up to the point of departure. Any additional money is not a strict legal requirement but can be used as a bargaining tool in negotiations about the future trade deal – as the EU is fond of saying, ‘nothing is agreed, until everything is agreed’. Let the EU take the UK to international arbitration if they want. Finally, he can restate that the UK will not impose a hard border. All these are credible and do not require EU consent.
The big advantage of being absolutely clear on the border is that it will force the EU and, in particular, the Irish Taoiseach Leo Varadkar to agree a workable solution that allows the UK to leave the Customs Union and Single Market at the end of October. Solutions exist to protect the integrity of both the UK and EU internal markets without any physical infrastructure on the border or any need for new technology. The Smart Border 2.0 report commissioned by the European Union Parliament from customs expert Lars Karlsson confirms this – as does the more recent report of the Alternative Arrangements Commission. Annegret Kramp-Karrenbauer, Angela Merkel’s successor as leader of the Christian Democratic Union, has said that a workable solution could be agreed in five days of discussions. There were discussions between British and Irish customs officials on creating an invisible border, but Varadkar stopped these when he came to power. In doing so, he politicised the border issue and turned it from being the EU’s Achilles’ heel into the UK’s – ably abetted by collaborating British ‘negotiators’.
It was this single issue that was then exploited in order to propose the backstop comprising a ‘single customs territory between the (European) Union and the United Kingdom’, without rules of origin. Northern Ireland, in addition, would have to abide by the rules and regulations of the EU Single Market. So long as the backstop is in operation, the UK would have to meet ‘level playing field conditions’ that prevented the UK competing against the EU. The UK would not be able to leave the backstop without the consent of the EU.
This, of course, is completely unacceptable. By making it clear that the UK will leave the EU on 31st October, the positions are immediately reversed. Both the EU and Varadkar have said that there will be no hard border. Varadkar would be forced to restart the discussions between British and Irish customs officials. He knows full well how devastating for the Republic’s economy a ‘no deal’ Brexit would be: the Irish Central Bank predicts a 4% cut in GDP and 100,000 job losses. And there are plenty of five-day periods between now and the end of October to agree a workable solution. But it requires the UK side to make it absolutely clear that we are leaving on Halloween, come hell or high water. This too is credible and again does not require EU consent.
The third step is to make a Future Relationship Statement (FRS), setting out the terms on which the UK will agree to trade and cooperate with the EU. Again, this has to be done in a way that cannot be blocked.
There is only one set of trading terms that the EU cannot block. Under WTO (World Trade Organisation) rules – which almost all international trading arrangements follow – we are free to set the tariffs and product standards for trade with the EU, so long as these are the same as for all members of the WTO under MFN (Most Favoured Nation) rules, unless we have a FTA with any country or group of countries. This is the default position, so is also credible and does not require EU consent.
We can actually do better than that and offer the EU to continue trading in goods on current zero-tariff terms under Article XXIV of GATT (General Agreement on Tariffs and Trade) and in services under Article V of GATS (General Agreement on Trade in Services) – while a full FTA is negotiated. But if they refuse, we can temporarily revert to the MFN rules under Article I of GATT.
The EU will ultimately agree to a FTA. In the meantime, we need to exploit the fact that the UK has a huge trade deficit with the EU – we are net buyers of goods of around £100 billion, equivalent to 5% of our GDP. Since the customer is king – and we are the customers – it should be us who decides the quality and prices of the goods and services we purchase from not only the EU but from the rest of the world. But what the WA and PD do is to allow the EU to determine these things. The audacity is astonishing. Did the EU and our ‘negotiators’ seriously believe that they could get away with this – and not just in the short term but indefinitely?
Since we will no longer be bound by the EU’s Common External Tariff, we can lower the tariffs we set on goods that we do not produce domestically. But whatever tariffs we set, the EU will be worse off given that they sell us mostly high-tariff goods like cars and agricultural products. We would pay tariffs to the EU of around £5 billion and they would pay tariffs of £13 billion. In addition, we would save the £11 billion net contribution to the EU.
This provides a strong incentive for the EU to agree a FTA, unless they want to continue punishing us for leaving the EU, and in doing so damage the EU economy even more. Given that we have a services trade surplus with the EU of around £30 billion, it is essential that this is secured in a future trading relationship. This means a SuperCanada deal, already offered to us by the EU in March 2018.
But although there is a strong economic incentive to agree a FTA, we cannot force the EU into accepting any deal that works for us in terms of services, and, in particular, financial services. Still this does not prevent us leaving the EU on the basis of the above DS and FRS. There are enough ‘mini deals’ in place – covering visa-free travel, aircraft landing, rail and shipping agreements, road haulage licences, student exchanges, defence and security etc – for the citizens and businesses of both the UK and EU to continue visiting and trading with each other. In addition, a sufficient number of the international trade deals negotiated by the EU have been novated that we can continue trading on the same terms with most of these countries as we do now. A key example is Switzerland which accounts for more than a quarter of our trade under these EU-negotiated deals.
A number of proposals have fleshed out the details of a future relationship along the lines outlined above: A Clean Managed Brexit from Steve Baker MP, The EU, The UK and Global Trade: A New Roadmap from Professor David Collins, A Better Deal from Shanker Singham, Robert MacLean and Hans Maessen, A World Trade Deal from Economists for Free Trade, and the Howe et al report cited above. For example, Baker suggests that we should send a draft UK-EU FTA to the EU – such as the ones proposed by Shanker Singham, Victoria Hewson, Hans Maessen and Barnabas Reynolds or Dr Lorand Bartels of the University of Cambridge – rather than wait until they do the drafting – which was such a disastrous error with the WA and PD. The EU could agree such a FTA under Article 207 of the TFEU (Treaty on Functioning of the European Union) on the Common Commercial Policy on the basis of qualified majority voting.
But unless the strategy is clear about what is needed to deliver these outcomes, we will soon be back wading through the same treacle of compromise and capitulation that have been the hallmark of our negotiations over the last two years. The only strategy that is guaranteed to work by 31st October is the non-cooperative one outlined above.
The new Prime Minister also needs to demonstrate conviction and commitment – and that involves putting Parliament in its place
A credible negotiating strategy is necessary, but this will not be sufficient. The new Prime Minister also needs to have ‘conviction and commitment’, as Dominic Raab has pointed out. But Boris Johnson – the front runner to be PM – has already wavered by first stating categorically that the UK will leave the EU by 31st October and subsequently saying that this is merely ‘eminently feasible’. This change was immediately picked up by EU negotiators, one of whom told The Times: ‘Even the boldest Prime Minister for a no-deal will have to demonstrate that he has had one serious try and that means an extension [beyond 31 October]’. Another told the Daily Mail that the EU believes Johnson will end up trying to sell an amended version of the WA: ‘If people really brief Boris and talk him through the implications of ‘no deal’, I think he will really think twice’. The first view is perfectly plausible and, unless further wavering is prevented, then we are very likely to end up with the second. After all, Johnson supported the Withdrawal Agreement on the third vote. Hunt voted for it three times. Johnson’s declared position, however, is that he is seeking a FTA with the EU and clarified that he will leave the EU by the end of October ‘do or die’.
The new PM also needs to demonstrate conviction and commitment with the other group trying to block Brexit: the British Parliament. It too needs a lesson in democracy. Read our lips: we voted to leave the EU in June 2016 by a bigger majority than any vote that any individual MP has ever received. We understood the decision we made. We understood why we made it. No amount of scaremongering by the majority of MPs who oppose this decision or their friends in the civil service and CBI etc will change this.
So if MPs are still determined to block the deal that the next PM sets or try to insist that the deal is put to a ‘confirmatory vote’ – weasel words for a second referendum to try and get Brexit reversed – then they also need to be blocked. They need to be made to understand that it is the people who are sovereign not MPs. And the people are here for ever, they are not.
If this, in turn, means that Parliament is prorogued until after 31 October 2019, then so be it. Constitutional historians like Professor Jonathan Clark argue that this would not be ‘“unconstitutional”:
‘[It] would be in accord with statute law, but applied in a situation that legislators could not foresee. [Nor] would [it] be “undemocratic”, for the point at issue is the clash between two sorts of democracy, representative and direct. Whatever the merits of these two, Parliament recognised the priority of the People in legislating for the referendum of 2016. Parliament’s claim to control prerogative depends also on public opinion, and support has ebbed away as Brexit has not been delivered’.
However, prorogation might not be necessary since, in June 2019, Parliament voted down a Labour motion to block a no-deal Brexit. Indeed, Maddy Thimont Jack from the Institute of Government argues that MPs have no decisive route – such as legally binding backbench motions, emergency debates, amendments to the Queen’s Speech, or ‘no confidence’ votes – to stop a PM determined from leaving the EU on 31st October.
Only a credible non-cooperative strategy executed with ruthless conviction and commitment by the new Prime Minister will get us out of the EU by 31st October
The message needs to be clear, simple, with no compromises. Theresa May said in her resignation speech outside No. 10 that the next Prime Minister must compromise. Well just look where that got her. Time’s up for doing the same thing over and over and expecting a different result. Only a credible non-cooperative strategy that cannot be blocked by either the EU or Parliament will get us out of the EU by 31st October. And that strategy needs to be executed with ruthless conviction and commitment by the new Prime Minister. Given that both Johnson and Hunt have voted for the WA, the new PM would need to signal his conviction and commitment by appointing a Brexit Secretary who refused to vote for the WA on all three occasions. To demonstrate his support for Global Britain, his first trip abroad should be to the US to kick-start the UK-US Free Trade Agreement. There is no need to make another round of humiliating visits to Brussels or to Europe’s capitals – as Theresa May repeatedly did.
This is an extended version of a blog originally posted on Briefings for Brexit
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The below is an extract from Economists for Free Trade’s new report, No Deal is the Best Deal for Britain
It has become clear that Remainers have a big problem: they can find little positive to say for either why we should remain in the EU or for Theresa May’s Withdrawal Agreement. Their total argument has been and continues to be based on ‘fear’. Nowhere has this been more apparent than their invectives about No Deal – i.e. a World Trade Deal where the UK leaves the EU on 29th March without a trade deal under WTO rules.
The Government, together with Establishment figures and the commentariat, have fallen over themselves warning of short-term perils – first, chaos at our ports and second, claims that somehow a host of existing rules and regulations will become inoperative as of 11.01 pm on 29th March. Day-to-day life, as we know it, will cease to exist with regard to travel, business contracts, citizens’ rights and even the ability of performing artists to perform.
This alleged short-term disruption is deemed to be so apocalyptic that it is considered not even worth thinking about if there might be a long-term upside. Thus, the cacophony about the short-term has shouted down any fundamental thought about the inherent benefits of No Deal.
What is the reality?
Disruption in the Ports: What Disruption?
It is claimed that on 30th March UK ports will have seized up due to delays required to process customs declarations. Furthermore, since UK goods will no longer comply with EU standards, onerous inspections will be required – adding to the bedlam.
These claims should not be taken seriously. They do not reflect what actually takes place at ports today and they fail to take into account the legal and competitive environment within which ports operate.
1. Post-Brexit port procedures will not be materially different from those of today and the required changes mainly are in hand. The image of customs officials with clipboards crawling over trucks and stamping approvals on customs forms has not been valid for decades. Today, all customs declarations are computerised and prepared at the facility of the importer/exporter or their designated customs broker. Shipments are pre-cleared by computers talking to computers so that trucks rolling into the ferry terminal essentially are waived through automatically. This is how the many UK ports that deal with shipments from non-EU countries under WTO rules operate today.
To accommodate Brexit, HMRC has adopted a ‘belt and braces’ strategy by which the existing Customs Handling of Import and Export (CHIEF) system has been doubled in capacity to accommodate the increased volume of EU-UK customs declarations. In addition, a new EU-wide customs declaration system (CDS) – which was already in the development pipeline before the referendum – will be run in parallel. HMRC has repeatedly stated before select committees and in its own publications that CHIEF and CDS are already operational and will be ready to deal with EU shipments on 29th March.
A potential issue is that some businesses may not have their software interfaces with CHIEF/CDS operational by March. The service industry of customs brokers should have the necessary systems and expertise to support such businesses (mainly small) that may not have the required internal capability. However, it may be the case that not all customs brokers will be sufficiently up to speed and have the required capacity to fill the gap completely.
To alleviate this risk, there are simplifications to existing procedures that HMRC can authorise and HMRC has already announced that for the 60 per cent of EU trade that is imports, it will ‘prioritise flow over compliance’ – i.e. it will wave vehicles through to avoid queues, even if customs declarations have not been properly completed. As shipments are pre-approved, normally, if a trader has not completed the required declarations, the shipment will not be authorised. The shipment may be delayed but it will not contribute to congestion at the port.
2. Inspection regimes will not change. What about the much ballyhooed inspections that Remainers claim will create delays and miles of parked trucks along the M20? In fact, as HMRC has repeatedly emphasised, there is no reason for much to change. Under WTO rules, inspections are intelligence-led, based on computerised risk assessments and generally have little to do with customs issues. Security, drugs and illegal migration are much greater concerns.
Since there is no reason why these risk factors should change after Brexit, HMRC intends to maintain the existing inspection regime post-Brexit, which currently results in only about 1 per cent of (even non-EU) goods being inspected.
The claim that new onerous inspections at the border will be required after Brexit because UK goods will somehow no longer meet EU standards is hypothetical fancy. After over 40 years with identical product standards and regulations – and contrary to what many doomsayers may wish the public to believe – UK goods will not suddenly become hazardous to the health and safety of EU consumers the day after Brexit. Last week the President of the Boulogne and Calais Ports made clear that the Port of Calais plans no additional inspections relative to what they do today.
So, it is clear there is no practical reason why disruption should suddenly occur in the ports following Brexit.
3. EU recalcitration and discrimination would be illegal. The WTO Trade Facilitation Agreement, the WTO Technical Barriers to Trade Agreement and the Kyoto Convention of the World Customs Organisation commit the EU and all 187 WTO countries to making border processing activities as streamlined as possible. These measures are enforced by WTO Panels and the WTO Appellate Body that are backed by the international legal system.
The WTO Trade Facilitation Agreement mandates a seamless (computerised, pre-cleared) border enabling trade to continue passing through ports with minimal checks, pre-cleared by computer, with all relevant information pre-entered at low cost straight from the loading logs. The EU’s own Customs Code requires customs declarations to be done online and allows these to be entered with as little as one hour’s notice.
There is no WTO requirement for border checks and, where physical inspections are necessary, the Agreements require that they be intelligence-led and not be more trade-restrictive than necessary – i.e. they should conform to the current regime applying to both the EU and the UK where only about 1 per cent of goods arriving from non-EU countries are physically inspected. The WTO’s Agreement on the Application of Sanitary and Phytosanitary (SPS) measures does allow for border checks to ensure the safety of imported food but stipulates that such checks should not be used as a surreptitious means of inhibiting cross-border trade or “arbitrarily or unjustifiably discriminate between WTO members where identical or similar conditions prevail… SPS measures shall not be applied in a manner that would constitute a disguised restriction on international trade”.
With regard to standards, WTO rules on non-discrimination on standards mandate that, once the EU or any other WTO member has announced their proposed domestic standards, these must apply without exception to all foreign exporters.
So, if the EU were to ignore the practical, common-sense reasons for continuing to process EU-UK trade as efficiently as they do today, they would be acting illegally and could face lawsuits. The WTO dispute process is far from toothless, enjoying an excellent compliance record among its many hundred rulings over decades of practice.
4. Competition will keep the EU in check. Even if common business sense fails and the EU is tempted to flout international law, competitive pressures will rein them in. Dover-Calais is the major concern in this regard because it has roll on/roll-off (RoRo) facilities accounting for about 30 per cent of EU-UK trade – and Calais is in the only EU country where political leaders have signalled possible uncooperative post-Brexit actions.
Fortunately, numerous other freight ferry routes – with RoRo capabilities – already exist between several UK and continental ports. Dutch and Belgian port operators have already made it clear that if an EU port – say Calais – were to attempt to complicate border procedures artificially to inhibit UK exports, ports such as Rotterdam, Zeebrugge and Antwerp (amongst others) would be keen to grab the business and quickly fill the gap.
It is estimated that sufficient capacity exists to handle 30 to 40 percent of Dover-Calais freight shipments. The Dutch sensibly have built up their customs facilities, hiring more inspectors and setting aside land at their ports for the limited additional inspections that may be required, primarily for agricultural products.
In practice, it is very unlikely to come to this, as pragmatic local French authorities and port operators have offered assurances for continued cooperation on numerous occasions, aware that they will lose out to their European neighbours if they attempt to frustrate Brexit maliciously. The latest such assurance was on the Today programme on 9th January when the President of the Boulogne and Calais Ports confounded his BBC interviewer by making clear that Calais will be ready for UK business by 29th March and he explained that they plan no additional inspections relative to what they do today and detailed a long list of specific investments and actions they have taken over the past year to avoid any possible congestion or delay.
Brexit will not lead to a blockade in the English Channel, as strangely many wish us to believe.
Life will continue after 29th March
Much of the drummed-up anxiety regarding “crashing out” of the EU has begun to abate as the UK Government, along with its EU counterparts, has ramped up preparations for a No Deal Brexit in light of the impasse in EU-UK negotiations. Despite the tireless efforts of the media and the status quo Establishment which still insist that the UK will collapse into recession and experience a severe supply shock and civil unrest, it is slowly emerging that trading with the EU under WTO terms will be manageable, albeit with some possible ‘bumps in the road’ in the early days.
Thus, work seems to be at last under way, and it should now be stepped up with enthusiasm – remembering that many problems can be lubricated by a £39 billion saving.
For example, an increasing number of the crucial non-WTO “side deals” that commentators gleefully warned were essential to avoid the devastation of post-EU isolation are now materialising. Aeroplane landing rights, drivers’ licences, euro clearing and derivative contract issues are now settled.
Many EU citizens living in the UK are already following the straightforward process for obtaining permanent residency. In recent days, the Dutch, German, Italian and Belgian governments have already announced post-Brexit citizens’ rights for UK nationals living in their countries. And the Spanish are establishing procedures for healthcare to be delivered to UK citizens when in Spain. We also have promises from the EU and Ireland that there will be no hard border, as one isn’t really needed and never was.
Furthermore, Lord Lilley and Brendan Chilton’s excellent report, 30 Truths about Leaving on WTO Terms, has detailed a long list of agreements that have emerged in recent weeks between the UK, the EU and EU member states affecting day-to-day life. These cover a wide range of areas including, for example, ‘micro’ trade agreements, medicines, clean water, air travel, aircraft manufacturing, haulage, agricultural and animal products, mobile telephones, auto type approvals and VAT rules. And – never fear – even British opera singers, musicians and other performers will still be able to tour the EU.
It is becoming ever more evident that civil servants – in spite of their public comments being constrained by ministers – have been working quietly behind the scenes to ensure minimal post-Brexit disruption.
Thus, it appears the closer we get to the alleged ‘cliff edge’, the more countries on both sides of the Channel are facing up to their responsibilities. The ‘cliff’ now appears to be turning into a grassy slope.
Remember the Millennium Bug? Perhaps we have been here before.
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The below is an extract from Economists for Free Trade’s new report, No Deal is the Best Deal for Britain
Leaving the European Union without a Withdrawal Agreement under Article 50 is not a step into a legal vacuum. Still less does it amount to going over any kind of “cliff edge”.
What happens is that our international trade with the European Union will become subject to the same legal regime which currently governs the majority of our export trade to the rest of the world. That is trade under the World Trade Organisation rules-based system.
The three key elements of the WTO system that will affect our post-Brexit trade with the EU are its rules on tariffs, its rules on non-tariff regulatory barriers to trade and its rules on the facilitation of customs procedures.
The WTO’s rules on tariffs allow members to charge tariffs on imported goods up to certain limits, but, subject to limited exceptions, any tariffs must be imposed equally on goods from all countries – the so-called Most Favoured Nation (MFN) principle. The EU will therefore impose its standard external tariffs on goods imported from the UK, unless and until a future free trade agreement or interim agreement leading to an FTA is agreed.
This is not a big deal. These tariffs will come to £5-6 billion per year, less than half the UK’s current net budget contribution to the EU.
The UK will be obliged to charge the same level of tariffs on imports from the EU as it does on imports from the rest of the world. But, contrary to much ill-informed comment, the UK is not required to charge the same tariffs on its imports as it currently charges under the EU-mandated Common External Tariff. We will be free to charge lower tariffs, or zero tariffs, as we judge appropriate, so lowering the cost of basics in household budgets.
The WTO agreement on Technical Barriers to Trade will require the EU to recognise UK-based goods certification procedures and allow entry to the EU Single Market for UK goods which comply with UK rules until such time as they are changed to become different from the EU’s rules. At the same time, the Withdrawal Act mandates that the UK shall continue to recognise EU rules and EU certifications on goods unless and until this is changed by secondary legislation. This means for example that medicines made in the EU will continue to be recognised as conforming to the UK’s import rules and arguments that there will be shortages are pure mythology.
The WTO Trade Facilitation Agreement will apply to smooth customs procedures between the UK and the EU. It mandates for example electronic pre-clearance of imported goods, avoiding the need for physical inspections at the point of entry except in exceptional circumstances.
In an ideal world, we would progress forward to a full Free Trade Agreement with the EU. But there is no need to rush it – our trade relations with the EU will operate just fine under WTO rules for as long as necessary.
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In recent months, BrexitCentral has featured a number of articles written by authors of a variety of pamphlets and papers published in the run-up to or since the publication of the Withdrawal Agreement.
We thought readers would appreciate having access to links to all those publications in one place, so hope you find the listings below of use. Clearly, it is not exhaustive, but where possible we have hyperlinked organisations’ names to their website so that you can delve further as in most cases there is more valuable information and additional articles or briefings to be found there. We will aim to keep this up to date as new publications come out, so please let us know of anything you think we should consider for inclusion.
Published by the European Research Group
- Fact NOT Friction: Exploding the myths of leaving the Customs Union (November 2018, published jointly with Global Britain)
- Your Right to Know: The Case against Chequers and the Draft Withdrawal Agreement in plain English (November 2018)
- Why an advanced Free Trade Deal – Super Canada – is superior to the Chequers proposal (October 2018)
- Practical proposals for the United Kingdom’s border with the European Union with particular emphasis on Northern Ireland (September 2018)
Written by Shanker A Singham and Radomir Tylecote
- Plan A+ : Creating a prosperous post-Brexit U.K. (September 2018)
Published by Martin Howe QC/Lawyers for Britain
- The deal: everyone is looking for legal loopholes, but they don’t exist (December 2018)
- Withdrawal Agreement: the Northern Irish “Backstop” and the constitution of the United Kingdom (December 2018)
- The Political Declaration does not save us from the trap of the Withdrawal Agreement (November 2018)
- Withdrawal Agreement: The Northern Ireland Protocol is neither a “backstop” nor temporary (November 2018)
- The Draft Withdrawal Agreement (November 2018)
Published by the Institute of Economic Affairs
- Dissecting the Backstop (November 2018, written by Victoria Hewson)
- Dissecting the Deal (November 2018, written by Julian Jessop)
Published by CLECAT, the European Voice of Freight Logistics and Customs Services
- The future economic partnership between the EU and UK (October 2018)
Published by Economists for Free Trade
- A World Trade Deal: The Complete Guide (September 2018)
Published by Briefings for Brexit
- Selling a sellout: the truth about the PM’s ‘deal’ with Brussels (December 2018)
Published by Policy Exchange
- The Irish Border and the Principle of Consent (November 2018, written by Graham Gudgin and Ray Bassett)
Published by Politeia
- The Court of Justice of the EU: Imperial, not Impartial (November 2018, written by Gunnar Beck)
- Free Trade in UK-EU Financial Services: How Best to Structure a Brexit Trade Deal (October 2018, written by Barnabas Reynolds)
- Deal, No Deal? The Battle for Britain’s Democracy (October 2018, written by Sheila Lawlor)
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The Treasury and Bank of England are at it once again, trying to terrify us into abandoning Brexit. The Treasury has just produced its new report on all forms of Brexit including Theresa May’s Withdrawal Agreement and lo! They are all worse than staying in. The Bank has run a ‘stress test’ on its ability to cope with a ‘worst case scenario’ for the UK economy; and lo! This is a ‘disorderly Brexit’ where the economy plunges into a deep 8% recession, unemployment surges to 7.5%, and house prices and sterling collapse. But God be praised, under good old Captain Carney the Bank can still cope!
What is one to make of this return of the bizarre circus duo?
Let us start by dismissing the Bank’s rodeo performance. The Bank’s latest warning of potential short-term Armageddon has no probability attached to it by the Bank. This is just as well because it is made up of absurd assumptions, each of which is highly improbable. Jointly their probability drops to virtually zero. The Bank might just as well have forecast what would happen if we went to war with the EU. It wants it both ways: as anti-Brexit propaganda and yet fully deniable. Let us waste no more time on a dangerous and irresponsible manoeuvre.
Move on to the Treasury. It has form on these awful forecasts. They said that in the year and half after the referendum the economy would contract by between 0.1% and 2.1%. In fact it grew by 2.8% and has continued to perform quite steadily, hitting what looks like over-full employment and causing the Bank to raise interest rates at last.
Now it has launched a second Project Fear. Apparently our economy will be badly hit under Brexit, whether we leave (worst case) with No (Trade) Deal on WTO rules or with a Canada+ Trade Deal. All this plus warnings of serious ‘disruption’ and ‘possible recession’. Poor Theresa May’s deal too will reduce GDP ‘in 15 years’ time by 1.4%’.
But as Mrs May agrees as she must, these forecasts are no better than the assumptions the Treasury have put into them.
Those assumptions are incredible in the extreme. The Treasury has spelt them out for us finally in full, after the past ten months of targeted leaks and some scribbled-on powerpoint slides extorted from it by the House of Commons. They are much as we expected.
First, they assume free trade deals around the world will yield only tiny gains to our economy – only 0.2% of GDP. Yet current EU protection is so high that on the Treasury’s very own model, eliminating it in a full set of trade deals for better access to all other countries would give a gain of 4% of GDP. The Treasury wriggles out of this by assuming that this protection is only about 8%, that only a quarter of it will actually be abolished, and finally that anyway the deals will cover half or less of our non-EU trade. To find this astonishing denial of the Government’s ‘bold plan to strike out for free trade with the world’ you have to trawl through the technical appendix paper; Mr. Hammond has not exactly confessed it on the Today programme, and nor will you find it out from the main report. Thus has the Treasury got rid of the biggest positive factor for Brexit.
Second, we come to the big negatives. The Treasury assumes that large costs will arise at the EU border for UK-EU trade even if we negotiate ‘free trade’ with the EU. One is pure ‘border costs’; such as extra paperwork and lengthy inspections. However, computerisation means that almost all cargoes are now cleared before reaching port; and this is now mandated by WTO rules.
Another new border cost according to the Treasury would be costly EU claims that our exporters do not satisfy required product standards. However, under WTO rules this is illegal since existing product standards are already exactly obeyed.
How does the Treasury rebut this point? It does not; it mentions it in its appendix but then sidesteps it, relying on an econometric comparison of EU trade correlations with countries outside the EU versus ones with EU countries. This finds not surprisingly that on average there are more barriers with the former. Of course: the EU deliberately makes its standards such that the US and other non-EU countries cannot sell some of their products inside the EU. But this misses entirely the point that to do this with the UK which exactly meets those standards is completely illegal under WTO rules. Having been in the EU, our situation is not reversible into that of a country that has never been in the EU.
Put in sensible assumptions into the Treasury’s own model in place of this nonsense and out pop big gains from a proper Brexit.
The Treasury says lots of institutions agree with its negative assessment of Brexit. What it fails to do is any analysis of just why they agree. It is for two reasons. First, most of them used the trade correlations the Treasury itself used before the referendum: but, as it has now agreed with critics like us, such correlations could not reveal causation and should be replaced by a full new trade model such as it has now moved onto. Second, for the minority which do use such a model, they put in much the same assumptions as the Treasury.
The last fear factor invoked by the Treasury is the ‘disruption’ and ‘recession’ from ‘crashing out with no deal’. But in practice No Deal would incorporate by administrative cooperation all existing agreements that are quite uncontroversial – on electricity in Northern Ireland, on aviation and so on. When the current deal is voted down in our Parliament, as it surely will be, the Government will need to move rapidly so that when we leave, these practical cooperative actions are in place. And if it can negotiate Canada+ so much the better.
As we look ahead, we will need to have a properly informed debate on the meaty question of how to work out the effects on our trade and welfare of different trade deals. We have our own World Trade Model which we have tested and found to do a good job of matching the facts of UK trade. Its details are published and anyone can find out what it says. The Treasury has rightly moved on from the misdirected ‘gravity correlations’ it used in the referendum and has now subscribed to the big GTAP World Trade Model from Purdue University in Indiana. This has some weak ‘gravity’ elements and is far too large to test; but at least it is logical and transparent. As taxpayers’ money has been used to acquire it and get it running, Parliament should insist that we taxpayers can access it and find out exactly how it behaves in response to different trade policies and assumptions.
The Treasury has finally given us a full report and appendix on its views. For this much, thanks. Now the citizens must have access to redo its flawed analysis, so that we know what its own model truly says about Brexit as properly conceived.
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This is the text of a speech delivered by David Davis to Economists for Free Trade on 28th November
The cliché that Britain stands at a crossroads is, for once, true. The decision we take in Parliament in a couple of weeks’ time will shape the future of our country for decades to come. To borrow a line from the Prime Minister, Brexit is within our grasp but perhaps not as she intends it.
If we reject the Prime Minister’s proposed agreement, we can take back control and set ourselves on the path to reclaiming our independence.
If we accept her agreement, we would repudiate the declared wishes of the majority of the British people. Wishes expressed in a referendum in which more voted than at any time in our history. The damage that would do to our democracy is incalculable. Trust in the political process and politicians would be dealt a cruel, crippling blow.
It will come as little surprise to you to learn that I will be voting against the agreement. From the beginning of the year there has been a long struggle, in government, between two views of Brexit. On one side, there are those who hope that extreme conciliation would buy a cooperative response from the EU. On the other stand those of us who take a more robust view of the economic freedoms needed to crystallise the benefits of Brexit. Much of this surfaced in the first clash at Chequers, in February, when the Cabinet Committee agreed we should insist on the “right to diverge.” I strove for a deal that would respect the outcome of the referendum.
After the decision at Chequers in July – Chequers 2 if you like – I knew that was not possible. I resigned to continue the fight on a different battleground. I acted to ensure that Brexit did indeed mean Brexit, and that Britain would resume her place in the world as an independent nation state free to shape its destiny.
I do not dispute that Theresa May has fought tirelessly and genuinely for what she believes is a good deal for Britain.
But the Government’s favoured road away from this crossroads is a denial of the restoration of sovereignty that underpinned the vote to Leave. It keeps us in the customs union potentially indefinitely. It makes us subject to the rules of the EU’s single market while denying us any power to influence those rules. It annexes Northern Ireland, part of our sovereign territory, into the Single Market regulatory structure. It will cost us £39 billion and rising. It sets the European Court of Justice, a foreign court, superior to our own.
It deprives us of one of the chief economic benefits of Brexit by preventing us striking free trade deals with fast-growing countries and markets across the globe.
Worst of all – it makes us prisoners of a Hotel California customs union. We can check out any time we like but we can never leave. This gives them unbelievable negotiating leverage on every single issue – as the EU negotiators have bragged to Brussels ambassadors.
And the other road? I will not pretend it is free of bumps and turns. But these are essentially short-term obstacles. We should press for an exit on a Canada-plus-plus-plus free trade basis. If that is denied to us by the intransigence of Brussels, we will have to leave on World Trade Organisation terms.
At this point all the choking tentacles of the EU fall away. No customs union. No backstop. No single market. No denial of new trade deals. No money paid over. No threat to the integrity of the Union.
These are the two main choices facing Members of Parliament as they prepare to pass judgement on the Government’s proposals next month.
Today, I want to look into the critical few weeks ahead, offer my view to the British public and to my parliamentary colleagues of what to expect, and urge them to stand firm in the face of the propaganda onslaught that is about to be unleashed.
The Government cannot currently expect to win the meaningful vote on their deal. To date, over 90 Conservative MPs have publicly declared an intention to oppose the agreement. With Labour, the SNP and the Liberal Democrats also lined up against – and with the DUP infuriated by the threat to the Union – defeat for the Government seems inevitable.
This may be so. But a couple of weeks in politics are a long time. And as Charles Moore observed in The Daily Telegraph at the weekend, parliamentary rebellions have a habit of melting away.
And, of course, Downing Street, the whips, the Treasury and the rest of the establishment have yet to do their best – or worst.
We are on track for a condensed version of the referendum campaign of 2016, along with all the lies, half-truths, exaggerations, spin and scare tactics.
Ultimately, this time, the decision rests with Parliament. This includes a Commons and a Lords that was overwhelmingly for Remain a couple of years ago.
Nor are the public to be left out of the propaganda operation. Downing Street has noticed that many of its troops are deserting to the Brexit camp, so the Prime Minister has headed for the airwaves. She’s doing more phone-in programmes than Nigel Farage.
Her aim is to appeal over the heads of recalcitrant Tory MPs in the hope that the public will pressure dissidents into backing the deal. The first shots came at the weekend with headlines about a new post-Brexit crackdown on unskilled migration from the EU.
Maybe, or maybe not, I think. Migration policy is a matter to be decided after the Withdrawal Agreement has been enshrined in law. It is covered by the non-binding – and decidedly woolly – Political Declaration. It is also almost certainly destined to become a bargaining chip, used by the EU after the legally binding part of the deal comes into effect.
“Want to protect your fishing grounds? Then relax the cap on Romanian workers.” This is the kind of haggling we can confidently expect.
In any case, I have my doubts about the wisdom of Downing Street’s strategy. Of course, our inability to control EU migration was a significant factor in the vote to leave. But it was not the fundamental reason – that was all about reclaiming national independence from Brussels. This was never just about immigration. It was always about control. It was always about democracy.
Like last time, the decisive battle will be fought on the economy. The bullets will fly fastest when we come to argue about the relative merits of the Government’s Brexit in Name Only approach and the Clean Brexit favoured by those, like me, who are determined to respect the referendum result.
Downing Street and the Treasury believe that they are on their strongest ground when they are lined up alongside Big Business and the City. These multinationals and big corporations, led by CEOs with multi-million pound bonuses riding on the next couple of years performance, unsurprisingly favour absolute stability in the short term over long-term opportunity. And, of course, they find that the current EU arrangements work splendidly for them – not least because they help to freeze out competition from smaller, more nimble firms.
Project Fear is set for a last hurrah.
The Treasury and the Bank of England will later today be issuing new forecasts comparing the Government’s Fake Brexit deal with a WTO exit.
I don’t often quote the FT, but I will do it this time: “Theresa May is preparing to use an economic assessment of her much-criticised Brexit deal to try to win over sceptical MPs.”
The FT makes no comment about the reliability of the Treasury’s last attempt at playing Mystic Meg.
My point is simple enough. The Treasury’s forecasts in the past have almost never been right and have more often been dramatically wrong.
The Treasury forecasts for the effects of a Leave vote made in May 2016 are these. They said that in the 18 months after the referendum the economy would contract by at best 0.1 per cent and at worst 2.1 per cent. What happened? It grew by 2.8 per cent.
The Treasury was wrong to the tune of between 2.9 – 4.9 per cent. This is a sum of up to £100 billion. Quite a lot of money. Quite a big mistake.
Of course, not all of us are brilliant at computing percentages of GDP, so George Osborne spelled out the numbers in starker terms. Unemployment would jump by 520,000 under the “cautious” projection and by 820,000 if the exit was on WTO terms. Voting to leave the EU would, over time, render the average UK family £4,300 a year worse off.
Osborne also used a visit to B&Q’s head office to predict a “Do-It-Yourself” recession as a result of a Leave vote. He prophesised falling house prices and severe damage to the public finances. A “punishment Budget” featuring tax rises and spending cuts was on the cards immediately after a Leave vote. Astonishing idea, of course, to respond to an expected downturn by clamping on a tight fiscal squeeze.
Needless to say, none of this spine-chilling nonsense came to pass. Families are no worse off and the economy has since grown by around 4 per cent. Unemployment has fallen by hundreds of thousands.
Earlier this year, the Treasury leaked its “Cross-Whitehall Brexit Analysis” in the shape of 24 PowerPoint slides to the website Buzzfeed. It caused quite a buzz – not least because it now predicts a huge 7.7 per cent of GDP hit to the economy in the event of a WTO exit. An exit with a Canada-plus deal was forecast to be painful, too, with GDP 4.8 per cent smaller than would be the case if we stayed in the EU.
Quite why the Treasury and its offshoots get things so wrong is an intriguing question.
The truth is that the Treasury is more often wrong than right. And the same goes for the OBR. They missed reality in 2009 by almost 6 per cent. That is equivalent to a miss of £120 billion today.
George Osborne was initially predicted to be more than 50 per cent likely to eliminate the deficit. The productivity growth forecasts of 2010 were 6 times larger than reality. The UK was supposed to enter a recession if there was a vote to leave the EU.
And just this year it emerged that the OBR’s previously predicted borrowing for 2017/18 would be £16 billion more than the out-turn. It is amazing the amount of money Whitehall finds down the back of the sofa.
Unsurprisingly, the dramatic numbers take the headlines, and people fail to notice that they are caused by forecasting errors.
Take Osborne’s £27 billion windfall in 2015, for example. The Chancellor hurriedly moved to spend it on tax credits and departmental budgets.
But, just a year later, he had to take it back. The OBR had undershot their borrowing forecasts by some £58 billion. As the OBR boss, Robert Chote, said at the time, “what the sofa gives, the sofa can also take away.”
But don’t take my word for it. I see from the Prime Minister’s interview with the Sun that she also has doubts about the Treasury and its forecasts. After all, and I quote, “they don’t always reflect every factor that can be taken into account… these things are always based on a set of assumptions.”
And it is notable – and frankly disgraceful – that the Chancellor has done his studio round today without publishing the underlying assumptions. Remember: forecasts are not facts: and theses are just polemical projections.
Professor Minford, of the Economists for Free Trade, has sought to explain the forecasting errors. First, he believes that the Treasury’s past reliance on the gravity model of trade has led it astray. A word on the gravity model, this assumes that trade flows are highest – and the economic benefits are greatest – when trading partners are in close geographical proximity. Europe is on our doorstep, ergo trade deals with the EU are of more value than those with more distant lands. This was possibly true when the commodities were bulky, heavy and of moderate value – coal, steel, wheat, sugar, for example – and the cost of transport was a significant proportion of the product cost. But not today.
The alternative model, the classical one developed by Ricardo in the 19th Century, assuming high competition across world markets, better fits the modern facts and predicts bigger gains from global trading on WTO terms. Transport costs are a tiny fraction of the cost of, say, an iPhone – or a near zero fraction of trade in services. This has the effect of making the entire globe the market in which we exercise comparative advantage.
Other things matter more than distance – a common language, for example, or communication links.
The good news is that – following strong criticism – the Treasury claims to recognise the limitations of its gravity model and has now switched to an improved alternative. But it has undermined its own work. If they are the same as previous work this year the assumptions it has fed in to this new model are faulty for three crucial reasons.
Firstly, the Treasury’s Cross-Whitehall analysis has made pessimistic assumptions about the positive effects of free trade on UK growth. If the UK were to adopt global free trade, the forecast predicts modest long-term gains of as low as 0.3 per cent of GDP.
This is extraordinary. One of the few things upon which economists agree is the great beneficial effect of free trade. Australia’s trade liberalisation delivered a 5.4 per cent long-term boost to GDP. This figure corroborates the Economists for Free Trade calculation of a 4 per cent boost for the UK.
The Treasury seems to assume that free trade matters when it is with the EU, but not when it is with anybody else.
The second flawed assumption in the Whitehall analysis is that there will be high border costs, from processing customs declarations and rules of origin certificates. They believe there will be extensive physical inspections at the border, even under a UK-EU free trade arrangement. This belies the way modern computerised pre-declared border procedures actually work. After all, only two to three per cent of goods are ever inspected.
Unlike the 6 per cent cost assumed by Whitehall, modern border costs are typically well under 1 per cent of the value of goods – and Switzerland measures its actual cost to be only about 0.1%.
Finally, Whitehall’s third flawed assumption is the belief that various non-tariff barriers will spring up immediately after Brexit. But after decades of integration, it’s absurd to suggest the EU will suddenly decide that our regulations aren’t good enough.
Whitehall assumes the cost of such NTBs will be equivalent to a 16 per cent tariff if we have a free trade agreement and 20 per cent if we leave under WTO rules.
These figures are truly massive. The total effect of Whitehall’s assumptions is that the UK – beginning with identical product standards and regulations – would face an effective EU tariff of about 30 per cent under WTO rules. This is about one and a half times the actual tariff faced by the US. Of course, given that we currently have shared product standards, this would be illegal under WTO rules.
These flawed assumptions have led to Whitehall’s central forecast – a 6% loss of GDP under WTO rules. Using the same modelling approach but with more reasonable assumptions, Economists for Free Trade calculates a GDP boost of about 3 per cent.
This helps to explain why the Treasury’s latest stab at forecasting produced a result fully in line with the 2016 version of Project Fear.
The Treasury insists that leaving the Single Market and customs union would do grave damage to the economy due to the loss of trade. However, it also insists that signing FTAs with other major world economies would do little good. Talk about facing two ways at once.
There is another problem with the Whitehall analysis that must be considered. There is a consistent overestimation of the positive impact the Single Market has on the British economy.
The Single Market was touted as a “vital national interest” during the referendum campaign. Project Fear constantly pushed doom-laden messages of economic ruin following a Leave vote.
However, this belief has no basis. The Single Market’s regulations are much less beneficial than assumed for the British economy.
Its rules are rigged in favour of big corporations. It suppresses innovation, competition and growth.
Sober analysis of the trading relationship between the UK and the EU spectacularly dispels the myth that the Single Market is vital for the British economy.
The researcher, Michael Burrage demonstrates that growth of UK exports to the EU has been lower during the era of the Single Market than it was during the common market decades between 1973 and 1992. Our export growth to the EU lags far behind much of the world. We are surpassed by many countries that trade with the EU on WTO terms.
Moreover, UK exports to non-EU countries under WTO based rules have grown four times faster than UK exports to the EU.
As Burrage’s work shows, EU-UK trade has been steadily declining whilst UK trade with the rest of the world has been rapidly increasing. The future of the UK economy does not lie with the European Union but with the wider world.
Contrary to the Whitehall dogma, the Single Market has not been the accelerator claimed for the British economy. We must stop worshipping at the altar of false gods.
Everyone supports evidence-based policy-making, but only the Treasury supports policy-led evidence.
Of course, apocalyptic Treasury forecasts of the grim effects of leaving the EU’s orbit are only part of Whitehall’s armoury of intimidation.
Plenty more will be hurled in the direction of MPs considering voting against the Government’s deal. Cheered on by the establishment media, we will be warned against “crashing out” of the EU and tumbling over a “cliff edge”.
They’ve claimed that planes will be grounded, and hauliers will suffer unprecedented delays. There’s been vehement insistence that Kent will become a lorry park, and hysteria over the rationing of food and medicine. Even Mars Bars will apparently become a thing of the past.
For example, the Healthcare Distribution Association has claimed that the UK will run out of insulin. However, when Channel 4’s Fact Check spoke to the UK’s leading suppliers (Sanofi, Novo Nordisk and Lilly) the companies all said that they don’t expect significant problems in the event of a no-deal Brexit.
Another foolhardy claim is that the UK will run out of food “within days”. Allegedly this would be because of a paralysed Port of Dover. Nothing, apparently, would be able to get into the country.
We’ve had long-term stoppages before, such as 26 days through the summer of 2015. Whilst this was costly, it was not as crippling as the wilder claims have inferred.
As my colleague John Redwood has pointed out, this is all nonsense. The EU is running a near £100 billion a year trade surplus in goods with the UK. The implication of this is just as we work to eliminate problems at the border, so will our European colleagues in Calais, Zeebrugge, Antwerp and Rotterdam.
If Parliament rejects the Governments’ current proposal, then the Government can press for a Canada-plus free trade deal backed by technical solutions on the Irish border. If intransigence from Brussels denies this, we should announce an exit on WTO terms and accelerate preparations for such an outcome.
I am afraid we must be ready for Project Fear 2.0. In a desperate attempt to reverse the result of the 2016 referendum, we are undoubtedly going to hear the most hair-raising stories and improbable forecasts.
Let’s remind those who might waver that we have heard this all before. Let’s expose the glaring weaknesses of the Government’s Fake Brexit. Let’s highlight alternative analyses showing that a World Trade Deal can work for us as it does the vast majority of countries.
“Trust the people” is an old Tory adage. Well, the people were right in 2016 and they are right today.
The task facing the Conservative Party, the governing party, is to deliver the will of the people as set out in June 2016. That means Brexit – and it means a clean Brexit that ensures a decisive break from the influence of a foreign power.
Downing Street and the Treasury will argue they are delivering a clean Brexit. But the facts point in the opposite direction. The Withdrawal Agreement and the Political Declaration are a bogus prospectus. They will keep Britain in orbit around the EU. We will be nothing more than a satellite state ruled from afar.
It is our duty to reject that prospectus and genuinely take back control
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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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It is often claimed that a no-deal Brexit would cause chaos at UK ports, with long delays at critical bottlenecks such as Dover and motorways turned into vast lorry parks. Indeed, we are told that any weakening of our ties with the EU would inevitably disrupt supplies of time-sensitive goods, such as fresh foods and medicines, and cripple businesses that rely on complicated cross-border supply chains. Fortunately, all these warnings have more than a dash of ‘Project Fear’.
Let’s start, though, with the element of truth. There are some potentially valid concerns about the non-tariff barriers (NTBs) that would be erected if the UK exits in March 2019 without a deal. These include logistical barriers, such as delays caused by physical customs and regulatory checks, and additional administrative hurdles, including the need to comply with ‘rules of origin’ and new licensing requirements for vehicles and drivers.
Most attention has focused on Dover, which handles 17% of all UK trade in goods worldwide. According to evidence compiled by the House of Commons library, Dover processes up to 10,000 incoming and outgoing freight vehicles a day. Currently, 99% of these originate in the EU and are processed in around two minutes, but checks on non-EU trucks typically take 20 minutes. The UK Freight Transport Association has estimated that an additional two-minute delay, on average, could cause a 17-mile queue on both sides of the Channel.
These risks obviously need to be taken seriously. Indeed, the Government is already beefing up contingency plans to keep the M20 flowing in the event of any future problems at Dover, and recommending that suppliers add to precautionary stocks of critical goods, including medicines. Car makers have also suggested that they might reschedule planned maintenance shutdowns to coincide with the period of maximum risk.
Nonetheless, fears that ‘no deal’ would result in substantial disruption at ports (or Eurotunnel) are exaggerated. The key point is that they assume a significant proportion of lorries crossing the Channel would be subject straightaway to the same checks as those from non-EU countries. This is very unlikely, for three reasons.
The first is legal. It has been argued (notably by Economists for Free Trade) that new UK-EU NTBs would be unnecessary, and even illegal under WTO rules, given that exports from both sides will still be made to the same standards immediately after the UK’s departure from the EU. Others have countered that some additional checks would still be required, or else the parties would be in breach of the WTO’s Most Favoured Nation principle. But there is at least broad agreement that checks could be limited. There is certainly no legal requirement to inspect every vehicle, or to carry out every check at the border itself. It is also not as if there are currently no checks at all.
The second is economic. Even French officials have stressed that it would be in their country’s own economic interests to minimise any additional delays. In particular, they have dismissed fears of a Calais ‘go-slow‘ and suggested that as few as 1% of UK lorries would be subject to a physical check (my own crude calculation is that an additional two-minute delay, on average, would require at least 10% of UK lorries to be subject to a 20-minute check).
The third reason is practical, and may well be decisive. Put simply, neither the UK nor the EU has the physical infrastructure, or enough officials, to check every vehicle anyway, or even a significant proportion. In this respect at least, the lack of preparedness could actually be a blessing in disguise.
A more pragmatic approach could also help solve other problems. For example, in the absence of any alternative arrangements, UK haulage companies would no longer be able to operate in EU countries under existing EU rules. This is much the same as the problem facing the aviation industry: if no mitigating action is taken, ‘lorries cannot be driven’, in the same way that ‘planes won’t fly’.
However, the EU has already made a reciprocal offer to the UK in respect of air traffic rights and the validity of aviation safety certificates in the event of ‘no deal’. The EU has continued to take a tough line on road transport, but an important precedent has been set. A similar solution could presumably be found if existing rules on road transport would significantly disrupt trade from which both parties derive large economic benefits.
What’s more, any initial disruption should be short-lived. For example, border delays could be reduced in future by the sort of ‘maximum facilitation’ (MaxFac) proposals that many have already suggested as a means of reducing the costs of customs clearance. The recent parliamentary testimony from customs experts Hans Maessen and Lars Karlsson should be required reading here (and for those who still believe membership of a customs union is the only way to avoid a hard border in Ireland).
Crucially, too, any problems created by a ‘no deal’ in March 2019 do not have to be permanent. Leaving on WTO terms could simply be an alternative stepping stone to a comprehensive free trade agreement that would keep any additional frictions to a minimum, rather than the standstill ‘transition period’ and Irish backstop proposed in the current Withdrawal Agreement.
Of course, I’m not suggesting we should dismiss the concerns of UK businesses entirely. Leaving the EU in March without a deal would clearly create a lot of challenges. But there are also many good reasons why even the initial disruption at ports should be much less than feared.
The last Budget before Brexit is a spectacular opportunity to send a message to the world that the British economy will not just survive but thrive outside the EU. In order to do that, some very clear messages need to be sent out. This is the vision thing which neither the Prime Minister or the Chancellor seem able to do.
We need a vision of a low-tax, low-regulation economy, which will overpower Germany and France as the largest economy in Europe. The number one lesson of economic history is that freedom works: there is no more robust an economic relationship than that between economic freedom and prosperity. And if you’re going to make a statement, it needs to be a big one – because economic behaviour doesn’t change with small tweaks to the system.
So how does the Chancellor make a big statement with very little money? When I worked at the Institute of Directors, we lobbied the previous Chancellor to pre-announce cuts in Corporation Tax. This made business happy about tomorrow, even though they weren’t that much better off today.
The rate of Corporation Tax stood at 28 per cent in 2010 and has been progressively reduced to 19 per cent today, with a commitment by the Government to reduce it to 18 per cent from April 2020. This what we need now: a promise from the Chancellor to deliver progressive reductions in Corporation Tax until the rate reaches just 10 per cent in 2025. Outside of tax havens, that would be the lowest rate of corporation tax in the world. This is a tax cut as much about the message as the money. Moreover, it is doable over that timeframe because each percentage point costs around £2 billion in lost tax revenue – before taking into account any dynamic supply-side effects which might increase (not decrease) revenue.
HM Treasury in part justified the previous Corporation Tax cuts in the wake of the financial crisis, as being necessary because of the economic shock the economy had experienced. Well, the Treasury seems to think both in the short and long term that Brexit is a negative shock to the economy; and so on the basis of its own argument, it needs to reduce Corporation Tax again, and in the same pre-announced manner.
I’m happy to use the Treasury’s argument against them, even though I fundamentally disagree with their long-term assessment of the economic consequences of Brexit. The problem here is that it’s very difficult to critique the Treasury’s assessment because it seems to have recognised the flaws in its previous methodology – published before the referendum – and abandoned it, but refuses to provide any detail of its subsequent approach and the assumptions behind it.
If HM Treasury is so confident in its analysis, why be afraid to publish it? The suspicion must be that they’re not confident and are only coming up with big negative numbers because of the questionable assumptions they employ about the post-Brexit world.
Research published by Economists for Free Trade (of which I am a part) shows that with the right policies, GDP could be 7 per cent higher – not lower – by 2030 as a result of Brexit. We can argue about how big that number is, but the key point is that it is positive not negative. With regard to no deal, other commentators, such as Open Europe, have recently published research which essentially says, yet again, that all the gloom and doom and Project Fear is way overdone. And they’re not advocating the domestic and international policies of economic liberalisation advocated here, which would increase the benefit of Brexit.
The most important supply-side liberalisation in the wake of Brexit is international, not domestic. It would mean that the UK could use exit from the Customs Union and the Single Market to reduce tariff and non-tariff barriers on imports from all over the world. The static (consumers and intermediate producers pay lower world prices) and dynamic (competitiveness and productivity are raised) gains from this liberalisation, in combination with domestic economic liberalisation, would set Britain on the road to far greater prosperity in the coming decades.
With negotiations not concluded, the Chancellor probably doesn’t want to say too much about the future of the City, but one thing he should be saying in private is that HM Government will unleash the City to ensure that it remains the number one financial centre in the world.
And if the Chancellor wants to make sure just-in-time logistics continue to work smoothly after Brexit, why not spend some more money on road investment to make sure overall transport times are reduced? As with pre-announced tax cuts, pre-announced road infrastructure investment would not break the bank now, or in the future, but it would change the mood music and begin to help people catch the post-Brexit vision of an economy intent on maintaining and improving its status as an FDI magnet.
Where there is no vision, the people perish.
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