Soon after graduate school I joined the Treasury as an economic adviser and worked alongside economists from the Bank of England and the rest of the Civil Service. We were proud to be bringing economics into the public service. Many years later in 1992 I served on the Treasury’s Panel of Outside Forecasters (‘The 6 Wise Men’) to help guide monetary policy in the aftermath of ‘Black Wednesday’ when we were driven out of the EU Exchange Rate Mechanism. The Treasury chief economist then was Alan, now Sir Alan, Budd, and the Bank’s was Mervyn, now Lord, King.
I am appalled that our equivalents today in the government have spent their time issuing antiBrexit propaganda – still hoping to reverse the referendum decision – instead of dutifully planning post-Brexit policy, so necessary with Brexit only weeks away.
THE WHITEHALL PROPAGANDA WAR AGAINST BREXIT
A few weeks ago, we had the latest Treasury and ‘Cross-Whitehall’ report, arguing that any Brexit at all, including the government’s proposed deal, would be worse than Remaining. Then the Bank weighed in with a ‘Brexit crisis scenario’, an implied forecast of how bad No Deal would be, concealed as a ‘stress test’ of whether the economy could survive it – it could! Latterly, the Bank has reiterated its forecast that No Deal would be bad, causing a likely recession, and using it as an excuse for delaying raising interest rates.
These interventions are designed to undermine our efforts to persuade the EU to modify the Government’s proposed deal by strengthening popular and MP concerns over No Deal. They aim also to persuade Parliament to back amendments delaying Article 50 and seeking another referendum. The sought-for prize in both cases is the status quo, ultimately Remain. It should be unthinkable for our Civil Service to play politics and conspire against the people’s 2016 decision so nakedly, as demonstrated in Brussels last week by the Civil Service’s chief negotiator.
This deceitfulness is bad enough but worse is that their propaganda efforts would lead to terrible economics. My message to Brits is: unlike these self-styled experts, you got this issue right. Yes, you were right to ask for your democracy back, and yes, this is also good for the British economy, contrary to all that Project Fear.
Let us remind ourselves about what Brexit means for economic policy:
- Free trade with the non-EU world, bringing down prices, boosting competition, and increasing productivity
- Setting our own regulations across the economy, to ensure the best approach to new technology, energy, and financial services – all areas central to our future growth prospects. This is in contrast to the EU’s highly interventionist, bureaucratic, protectionist approach
- Ensuring that unskilled immigration is no longer subsidised by the taxpayer at great cost to lower-income communities (£3,500 per annum for each unskilled worker) and that it stops depressing wages to the detriment of UK unskilled workers, whom businesses then have no incentive to train
- Ending paying large amounts into the EU budget
Taken together, we calculate these policies will add about 0.5% a year to our growth rate over the next decade and a half, cumulatively adding 7% to GDP by 2035.
As part of the EU, we have been unable to adopt these policies because we have lost democratic control. Reasserting it through Brexit means we can move into a post-Brexit world of better policies that will promote UK prosperity.
THE TREASURY’s ABSURD ANTI-BREXIT ASSUMPTIONS
How has the Treasury managed to argue precisely the opposite; that post-Brexit our economy will decline by 7% or more of GDP? Answer: by making absurd assumptions.
No Gains from Free Trade with the Non-EU World
First, the Treasury alleges that free trade with non-EU countries brings in trivial gains because we would reduce our own trade barriers by only a little and other countries similarly would do little to reduce theirs.
Aside from this refuting the most widely agreed principle in economics, we have practical evidence from Australia to disprove this claim. Australia too had high protection against the rest of the world but thirty years ago they did remove it and did strike free trade deals with all and sundry. Their government now estimates that free trade boosted Australian GDP by over 5%. If Australia can do it, so can we.
In fact, if we assume we get rid of the current EU protection of about 20% on both food and manufactures, the gain to UK GDP is 4%. – calculated by using the same World Trade Model now used by the Treasury. Moreover, we have further calculated that virtually all this gain could be obtained by agreeing just one key free trade agreement – i.e. with the US. This is because the huge US economy can supply virtually all of our current imports and almost all at the lowest world price.
‘War at the Border’ with the EU
Second, the Treasury assumes that we would become engaged in a sort of ‘border war’ with the EU. The Treasury alleges the EU would increase inspections and slow traffic down, that they would query whether our exports comply with their standards. And, vice versa, we would do the same to them. The Treasury assumes that such actions would be the equivalent of imposing 25% tariffs each way.
This is fantasy. Besides being against our own and their own interests, these actions are illegal under WTO Rules. This does not just mean that there could be legal action in WTO Appellate Bodies. More to the point, injured businesses in the thousands would take the offending port authorities to EU and UK courts that enforce acceptable and legal commercial practice – as defined by WTO law.
Practically speaking, such actions would represent economic suicide to European port operators. Not surprisingly these authorities, including Calais, have declared roundly they will not take any such illegal actions and inspection regimes will remain the same as they are today. And HMRC has declared a policy of prioritising flow over checks – i.e. waving through imports and worrying about any customs aspects subsequently.
No Gains from Post-Brexit Tariffs
Under No Deal initially there probably would be tariffs both ways. Until a free trade deal is agreed, each side would be forced by WTO rules either to impose tariffs on all countries, or to abolish them entirely for all. For political reasons, the UK is not likely to abolish tariffs universally in the short term.
Importantly, the Treasury has failed to acknowledge that tariffs would favour the UK – we would receive £13 billion in tariff revenue from EU exporters versus the EU Commission receiving £5 billion from EU importers (thus, a net loss to the EU).
As soon as we have agreed trade deals with non-EU countries – especially soon with the US – our home market would be dominated by lower world prices. EU exporters would not be able to ‘pass on’ the increased costs of any UK import tariffs because UK consumers would not pay the higher EU price. Similarly, EU importers could not ‘pass back’ to our exporters the EU tariffs they are paying, as UK producers would switch to selling at home. In practice, our export sales to the EU would not suffer because EU prices are raised by EU protection to the same levels as UK export prices plus these tariffs.
This means that, under No Deal, we gain at the EU’s expense. This should encourage the EU to do a free trade deal with us after Brexit – which we of course would welcome.
So in short the Treasury has it all wrong on trade.
No Gains from UK-Based Regulations
The Treasury attributes virtually no gains to us retrieving control of our economic regulations, contrary to all the evidence of damage from EU regulations. How ridiculous is that? Our own UK government saying it could not do a better job of regulation than a foreign power with an expressed aim of reducing our competitiveness!
A Mad Immigration Policy, Keeping Out Skilled Workers
To cap it all, the Treasury assumes we will pursue a self-harming immigration policy of stopping skilled immigration, which all agree we need. Again, a bad own goal.
To sum up, our own Treasury and civil service see no benefits from free trade with the rest of the world while lamenting the loss of free trade with the EU, imagines standard trade procedures as practiced all over the world will be impossible with our EU neighbours, believes we are incapable of implementing better home regulation, and thinks we will adopt an irrational immigration policy. If this is truly what they believe, we will need another civil service post-Brexit.
THE BANK’s TALK OF RECESSION FROM NO DEAL
Turn now from these crazy long term Treasury estimates to the short term threats of recession made by the Bank, backed by regular remarks from the Chancellor Philip Hammond.
As we saw during the referendum campaign, the Bank has form in predicting ‘Brexarmageddon’. Then, the short term forecast was that the uncertainty triggered by only a Leave vote would destroy consumer and investor confidence and so kill off spending, creating a recession.
Instead we have seen the UK economy continue growing fairly steadily, reaching extreme lows in unemployment and record employment. Wages are now growing faster than prices. Also the economy has absorbed a large devaluation that has had a tonic effect in improving our balance of payments. It did this with a minimal effect on inflation. Nothing here to worry about at all.
For their latest scary Brexit No Deal scenario, the Bank has again invoked a crisis based on uncertainty and plunging confidence – heavily focused on what happens with the Dover-Calais ferry route.
But No Deal – as we have explained – will not disturb the border, as that would be illegal and there are alternative ferry routes available. As for shortages of vital foods, medicines, or vital components, they depend on the same story, now discredited by the EU port authorities who are worried about losing market share to competing ports.
With border procedures changing, there will be some short run hiccups, as some firms may fail to adapt quickly. But firms will soon learn, and will get extra support and credit to tide them over.
Has investment been hit? I show below the chart of UK total business investment up to the most recent available figures.
What the chart shows – following the Financial Crisis – is the usual irregular behaviour of most economic series around a rather smoothly moving upward trend. It is true that the latest data points to a weak and declining growth of investment as shown below in more detail from the latest ONS release. This is not surprising, given the long deferral of positive Brexit prospects due to the Government’s failure to provide a clear route to Brexit and to explain its benefits.
Therefore, it is likely that some investment is being delayed until Brexit has happened; but it then will be implemented. This is the essential point about investment; that it is delayed, not lost.
One can see from these two charts that, although investment growth is weak, its contribution to the economy is fluctuating around a stable trend. Meanwhile we can see that the economy is fully employed so that demand growth overall is continuing to create jobs; growth is fluctuating as the latest GDP figures show, but this is quite normal. The fourth quarter was slower after an unusually strong third quarter – and subsequent revisions often are higher. So from the point of view of demand, the weak investment is not preventing full employment, with an economy well at the limits of productive capacity.
Of course, EU countries would love to have our results – Germany’s just announced Q4 GDP growth is half of ours, while Italy has been in recession for six months.
NEGATIVE FORECASTS REFLECT POOR UNDERSTANDING OF BREXIT ECONOMICS AND PEOPLE’S EXPECTATIONS
The truth is that ‘uncertainty’ as a factor is much overdone by commentators. Change is a continuous feature of any economy. The ‘uncertainty’ argument depends on a belief that rational market participants will somehow not be able to cope with future change thereby freezing their activities.
In reality, businesses need to make money quickly as markets are constantly changing; households need to pay bills over the foreseeable future, and having a job is the best guarantee of being able to do so. So the ‘here and now’ situation, especially with employment, dominates their actions. As for future shocks, there are many; and predicting them a fool’s game. Of course, we can insure the obvious things.
So it is the UK’s flexible labour market that has kept the economy fully employed, full of short term confidence therefore, and growing steadily – Brexit has made little difference. It is a good lesson in the importance of market flexibility.
Whatever the short-run effects of Brexit uncertainty, they soon will give way to post-Brexit reality. It is here that official forecasts fail most seriously because they do not factor in the gains explained above. The economy, particularly investment, will respond to the prospects of these gains. That is how rational expectations of the future stimulate entrepreneurs to take advantage of unfolding new opportunities. Officials do not understand this process and, consequently, do not include such effects in their forecasts. Add in some uncertainty nonsense and out pop their doom and gloom forecasts – particularly if such forecasts support a biased perspective.
What we need now is for Brexit to occur and usher in the new opportunities from free trade and better regulation.
We see here an astonishing catalogue of bad economics coming from a determination to reverse the people’s referendum decision. This from our own Ministers and Civil Service who are supposed to support policies the people have voted for. Our civil servants must now get behind Brexit and reflect its opportunities in their forecasts.
It is time that the Bank and the Treasury stopped making arbitrary assumptions that our flexible firms and households will suddenly behave like headless chickens. Instead they should assume rational expectations, by now a widely supported assumption in economic forecasting.
My advice to the British people is: make it known to MPs that you will not stand for their bad economics, stick to your previous thinking, ignore the ongoing Project Fear as you got it right and these ‘servants’ of yours got it all wrong.
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Many suggest that, despite it being made very clear at the time of the referendum that a vote to Leave the EU meant leaving the Customs Union, we should Leave the EU but remain a member of the – or a – Customs Union.
This would very much mirror the situation in which Turkey finds itself – and that itself should be a lesson as to why this is a bad idea and why going WTO on 29th March would be infinitely preferable by comparison.
A customs union with the EU means that the UK would not have its own trade policy. Therefore we would not be able to strike preferential agreements affecting trade in goods or services with other countries; we would not be able to set our own tariffs to suit the UK economy; and we would not be a full member of the World Trade Organisation. It seems extraordinary that any MPs and others can seriously believe that restricting the UK’s options in this way to be a good idea.
The second aspect of a customs union with the EU that I don’t think many MPs and others realise is that any goods exported to the EU or imported from there would still need to be covered by a movement certificate. This is detailed in the proposed Withdrawal Agreement on pages 342 to 353. The proposed A.UK document would appear to mirror the A.TR used for trade with Turkey. This document has to be completed by the exporter and then stamped by HMRC before being sent to the customer.
For businesses like mine which despatch large numbers of small consignments, we would need to employ an extra person just to complete these documents – which would be far more expensive than the cost of paying the applicable tariff. It could also potentially lead to delays in despatching urgent orders where – as is the case with Turkey – it is required that the stamped document accompanies the order.
Shipping under WTO rules, as we do to most of the more than 120 countries in which we have customers, requires no movement certificate, no pre-stamping, just invoices produced here. This means that orders are despatched on the day of receipt and in Europe and North America delivered next day customs cleared.
Ironically, this means that if the UK were in a customs union with the EU, our competitors in the United States would be able to supply our customers in the EU quicker than us. Their goods would have arrived with our customers whilst we would still be waiting for HMRC to stamp the A.UK movement certificate!
I think it is important to note that neither Norway nor Switzerland as members of the European Economic Area have shown any desire to be members of the EU customs union and have instead preferred to define their own trade policy, with great success. As one of the largest economies in the world, it seems extraordinary that we should even consider tying our hands in this way.
To me, as someone trading all over the globe, it would be madness being in any sort of customs union with the EU and we should maximise trade through simplicity and have no hesitation going WTO on 29th March.
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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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Fear of leaving the EU without a deal, and of trading with the EU thenceforth under WTO terms, has been created primarily by the much-cited series of predictions of severe adverse economic consequences by HM Treasury. It is therefore of some importance to decide whether their predictions are credible.
One set of their pre-referendum predictions referred to the adverse consequences within two years of a vote to Leave the EU rather than leaving itself. Since we have now lived through the period they covered, we now know that apart from one minor point, the fall in the value of sterling, they were all false. Every other prediction they made, on GDP, (which was predicted to fall rapidly by between 3.6% and 6.0%) on employment, house prices, wages, inflation, FDI and public finances, was wrong, often by risibly large margins, and always in the same direction. This suggests they were deliberately manipulated to give a politically helpful result for the then Government-backed Remain campaign. They naturally raise questions about the Treasury’s other three sets of predictions about the long-term consequences of Brexit itself.
These cannot be tested by reality until 2030 or beyond, but since they rely on a number of highly improbable assumptions and estimates, they are no less contrived than their short-term predictions, and no more credible. These assumptions and estimates cannot all be examined here, but we can identify the most improbable and incredible, the ones that have contributed most to the Treasury’s characterisation of trading under WTO terms as the worst possible post-Brexit option.
Their first set of long-term predictions was published in April 2016, and depended to a large extent on the assumption that future UK intra-EU trade in goods would increase at the same rate as that of all other members. This was followed by the estimate that by 2030, if it remained a member then, UK trade in goods would have grown by 115%. If, by contrast, the UK left to trade under WTO rules, it would not enjoy any of that 115% growth, and primarily for this reason, its GDP in 2030 would be 7.5% smaller than it would have been if it had remained a member.
This seems to have prompted Remain supporters to describe the transition to a no-deal exit as a cliff edge, a car crash, or a leap in the dark, and trading under WTO rules as chaos, catastrophe and Armageddon. Since most of world trade, and much of UK trade, is routinely conducted under these self-same WTO rules, the aptness of these metaphors is questionable, but what matters here are the assumptions on which the Treasury prediction was based.
Questions about it might first have been raised with the Treasury itself since a rare piece of in-house classified research conducted in 2005 had shown, like more recent studies, that the rate of growth of the UK’s intra-EU trade during the Single Market has differed greatly from that of other members, most especially from those in Eastern Europe. This HMT research also showed that over the 31 years from 1973 to 2004 it had grown by only 16%, while later IMF/DOTS figures showed that over the 22 years from 1993 to 2015 UK exports to the EU 14 had grown by 25%. To then ‘estimate’, as the Treasury authors do, that over a mere 15 years to 2030 UK-EU trade in goods would suddenly increase by 115%, may be reasonably called absurd, or even a deliberate manipulation to produce a highly misleading prediction. A recent re-examination of the same evidence, using the same gravity approach as the Treasury, but referring to the UK alone, estimated the likely increase of trade in goods with the EU by 2030 to be ‘in the range 20-25%’.
The Treasury was a contributor to the second set of predictions, the EU Exit Analysis Cross Whitehall Briefing of July 2018. Its wildest assumption was that UK goods trading with the EU under WTO rules would immediately incur tariff, non-tariff and customs charges with a total tariff equivalent value of 30%. It qualifies as wild because the total tariff equivalent value of the goods exports of United States and Japan to the EU have been reliably estimated to be just 20%, or only two thirds as much as those the Treasury predicts for UK exports after a no-deal Brexit, even though its product standards are identical to those of the EU.
Patrick Minford analysed these non-tariff and customs charges in considerable detail, and pointed out that some of the barriers conjured up by the authors of these predictions would be discriminatory and therefore illegal under WTO rules, which the EU generally respects. Why UK civil servants should assume that their EU counterparts would deliberately ignore them post-Brexit is unclear. However, with the help of the 30% total tariff equivalent value, leaving with no EU deal and trading under WTO rules again emerges as the worst post-Brexit option, resulting in a shortfall in UK GDP by 2030 of about 7.7% versus what it would have been had the UK remained an EU member.
The third set of predictions was published in November 2018 specifically to inform Members of Parliament about the long-term economic consequences of various future relationships with the EU in advance of their fateful ‘meaningful vote’ on the agreement negotiated by Mrs May. It contrives, as Andrew Lilico observed, to show the ill-effects of trade under WTO rules by the simple ploy of exaggerating all the future gains of EU membership and minimising all the possible gains that might follow the UK taking back control of immigration, regulation and trade policy.
The outstanding example of the latter is the 0.2% gain to GDP that it estimates would result from FTAs that the UK might conclude with the US, Australia, Canada, India, China and 12 other non-members. It qualifies as an absurdity because the European Commission had previously estimated that the gain to EU GDP of concluding agreements with a similar set of countries would be 1.9%, almost ten times as much therefore as agreements negotiated by the UK alone which would, one imagines, be better tailored to British exporters.
By repeatedly making other estimates in a similar manner, the report arrives at the desired prediction. Indeed, the final prediction that made the headlines, a 9.3% shortfall in UK GDP by 2035-36, was reached simply by assuming that there would be zero immigration from EEA countries until 2035-36, a proposal that no one has ever made. The recently published White Paper suggests it is far removed from any likely future government policy.
The remarkable thing is that any of these Treasury predictions have been given any credibility whatever and were not dismissed with a laugh, just as the predicted immediate consequences of a vote to Leave have often been. Part of the explanation must be that specialist publications like The Economist and the Financial Times, and specialist correspondents of other media such as the BBC, Sky, The Guardian and The Times did not check and flag these and other questionable assumptions and estimates on which these predictions depend.
Perhaps they did not have the time or maybe they welcomed Treasury support for the Remain cause, but a further reason one suspects, is that, like the rest of us, they wanted to trust Treasury mandarins. They saw them as honest, upright, non-partisan experts performing their duties by providing entirely trustworthy and reliable evidence to inform ministers and public debate.
Unfortunately, on European issues at least, this image is woefully mistaken. The Treasury has never regularly and dutifully conducted impartial research on the impact of EEC/EU membership on the UK economy. And it has never been asked to do so by any government since 1973, probably because ministers were usually engaged in persuading the ever-sceptical British public of the merits of European integration and doubted that empirical research would be an altogether reliable ally.
Since 2000, the Treasury has, like other departments, been obliged to conduct impact assessments of proposed legislation derived from EU regulations and directives, but it never sought to translate them into a meaningful national cost/benefit analysis. In 2003, at the time of the debate on joining the euro, Treasury mandarins searched the world for experts on optimal currency areas and debated and published their differing views shortly before the Chancellor announced his decision. The research conducted in 2005 and mentioned above was a one-off, and remained classified until an FOI request in 2010.
When they were asked to make the case for Remain, Treasury mandarins therefore had no historical analyses to draw on, apart from the 2005 one they wanted to forget. And they did not instantly assume a quasi-judicial impartiality. Apart from the one month purdah periods before the 1975 and 2016 referendums, they had never been asked to be impartial on this issue, and they evidently felt under no obligation to be impartial with respect to the division of opinion in the country at large. Hence, they immediately showed themselves to be fervent, unabashed advocates for continued EU membership and produced predictions to delight their all those who shared their view.
All of us have paid, and are still paying, a high price for the Treasury’s failure to conduct and publish impartial analyses of the impact of EU membership on the UK economy over the preceding forty-plus years in accordance with our image of them, and with their own core values and rule books. Had they done so, the referendum debate would have been rather more informed and enlightening than it was. Instead of constructing Project Fear for the Remain side, they might have tried to match Business for Britain’s superbly documented case for Leave in Change or Go.
In the course of such research, they would necessarily have had to understand and explain why the exports of countries trading with the EU under WTO rules, like the United States, Canada, Australia, Singapore and a host of emerging societies have been growing so much faster than the supposedly frictionless ones of the UK over the life of the Single Market. American exports to the EU, for example, grew by 68% from 1993 to 2015, and the smaller British exports by just 25%. If trading with the EU under WTO rules has proved so successful for others, why would it be the worst possible option for the UK after Brexit?
They might also have been able to explain why it is that UK exports to 111 countries around the rest of the world under WTO rules have also grown so much faster than its exports since 1993 to the EU itself, and to those countries with which the EU has negotiated trade agreements from which the UK was supposed to benefit. These are questions that the Treasury mandarins have preferred not to address.
Much relevant evidence to determine whether or not trading under WTO rules is the worst post-Brexit option could be obtained from UK companies which currently trade with the EU from a member country and with the rest of the world under these rules, since they are able to make direct comparisons. The Treasury is well-placed to conduct such research via HMRC but this is more evidence that it has decided it, or the government, or the country does not need. Some companies have, however, spontaneously testified about their experience of trading under both systems. It directly contradicts the sharp contrast between them which the Treasury has sought, with some success, to make the centrepiece of the debate about the UK’s post-Brexit options.
Lord Bamford, Chairman of JCB, the UK’s largest manufacturer of construction equipment, for instance, recently felt ‘compelled to say this about a no-deal Brexit: there is nothing to fear from trading on World Trade Organisation (WTO) terms… Trading with Australia on WTO terms is as natural to us as trading with Austria on EU single-market terms. John Mills, founder of JML, which sells to ‘80 countries at the last count’, said that ‘about 80 percent of all our international trade is on WTO terms, so we know what the paperwork’s like. Once you’ve done it half a dozen times, you’ve got it all on the computer, it just isn’t that difficult.’
Even more emphatically, Alastair MacMillan, whose company exports to 120 countries in the world including every EU member, points out that ‘there is little difference in the way we handle freight going to the EU compared to the rest of the world. The United States is our biggest market and we compete directly against US companies in their own market, in part, because we deliver next day to anywhere in the United States by 1pm their time, customs cleared. That, to me, is frictionless trade and it is at a cost that is not dissimilar to the same service to customers in the EU’.
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A true economic miracle is happening. An extraordinary leap in the UK’s global export trade has occurred – a complete reverse of the ‘Doomsday’ predictions of the Treasury, Bank of England and Department for Business in London both before after the Brexit vote.
According to figures published by the UK Office of National Statistics in November – in the second calendar year following the EU referendum – exports to non-EU countries were £342 billion while exports to EU countries were £274 billion.
In the same period, the growth in exports continued to outstrip the growth in imports, almost halving the UK’s trade deficit from £23.4 billion to £15.8 billion. Most exceptionally, since the referendum, exports have increased by £111 billion to £610 billion.
Doubters will say it is a temporary blip caused by the falling pound. Not true. The boom is in new markets, and largely in new products and services, too. UK exports not just increased but doubled in hitherto obscure countries such as Oman and Macedonia. Exports to distant Kazakhstan climbed to $2 billion, only slightly less than the UK’s exports to Austria, worth $2.43 billion in 2017, which like many EU nations buys very little from the UK.
In the 12 months to September, the value of UK exports grew by some 4.4%, including strong growth in the manufacturing sector. Indeed, HMRC stated that exports of goods had shown “robust growth in every single region of the UK”. The number of Welsh SMEs which export doubled during the last two years to 52%.
Curiously, none of this has been spotted by any of the UK’s headline media – the BBC, Sky News or the FT. Not a peep from the new editor of the Daily Mail. Even The Economist was asleep on the job. Meanwhile, various government departments are spending much of their time issuing ‘Death in Brexit’ forecasts in a co-ordinated campaign with the Bank of England and other allies – and rarely champion our achievements.
Four years ago I was interviewed by Richard Cockett, The Economist’s UK business editor. I told him the UK was experiencing an unparalleled SME boom. How did I know, he asked? Since leaving the FT as a technology correspondent and columnist in 2003, my small team in central London has maintained a uniquely comprehensive database of more than 70,000 UK smaller companies.
As a result, daily we receive an avalanche of success stories. In the food and drink sector alone, if you want whisky marmalade or beetroot ketchup, or 500 new gin varieties or more than 1,000 new craft beers launched since 2011, our very brave, risk-adoring micro-SMEs will deliver.
If a New York cathedral needs a new, hand-made organ that £3 million contract comes to Britain. We sell sand to Saudi Arabia, china to China, and Turkish delight to Turkey. In the ultra-competitive auto components sector, UK exports are up 20%. Luxury goods, consumer goods, clever instrumentation for NASA and crucial cerebral input into US defence projects are all avidly listed in our dataset.
And yet, in our view the true importance of the export boom is as much political as economic. It proves that a No-Deal exit from the EU – or what I much prefer to call ‘Our Own Deal’ – is by far the best option, and far less damaging and disruptive than the ‘experts’ at the Bank of England, IoD, CBI, OECD and World Bank have forecast.
Far from being the ‘poverty and isolation’ scenario predicted by the chin tremblers who endlessly appear on Radio 4, the UK will be far much dependent on the EU in as little as five years.
Fears about UK-made cars from Japanese firms such as Nissan and Toyota being cut off from Europe are groundless. First, the UK could retaliate against BMW and VW – something no post-Merkel German politician would tolerate. Any anti-Japanese actions by the French would result in the rapid diminution of the £4 billion annual exports of French cosmetics to Japan. And the French know it, no matter what Macron might bluster.
But the export explosion is not the only piece of recent great news for the UK – there is more. First, in October 2018 Japan’s Prime Minister, Shinzo Abe, invited the UK to become part of the Pacific free trade pact – although this is dependent on the UK leaving the EU’s Customs Union. It would make the UK the sole geographically-distant member of the grouping, helping the country to rebuild trading links around the Pacific Ocean that stretch back more than two centuries.
Next, BP’s huge Claire Ridge oilfield, west of the Shetlands, just came on stream, providing no less than £42 billion in revenues over the next 25 years. It is a development much envied across energy-starved Europe – and there are more oilfields to come.
At this critical moment in the Brexit saga, it is vital the UK now wakes up to the much brighter future it has outside of the EU, and vital that Mrs May copies the bravery of our SME exporters. The so-called ‘No-Deal’, a term that needlessly frightens ordinary citizens, should indeed be re-named ‘Our Own Deal’, in which we invite all nations to trade with us on fair trade, low or no tariff, basis.
The UK economy will soon be in a solidly secure position to refuse any damaging ‘deal’ from the European Commission. Perhaps it was always the height of imbecility to think we could ever get a good deal from the Commission.
Finally, the tide of history is in our favour, even in Europe. The current, sub-optimal generation of European politicians – Cameron, Merkel, Juncker – will soon ‘be history’. Merkel goes next year – and every EU Commissioner will be replaced, too.
As Brexit talks limp from one embarrassment to the next, a No-Deal option will not be the doomsday Theresa May, the financial and property elites, and the heads of the UK’s top organisations and PLCs have long predicted. In fact the UK should never have negotiated with the Commission – from whom no fair deal was ever possible. The UK should introduce its own deal, ‘Our Deal Now’, in which we offer all nations fair trade agreements with no or low tariffs.
For hundreds of thousands of small UK companies, a complete split from the EU can’t come soon enough.
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The wide-ranging Free Trade Agreement with zero tariffs proposed by Donald Tusk in March foundered on the supposed problems of the border between Northern Ireland and the Republic of Ireland. In response, the Prime Minister proposed in her Chequers document to bind the UK to a “common rulebook” – really the EU’s rulebook – for goods in order, she said, to ensure continued frictionless trade between the EU and the UK.
This attracted little political support in the EU because it was seen as “cherry-picking” and even less in the UK for leaving us as permanent, non-voting rule-takers. The proposals were rejected on a technical level by the professional customs body, CLECAT, whose 19,000 members handle 80% of European customs transactions. They found that Chequers “would require five to ten years before it can be applied in practice… new/non-existing systems and procedures will potentially lead to more complications.”
Reports this week suggest that the Prime Minister has now gone even further to secure a deal at any cost. Her new “backstop” proposal is for an open-ended customs union. She has ruled out customs union membership 21 times, so this would represent a humiliating defeat. The UK would have submitted to everything the EU demanded, paying them over £40bn for the pleasure and completely ceding our international trade policy to Brussels in clear breach of the Conservative Party’s manifesto commitments.
How has the Prime Minister got into this mess? Her motivation – a seamless border – is well founded, but her premise is that the only way to guarantee this is by some new, complicated customs arrangement. This is simply not true.
Firstly, only 4.9 per cent of Northern Ireland’s sales are with the Republic of Ireland, representing under 0.2 per cent of UK GDP. We should not, surely, give up our law-making capability over a wide area for the sake of that tiny fraction.
Secondly, there is already a border now – for tax, VAT, currency, excise duty and security – managed by technical and administrative procedures. These existing measures provide the foundation to maintain frictionless trade after Brexit. The Heads of HMRC and the Irish Revenue have confirmed this, saying that any additional requirements can be achieved without any new facilities at the border.
To see why, consider the range of simplifications to customs procedures and administrative obligations available under EU law. These are an ideal fit for much cross-border trade, characterised by regular, repetitive shipments – the same milk, from the same cows, from the same farm, in the same tankers, on the same roads, to the same destination. These obligations typically require only a one-off registration and, for regular trade, negligible costs of repetition. Companies already have to report all cross-border trade for VAT purposes, and the current system provides a framework for streamlining customs controls. Even small traders can – and currently do – take advantage of a voluntary registration to claim back VAT.
The agri-food sector accounts for just under half of all cross-border trade. Inspections can be necessary for these products but can, in practice, take place many miles from the physical border. I saw this myself when I visited Rotterdam, Europe’s largest port, this week. The Border Inspection Point is 40km from the docks and deals with 30,000 shipments annually from all over the world, including from outside the Single Market and Customs Union. There, 97-98 per cent of chilled or frozen meat and fish are cleared without physical inspection. Only 2-3 per cent are physically checked, based on intelligence, and 90 per cent of those shipments are cleared well within an hour.
The simplest way to avoid the need for animal checks between Northern Ireland and the Republic of Ireland is by maintaining an all-island biosecurity zone for disease prevention and public health. I visited the facility where inspections already take place for livestock shipments from Great Britain at the port of Larne. There are clear lessons from Rotterdam as to how such checks can be managed efficiently and how intelligence can minimise the need for lengthy inspections.
The Prime Minister’s convoluted customs proposals are unnecessary. Existing technical and administrative processes can ensure that a frictionless border is maintained after Brexit, not as a temporary, cobbled-together “backstop” but as a durable, long-term arrangement which allows for the wide-ranging, zero-tariff trade agreement which Donald Tusk proposed. That, surely, is the optimal solution for all sides.
The post The Prime Minister must not go for a deal at any cost appeared first on BrexitCentral.
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Brexit march: Former Conservative deputy prime minister calls Theresa May's No 10 speech an 'affront to parliamentary democracy''I may be naive, but if something is wrong, I look first for the person in charge,' Lord Heseltine told thousands of protestors in central London
Brexit march: Former Conservative deputy prime minister calls Theresa May's No 10 speech an 'affront to parliamentary democracy''I may be naive, but if something is wrong, I look first for the person in charge,' Lord Heseltine told thousands of protestors in central London
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