Tuesday, 19 September 2017

Fox: He's Got Magic

How's Liam Fox  getting along?  Why, he must be close to signing off on a bumper crop of FTAs by now.  After all, that is what David Davis promised back in 2016.  The job of making that happen fell to the hapless Liam Fox when he was appointed Secretary of State for International Trade.  Davis specifically promised a negotiated trading area 10 times the value of the European Union that would involve Indonesia, South Korea, Australia, New Zealand, the US, Canada, Hong Kong, China and India. They promised all of that by March, 2019.  Like charismatic salesman at a street market they also promised a deep and special FTA with the EU that would replicate all of the current advantages of EU membership but without any of those pesky obligations.  Depending on which spokesperson was available at the time, our putative relationship with the EU was described as akin to Canada (with its CETA FTA) or similar to Norway (membership of EEA) or it would be like Switzerland (byzantine system of 120+ bi-lateral agreements) or it would be a bespoke deal that must never be specified lest its magical allure wears off. That is quite an impressive list, isn't it?  How is Liam Fox getting on?  How is he getting on?


Astonishingly, we're approaching the half-way point between the referendum result and the UK's imminent and guaranteed departure from the EU.  Assuming a linear trajectory, we should be roughly half-way through the list of trade negotiations by now, meaning that a trading area just 5 times the value of the European Union should be completed or nearly there.   Let's start counting on our fingers how we're doing.  The EU?  We haven't started any trade discussions with the EU.  India?  We haven't started any trade discussions with India. The US?  Despite some well publicised meetings aimed at generating news headlines we haven't started any trade discussions with the US.  South Korea?  We haven't started any trade discussions with South Korea.  Canada?  The Prime Minister is there right now and she is discussing issues related to trade but we are most definitely nowhere near negotiating a FTA with Canada. Japan? We haven't started any trade discussions with Japan.   Don't worry, I'm not going to torture you with more of this "we haven't started any trade discussions with country X" because I think we all knows where this is going to end up.  The UK has literally failed to start a single negotiation in all the time that has passed since the referendum result.  What went wrong?  Do shout out the answer if you feel like. Yes, Liam Fox is a good answer but it's not the whole story.

There are just so many issues here that they would be hard to fit into a single blog post.  I need to filter somehow or other so I thought I'd order them by their entertainment value. That's right, this post is now guaranteed to become more entertaining as it proceeds.  Before you all ask for your money back let's start off with the enormous pile of contractual obligations that will be declared void on EU departure day.  When the UK leaves the EU every single contract and treaty involving the EU and third countries will no longer apply to the UK. The Financial Times identified a truly incredible 759 treaties that will need to be ratified just for the UK to tread water.  These include fisheries agreements with Iceland, transport agreements with Santiago, nuclear agreements with Australia, regulatory cooperation agreements with New Zealand, customs agreements with Japan.  It is a truly astonishing list and I haven't even mentioned the trade deals yet.  The list contains a staggering 295 trade treaties, 202 regulatory cooperation treaties on everything from company takeovers to data sharing, and 65 transport agreements.  Before embarking on a free trade negotiation with the UK any one of these treaties can be used as a bargaining chip.  Even for third nations more than willing to talk trade with the UK it remains the case that all of this has to be sorted out first because trade cannot take place if aeroplanes can't take off and land.  On exit day, the UK will be faced with the kind of international relationships enjoyed by North Korea and South Sudan.

This brings us to the problem of government capacity.   The UK Civil Service is overburdened with a regulatory maelstrom.  It has to arrange the completion of 759 international treaties by 31 March, 2019;  identify any others that the FT might have missed; negotiate a complex exit deal from the EU; implement the entirety of EU law into UK law but without referencing any EU institutions or courts; ramp up UK mirrors of all EU technical agencies;  massively increase the UK border capacity; prepare UK business for customs of origins checks; prepare UK border control for customs of origin checks; implement a tariff payment and rebate system;  plan for the transcription of EU treaties into politically acceptable Free Trade Agreements; hire and train tens of thousands of staff.  To be honest, I'm just an amateur blogger so that probably only scratches the surface of the work that needs to be done. To make matters worse, instead of handing this work to established departments with existing procedures and expertise, Whitehall has been asked to play a prolonged game of musical chairs in the newly formed Department of International Trade and Department for Exiting the EU.  I think we can all agree it is a lot of work but is it an insurmountable goal? Luckily, we don't need to guess an answer because Liam Fox admitted that capacity was an issue and that he was "simply unable" to make it work.   Just in case you missed it let's repeat that one more time: Liam Fox admitted in public that the UK does not have capacity to complete the jobs required to smoothly exit the EU.

Can it get worse?  Yes, of course it can get worse.  Liam Fox is forbidden by EU law from signing trade deals before the UK exits the EU.  There is some legal debate about whether the UK can even negotiate trade deals while still a member of the EU but that is a moot point because a) it will seriously break down trust between the UK and the EU by turning the UK into a trade competitor and b) the UK has anyway used up all its capacity on negotiating its escape from the ghost of Jacques Delors.  When David Davis and Liam Fox made all those promises were they deluded or telling an outright lie?

Let's imagine Liam Fox invited his mate Adam Werrity round and all his mates and all their mates.  I'm not sure the universe could handle that concentration of raw talent but let's imagine that it could and that they all agreed to bat for UK trade at the weekend.  Let's imagine they chose Canada as their first port of call.  How might that go?  To work that out we need to think about the career goals of a typical Canadian trade negotiator.  My guess is they'll want to do this quickly so they can catch the ice hockey highlights on the gogglebox.  The last thing they want to do is to promise the earth to their boss only to find out that it will be a rocky ride getting there.  As a consequence, the first question they'll ask is if the UK is going to be a regulatory annexe of the EU. Does the UK intend to uphold the regulatory standards of the EU but through a different legal mechanism or does it intend to completely change to a new set of standards?  If the UK commits itself to EU regulatory equivalence then it might point to a favourable outcome using CETA as a template. This is great for Canada because everything they invest to make CETA work will also benefit the Canada/UK deal.  It also creates a Canada/UK/EU trading zone with all the attendant benefits of scale.  The problem is that neither Liam Fox nor Adam Werrity nor any of their mates nor David Davis knows the answer to this basic question.  The UK truly cannot decide a course for its future.  On the one hand, it cites a "deep and special" partnership with the EU and publishes position papers that foretell a future of EU equivalence.  On the other, meanwhile, the bumbling Foreign Secretary publishes a 4000 word hymn to Brexit that once again threatens to turn the UK into a low tax, low regulation economy.   Which is it to be?  The truth is that nobody knows and nobody will know until the UK finalises its relationship with the EU. Until that happens nobody will seriously discuss trade with Liam Fox because it would be a waste of time.

If you're a news fanatic you'll probably have noticed that Theresa May has been over in Canada talking to Justin Trudeau and that issues around trade have been discussed.   It's quite clear that Theresa May has convinced the Canadians that the UK will be a regulatory annexe of the EU because it seems that everyone is keen for something like CETA to continue with the UK after Brexit.  Despite Fox and Hammond and Johnson all making headlines with their incessant talk of an economy diverging from the regulatory standards of the  EU, May has unilaterally convinced a foreign head of state that is all mere chit chat and that the UK will be nothing more than a regulatory extension of the EU.  She must have spent her time outlining her vision for the UK's relationship with the EU as something akin to today's situation but with a few cosmetic changes here and there.  With that decided, the UK and Canada can use CETA as a template.  Except, of course, it hasn't been decided at all.  Theresa May might have decided in her own mind but I think we all recognise that the situation is fluid, at the very least. Would Jacob Rees-Mogg accept the UK automatically mirroring EU Regulations and Directives even if freed from the clutches of the ECJ?

We now see the only way forward for the UK.  If the UK is to sign any trade deals at all in the next 5 years or so it will have to become a regulatory annex of the EU.  Only by following that path can it relatively painlessly repair all the trade deals that it breaks by leaving the EU.  That brings us to the second most entertaining problem.  The EU is currently in trade talks with Japan and has voiced an interest in starting trade talks with Australia and New Zealand.  These countries also have capacity limits of their own and will prioritise their resources for the biggest fish.  Given that the EU has a population 8x that of the UK and includes Germany, already a larger market than the UK, it is obviously going to talk to the EU first.  It is going to choose the EU anyway because they have stable governance and are able to commit to long-term plans and initiatives.  Moreover, they know that they can just take the deal they strike with the EU and the UK will fall in line. Is this a good thing?  Well, no, because the UK will end up adopting trade positions that don't reflect the needs of its economy.  Trading conditions that might benefit Audi in Stuttgart probably don't necessarily apply to a payroll services company in Solihull.

Now we come to the most entertaining problem.  The problem is that the UK is supposed to be free to take control of its own trading affairs but we've just seen that the only political solution that has any chance of diverting the Brexit bus from the cliffs is to be, in the words of both Johnson and Gardiner, a vassal state.  Surely, though, the UK can go ahead and forge its own trade deals with its nimble legislative processes?  Well, this is where it gets really hard.  The truth is that, apart from the US, the EU pretty much has it covered with anyone interested in doing substantial trade deals and harmonising with EU standards to a meaningful degree.  Huge parts of the world actually run protected economies.  Brazil and India, for example, both fall into that category.  In comparison, the EU's WTO tariff rates average 4.8% and are much lower than the world average of 9% and insignificant compared to WTO bound rates that often run as high as 39%.  The trouble is that a trade deal only really has to liberalise trade relative to where it is right now and that might not mean very much in terms of real value.  A trade deal with a divergent and protected economy half-way round the world will have even less monetary significance and be even harder to sign.  Besides, if they know the UK will just fall in line why would they bother with the UK until they've sorted out a deal with the EU?

The simple truth is that the most stable outcome is guaranteed to be worse than the trading conditions enjoyed today by the UK.  I don't think anyone voted to be a regulatory annexe of the EU, to take on 2nd hand trade deals that we didn't influence and don't reflect the needs of the economy.  This is not an attractive option at all.  What are the alternatives?  What about the low tax, low regulation economy everyone keeps mentioning?  I've kept the best for last because the fantasy of Fox and Minford is to become a "beacon of free trade" by slashing as many tariff and non-tariff barriers as feasible and turning the UK into an economic free-for-all. Who would sign a free trade agreement with the UK when they already have complete and unfettered access to the UK's economy?  Nobody.

Over and out,

Terry

PS The US is a special case because it looks like TTIP has been abandoned so there won't be an existing FTA for the UK to adopt.  I've blogged about the specific issues of TPA and Congress in more detail but let's just say that we are dealing with a President who consistently wants more tariffs rather than fewer.   Trump is now on record as having said: "So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs."

PPS There is still one issue that I haven't deal with.  If the UK manages to agree an extended period of negotiation beyond the 2 years laid out in Article 50 then it is most likely it will not be allowed  to sign trade deals for its duration. The Canada/EU deal, for example, will cease for the UK on 31 March, 2019 yet the UK will not be able to enforce any proposed agreement with any 3rd party for some years after that date.  The EU could concede on this point but what will that cost? Never forget who holds all the aces.


Thursday, 14 September 2017

The Brexit Game

I invented a pub game on my holidays. Truthfully, it is not a very good game and players will quickly tire of it but despite its low entertainment value I'm going to devote the entirety of my first post-holiday blog post to an utterly pointless discussion of The Brexit Game.  If you'd like to play the game in your local hostelry I'm going to describe the rules but they're not hard and fast or anything like that so feel free to customise them to maximise your enjoyment. When you've finished playing the game it might also be fun to chat about the patterns that you observed and see if you can draw any conclusions. I've only played a handful of times (and I'll probably never play again because, as I said, it isn't really a very good game) but it was fun to gamify what I was already obsessively doing with every waking thought.



If you want to play along, the game is quite simple to play. The game hinges on the idea that literally everything can be categorised as Remain or Leave. Some might say that is a spurious notion but I like to make bold, binary statements because a) exaggerating differences allows us to work out what they actually are and b) let's face it, it's more fun that way. The idea of the game is to propose a cultural figure that most divides opinion about their Brexit status. Play begins by agreeing the play order of all participants and the number of times you intend to cycle round. The first player then takes up the mantle of the nominating player and proposes a famous individual. That is followed by a vote of all players on the Leave/Remain status of the chosen celebrity. Points are awarded to the nominating player by subtracting the difference of Leave and Remain votes from the total number of players. The next person in the play order then takes on the role of the nominating player and so on until the chosen number of rounds are complete. The winner is obviously the player with the most points.

Let's try out a trial round. I reckon about 6 people read this blog so it makes sense that there are six players in our imaginary scenario. To get the ball rolling, I'm going to start by nominating Paul Daniels, 70's magician and all-round cultural reactionary. Was he Leave or Remain? Let's all vote and let aggregate opinion settle the debate once and for all. The scores are in and it turns out we're almost in agreement but one of you lot thinks he would have voted Remain. Oh dear, I don't think everyone is as familiar with the Gesamtkunstwerk of Paul Daniels as I originally thought. Anyway, let's work out that score. The difference between Leave and Remain votes is 4 (= 5 Leave - 1 Remain) so I score 2 points (= 6 players - 4 difference). I hope you can all see how it works. If I had proposed a celebrity that completely divided opinion I would have scored a maximum of 6 points. On the other hand, nominations that generate clear agreement of either Leave or Remain lead to nul points. Let's pass on to the next nominating player. Did I hear Tony Blackburn? Wow, good choice.

The game can be extended as much as you like. Personally, I found it slightly less tiresome when I tried to categorise literally everything into culturally Remain or Leave rather than just focus on voting intentions of humans. The great thing about that is that it allows bands, films, TV series and even snacks to be included. Is it even possible to categorise the cultural leanings of crisps? I don't know, to be honest, but let's at least give it a go because there are no quitlings on this blog. What do you all think about Quavers? I reckon they are Leave but I'm equally certain that Space Raiders are Remain. Howzat for brinksmanship?

After playing a few times and thinking about this most important topic for a few minutes I came up with another variation. This time the game is called "The Brexit Partners Game". The idea of the game is to come up with perfect Leave/Remain partnerships. To be honest, I couldn't didn't bother to come up with a scoring mechanism but that doesn't really matter. I'm guessing something that maximises points for the most divergent pair but the hard part is to agree what constitutes a legal pair. Here's a few I prepared earlier to give you an idea just in case anyone is inclined to take up the challenge of turning this into a playable parlour game that is guaranteed fun for none of the family.


Leave Remain
John Lennon Paul McCartney
Oasis Blur
Sid Little Eddie Large
Bill Wyman Mick Jagger
Joe Cocker Jarvis Cocker
Paul Daniels Phil Daniels
Ernie Wise Eric Morecambe
HP Sauce Soy Sauce
Stilton Gruyere
Dire Straits Sting
Morrissey Johnny Marr
Grant Mitchell Phil Mitchell
Sherlock Doctor Who
Quavers Space Raiders
Gary Numan Human League
Jerry Tom
Terry June
Cilla Black Sarah Greene
Michael Caine Roger Moore
Adele Amy Winehouse
Lewis Morse
Liverbirds Robin's Nest
Sex Pistols X-Ray Spex
John Cale Moe Tucker
John Humphrys John Snow
The Liverbirds Girls On Top
Ray Barraclough Les Dawson
The Goodes The Ledbetters
Jonathan Ross Graham Norton
Bruce Forsyth Tess Daly
Ken Barlow Deirdrie Barlow

I bet you're probably all impatient to hear the highest scoring nomination over my holiday break. Even if you're not, I'm going to go right ahead and tell you. It was Gary Numan and it was proposed by my fantastic friend and fellow idiot Mothra de Suave. On the one hand, Numan's music is futuristic. Gary Numan was a electronic pop pioneer who wasn't afraid of replacing mechanistic human effort with devices better equipped for the job. Removing all that drudgery of heavy guitars and faulty amplifiers and sore hands and broken strings freed up more time to focus on the core task of writing and recording a great song. More than that, synthesisers democratised the creative process so that everyone with a good idea could quickly participate. Reducing the barrier to entry (all that tedious learning of chords, finger exercises, scales training, expensive equipment) meant that ideas came to the fore. Isn't progress all about letting as many ideas as possible percolate through society and letting as many people as possible take part? Gary Numan was borrowing from Kraftwerk (Germany) and David Bowie (another planet altogether) and punk (London) and New Wave (New York). His output was nothing less than a cultural melange that contained a message for the whole world. That all sounds quite Remain, doesn't it? It certainly does but we need to look at that message a bit more closely before passing final judgement. Numan's music conjured a vision of a fearful and lonely future. His was a future where the machines were in control; human friendship had been electrified and would by now be entirely digital; solace and safety could only be found behind the locked door of a car. That all sounds like Leave to me. Yes, that all sounds like someone who wants to turn the clock back rather than look to the future; someone who shuns the green experience of shared transport for a solitary trip on a polluted motorway that used to be the home of frogs and rabbits. It's more than a tad Leavey. Well, this is vexatious. Are there any other clues that might help us settle it? Well, there is always the story that he came out as a Tory back in the 80s. Does that help? Not really because it might not be true and even if it was I'd say that historic party allegiances serve poorly as a Brexit benchmark. The clue that eventually tipped me towards Leave is that poor old Gary left the UK due to a sense that society was breaking down after some cheeky kids yelled at his wife.  He moved to Santa Monica, a city that might appear polite on the surface but actually has a significant problem with deadly gun crime, car theft and, as it turned out, a high rate of anti-social behaviour. He didn't think that through, did he? That is pure Brexit so I'm tipping Gary for Leave but I could be easily swayed back by anecdotes that point the other way. If anyone can beat Numan please let me know.


What have we learned? Not a lot, to be honest, but at least Brexit brought us all a shit pub game. That's honestly about as good as Brexit is ever going to get.

Over and out,

Terry

PS It probably took longer to think up this rubbish game than most Brexiters spent trying to understand even the basic operational details of the EU.

PPS If the Daily Express can attempt to categorise every substance in the world as cancer forming or cancer curing then I can do the same with Brexit. In keeping with that spirit, my next blog post will be about Princess Diana.

Thursday, 31 August 2017

Brexit Holidays

It's time for a break.  That means a break from the relentlessly sunny Swiss summer, a break from another particularly busy period at work, and a break from Brexit blogging from a Scottish perspective.  I'm off to Scotland to check if it's still raining and maybe take a look at that bridge everybody is talking about. There will be whisky, there will be laughter, there will be communal playing of the ukulele, there will be roamin' in the gloamin', there will be whisky,  there will be bicycle rides by the salty sea, there will be times when I just sit in a comfy chair and enjoy the doing of nothing whatsoever.  Did I mention there will be whisky? There will also be no Brexit blogging for the next 10 days or so.  I really, really need a break. Let's face it, we all need a break from the endless bad news blogging that I serve up here on a semi-regular basis.


See you all the week after next!

Over and out,

Terry




Friday, 18 August 2017

Really Stupid Pt 2

One of the problems with being an amateur Brexit blogger is that I just can't keep up with events.  Brexit logic may have a 9 month cycle but on top of that it is plagued by a high frequency signal  that is basically just noise to the ear of a rational human being.  Monday might bring a leak that the UK is going to ban chemically washed chicken, then Tuesday might inform us that we're going to buy a job-lot of disinfected poultry with the loose change from our £40 billion exit bill.  It all just moves so fast. Sometimes this blog is like watching the football highlights from two weeks ago - all the drama of the moment is forgotten and all you've got left to enjoy is a grim sense of life ebbing away and footage of some overpaid idiots running around a grass rectangle.  This is one of those sometimes because today's post is a delayed review of the UK government's proposal for the Northern Ireland/Ireland border.  Enjoy.

What does the UK propose?   Let's start with the good news.  The UK intends to maintain the Common Travel Area.  This is a historic agreement between Ireland and the UK that basically bestows the kind of rights that the EU would eventually bestow upon its citizens.  In fact, those rights go far beyond the EU because it includes voting rights and fewer conditions on benefit claims or residence.
  • the right to enter and reside in each others’ state without being subject to a requirement to obtain permission;
  • the right to work without being subject to a requirement to obtain permission;
  • the right to study;
  • access to social welfare entitlements and benefits;
  • access to health services; and
  • the right to vote in local and parliamentary elections.

Is there any more good news?  Well, it does provide quite an interesting history lesson.  Did you know that in 1972 only 17 of the 200 border crossings were approved for vehicular traffic?  The border was such a dangerous place (bombings, shootings, violence) that it had to be policed by armed guards and watchtowers.  The Good Friday agreement of 1998 removed all signs of the border and paved the way to relative peace.  Although the EU wasn't directly instrumental in striking that agreement, the border arrangements brought about by EU membership helped to make it possible. I've even crossed the border myself a few times and the only visible sign of change is that the road signs change from kilometres to miles per hour.   

I don't want this blog to just be the bearer of bad news so I'm going to stay with the positives a bit longer: there are no plans for passport checks at the border.  The rights of travel for Irish citizens will, of course, be covered by the continuation of the CTA.  It looks as though the UK government is not going to require visas for EEA visitors because they seem happy for EEA citizens to cross into the UK through Ireland. Interestingly, they don't really say much about the rights of non-EEA visitors to cross the border.  It seems highly unlikely that Ireland and the UK will align their visa requirements for non-EEA so this is a bit of a loose end that does need tying up.  It strikes me that anyone with rights to travel to Ireland but not the UK can now just enter the UK through Ireland.  Eventually, someone without a UK travel visa is going to commit a crime in Basingstoke and Tony Parsons is going to blow a gasket.  This is actually quite serious because taking control of the borders ought to mean exactly that but now the government is basically letting the Irish government control entry to the UK.  This might be a very real problem but it's not even in the top ten on the chart of shame.

Let's move on to the bad news.  When the UK exits the EU it will no longer be in the EU Customs Union.  As a consequence, we might expect that the Irish mainland border will start to look like the rest of the EU's border. What does that look like?  Well,  I've blogged about this a few times because I regularly cross the EU's border with Switzerland.  It basically look like any other border on the EU's periphery:  there are manned checkpoints on major crossing points;  temporary checkpoints and random checks on minor crossing points, and very occasional checks on trains.   If you're crossing the border in a massive truck laden with delicious cheese you'd better have your dockets ready because you're going to need them.  A family car on a minor crossing point might get stopped but, then again, it might not.  You're highly unlikely to be stopped on a bicycle or on foot but the risk is always there. Switzerland is in the Schengen area so all that checking is performed to maintain the integrity of the tariff regime. We might expect that kind of border to appear at the NI/Ireland interface but the government aren't proposing any of that because they have permanently taken leave of their senses.

They're an experimental lot at Brexit HQ because they are very keen on the words "unprecedented".   I can hereby declare that their proposal is certainly unprecedented.  It is also unhinged, unworkable and unstable.  David Davis proposes that the EU basically ignores the border altogether.  Yup, let's all pretend it doesn't exist even though it does. He basically says that small traders should be allowed to move goods freely across the border without any regard for differences in tariff regimes.  He then says that large traders should register as trusted businesses and we'll just trust everyone to pay their tariff charges at their leisure.  Once all that is in place the border will continue with zero border infrastructure, zero guards, zero watchtowers, zero cameras and zero checkpoints.  This is a mad fantasy and the rest of this post will be devoted to tearing down the hapless plan until it keels over from the weight of shame.

The problem can be summed up in one word:  arbitrage.  Any time there is a price discrepancy in any commodity across the border it encourages cross-border trade in that commodity.  That price discrepancy might be due to currency fluctuations or it might be due to tariff policy.  If there is an open tunnel across the border it will allow cheap goods to flood either country against national policy.  That counts for small traders just as it does for large ones.  Did you know that the Swiss actually made attempts to control the cross-border traffic in German pizza delivery companies? They need to do that because Swiss pizza is much more expensive due to the high value of the Swiss Franc. All it took was a few complaints about foreign pizza imports and its effect on the economy of border towns and something was done about it through the enforcement of tariff payments.  That's right, even small businesses can build up political pressure at the border.  Big business is another story altogether.  The UK has repeatedly threatened to turn itself into a low regulation, low tariff, low tax economy.   That seamless border will be an open target for smugglers to exploit the border by sneaking cheap steel and oil and anything you want to mention into the EU.  The key point is that once it crosses to Ireland there are no further checks anywhere in the EU.  It works the other way, too.  Jeremy Corbyn might want to increase steel tariffs to help Welsh steel workers.  There's no point doing that if cheaper Chinese steel can flood in from the EU.  To be honest, most things involving Corbyn have no point.

David Davis is basically asking the EU to significantly weaken its border and undermine its long-term economic strategy for absolutely nothing in return.  He is asking the EU for a massive favour just because the UK finds itself in a hole.  He is asking the EU to trust the UK, even though the UK is facing a £2 billion fine for repeatedly failing to uphold EU regulations at its own ports.   The best outcome for the EU can only ever be that it is not as good as it is today.   It is not an attractive proposition.

Can it get worse?  Yes, it can.  What about the prospect of hormone-injected beef from the US winding its way to Munich all the way from Munster?  Well, Davis has thought of that.  He says that the UK will mirror all of the EU's agri-food regulations.  Well, he can wave goodbye to a US trade deal if he does that.  Does the border have a magical agri-food filter?  No, it doesn't. Chemicals and nuclear material and paint and toys and inefficient vacuum cleaners will also want to cross the border.  The UK will need to mirror all legislation on pretty much every possible commodity category.   Davis doesn't explicitly mention any of that but that's what he'll have to do. He can wave goodbye to any trade deal with anyone with that kind of legislative weight on his back.  Did someone mention live animals?  Chickens and horses and animal disease can all cross the border.  Disease control and the EU Directives and Regulations that uphold standards of disease prevention aren't even mentioned. Can it get any worse?  Well, who is going to monitor all this?  The ECJ will quite clearly not be involved.  I think he is just asking Barnier to take the UK on trust.  Why would the EU agree to any of this?

It turns out that taking back control means giving up control.  Brexit means that the UK lets Ireland decide who gets to travel through its ports.  Brexit means that the UK gives up any attempts to pursue its own macro-economic policies. Brexit means that it is locked into EU regulatory standards in perpetuity without any say in those standards.  Brexit means that it is unable to sign its own trade deals because of the inherent loss of political freedom and power.  

The government's position paper tries to solve an intractable problem.  It is well written and contains all the references and caveats of a real position paper but it is actually 3 pages of logical fallacy and logistical nonsense fluffed out with 27 pages of waffle.  The EU is simply not going to agree to significant disadvantage in return for literally no gain.  Even the UK could not maintain the seamless border because borders are specifically designed to maintain regulatory and economic difference.  The only way that a truly seamless border is possible is by enforcing political convergence.  If only there was some kind of way to organise that across the whole of the European Continent. If only.

Over and out,

Terry

PS It looks like Davis is trying to resurrect the "row of the summer" over the sequencing of the talks.  He makes the point  pleads several times that progress will be faster with parallel talks.  Is he an idiot or is he playing to the press gallery?  Answers on a postcard. 








Wednesday, 16 August 2017

Really Stupid

It's getting much, much harder to write about the idiotic behaviour of the UK government at the moment. Honestly, they are just going round and round in circles, repeating the same mistakes over and over.   Watching it and thinking about and writing about it is a painful and frustrating activity.  You know, it's actually hard to engage with this level of stupidity. It would be easier if the daftness was less repetitive but it isn't like that. Instead of fresh and interesting "proposals" that require forensic analysis and documentary rigour, what we get instead is the entry level inanity of last autumn repackaged for a summer audience. As a consequence, I've become aware that this blog is now repeating itself. A quick analysis of my posts leads me to the conclusion that Brexit logic follows a 9 month cycle. That means we should all be on the look-out for the ungainly return of  "cake and eat it" Brexit.   Oh, and there it is, right on time.  Yup, there it is in the form of the opening chapter of an epic fantasy novel about the EU Customs Union.  Read it at your peril.

 
 
What exactly are Brexit HQ up to with their latest harebrained wheeze?  Well, the government have decided to rush release their madcap imaginings for the UK's future customs relationship with the EU.  I fully recommend taking a short break from this blog to read Ian Dunt's pithy response because it tells you pretty much everything you need to know about the delusional fantasy bubble that protects David Davis from the harsh realities of the real world. Follow the link, read it at your leisure, and we'll meet up again in paragraph 3.

Welcome back.  That was quite a post, wasn't it?  What more can I add?  Well, I thought it would be fun just to take a single sentence from the government's position paper and see where the madness leads us.  I know I've done this before a few times but here I am doing it once again.  I did say this blog is repeating itself, didn't I?  I'm fairly certain that any sentence will lead to a self-inflicted skull trepanation but, for no particular reason, I like the sound of this one:
As a first step, we will seek continuity in our existing trade and investment relationships, including those covered by EU Free Trade Agreements or other EU preferential arrangements.
The UK is going to leave the EEA and the EU Customs Union on 31 March, 2019.  There's not much we can do about that because all of the treaty agreements governing the EU will immediately exclude the UK when it exits the EU.  Leaving the EU Customs Union means that the EU now treats the UK as a third nation and will start imposing tariffs on all goods entering the EU from the UK.  This will have a catastrophic effect on British business because UK exports will just get snarled up in huge queues at Calais and Hamburg.  Even if the UK can come to an agreement with the EU about goods originating in the UK there is still the thorny problem of goods entering the  EU through the UK.  Leaving the EU Customs Union, after all, means that the UK is no longer bound by the system of external tariffs that the EU has painstakingly assembled over the last 50 years through Free Trade Agreements (FTAs) and negotiated tariff schedules at the World Trade Organisation (WTO).  The EU will need to defend all of those tariff agreements and the only way it can do that is to check everything entering the EU from the UK independent of its source of origin.

What we all need is continuity until a new system can be implemented in a timely manner.  David Davis intends to salvage some sense of continuity with the EU by temporarily retaining all of the EU's tariff rates.  Those tariff rates include the 45 or so FTAs that the EU has negotiated in addition to the EU's tariff schedules at the WTO.  Tariff duplication is pretty much the only way that the UK could ever hope to convince the EU that there is no need for border checks on goods shipping to the EU from the UK.  If, for example, the EU imposes a 0% FTA tariff on Mexican ukuleles but a 12% WTO tariff on Nicaraguan ukuleles then the UK needs to make sure that those tariffs persist at the UK border.  Mexico will have every right to be furious if they learn that Nicaragua (and everyone else) is able to sneak its ukuleles tariff-free into the EU simply by redirecting them  through UK ports.  They will start wondering about the value of the FTA because they could just as easily copy Nicaragua's loophole and redirect everything through Kent.  EU luthiers will also be furious because their business will suddenly face all sorts of unplanned competition from global ukesters. All that fury will force the EU to start checking goods entering from the UK so that they can make sure the correct tariffs are applied.  If that happens UK businesses will immediately find their goods snarled up in lengthy border queues. The only way to avoid that is for the UK to maintain the EU's system of external tariffs at the UK border.

The problem that faces the UK is that it will no longer participate in any of the FTAs that the EU has with Mexico and South Korea and Canada.  In the absence of any FTAs, it is unilaterally proposing to maintain low or zero tariffs on goods from all those countries.  More than that, it is unilaterally maintaining its side of the standards bargain.  Of course, any of those countries might choose to enter a FTA with the UK but that is years and years away.  In the meantime, they get guaranteed tariff-free access to the UK and a continuation of all rights to market access without having to give anything in return.  If they want to stop the import of UK paint due to a row about standards they will have every right to do that.  If they want to resort to WTO tariff schedules for UK goods then they have every right to do that, too.  They can literally do anything they want because the UK has given up all of its negotiating power. This is taking back control.

Can it get any worse?  Well, yes, it can.  The UK cannot legally apply preferential rates to some nations but not others without first agreeing a FTA that conforms to WTO rules.  It is simply not in the interests of any nation to sign a FTA with the UK during the transition period for all the reasons described above.  Even if it turned out that Mexico was desperate for a FTA, the UK is really in no position to sign any trade deals with anyone until it stabilises its WTO schedules and completes a FTA with the EU.  We all know that FTAs take years and years to come to fruition.  In the meantime, the UK will have reverted to trading with the EU's trading partners under WTO rules but will have taken the unprecedented step  of unilaterally applying the tariffs and quotas and standards of the EU's FTAs for a period of time. Does that sound discriminatory?  Yes, it does.  Nicaragua will be perfectly within its rights to lodge an appeal that the UK is discriminating against its ukulele industry by applying preferential rates to Mexican and Canadian ukuleles.  The only outcome is that the UK will be forced to apply its WTO tariffs to all WTO members until it can agree about 45-50 FTAs with the EU's existing trading partners.  The logical outcome here is that the UK can't uphold the EU's external tariffs without being a member of the EU Customs Union. Something, somewhere has to give because the UK cannot revert to WTO rules and uphold the EU's system of external tariffs.  

The UK is going to drop out of about 45 FTAs that it currently enjoys as a member of the EU.  David Davis thought that was worth just one sentence.  He didn't provide any details about how he might convince 45 global partners to maintain the status quo when it clearly isn't in their interest to do that.  He didn't speculate on how long it might take or how he would reach formal agreement with everyone involved before the UK exits the EU.  He didn't consider why anyone would enter a temporary agreement with the UK as it struggles to leave the EU only to have to rip that up for a more permanent one at an unspecified date in the future.  He didn't ponder on the legality of the UK's position or how it might open the UK up to further WTO dispute at a time when it needs stability more than anything else.  He literally didn't think about any of this at all.  I'm pretty confident I could have written a thousand words on the logical and practical failings of almost any sentence in his proposal.  Meanwhile, the UK still hasn't published a position paper on the more pressing issue of the exit bill.  All musings on future trade with the EU will be filed in the bin until we agree on the bill, Northern Ireland and citizens' rights. Why didn't he engage his peanut brain on the stuff that really needs attention?

Over and out,

PS "What we all need is continuity until a new system can be implemented in a timely manner."  I love sarcasm.

PPS I've been a bit quiet lately but a) it's summer and b) I thought I'd take advantage of the quiet before the Brexit storm.


Monday, 31 July 2017

Trans Europe Express

There's been a lot of talk about transition deals in the last few days.  What's going on?  I, for one, think it's time to find out.


I always like the way that David Allen Green lays out his thinking in numbered points so I thought I'd give that a go.  I have to say that I like it a lot.  It makes it look lawyerly and implies a level of gravitas not normally associated with this blog.  Another plus point is that it makes for a shorter post. Enjoy.

1.  The two year limit laid down in Article 50 can be extended if all parties agree.  The EU will certainly not contemplate that because it would leave the UK a full member of the EU and lead to UK MEPs in the next European Parliament.  The last thing they want is year after year of Roger Helmer and his obsession with spreading falsehoods about the pH scale.  The UK government have also pledged that its EU membership will terminate on 31 March, 2019.  If the UK wishes to extend the available negotiating time then it needs a different solution.  The buzzword for that is "transition deal".  This is as meaningless and hard to define as "red, white and blue Brexit" and "Brexit means Brexit".

2. The UK has not yet actually asked for a transition deal and made no mention of it in the Article 50 letter that Theresa May delivered to the EU.  They will have to formally ask for one instead of leaking it to the press and making personal speeches about it.

3. As it stands, Michel Barnier has no authority to grant the UK a transition deal.  The limits of his powers are laid out in the position papers agreed by the European Parliament and the Council of Ministers. If the EU wishes to grant Barnier the power to agree a transition deal then it will first need to formally iterate on its position until it reaches a final consensus and publishes that in the form of a position paper.  This will take some time.
 
4.  The EU has made it clear that a transition deal is contingent on the UK first laying out its final goal to a level of detail that has so far eluded our brightest and best political leaders.  The EU, of course, need to weigh up the pros and cons of granting the UK's wish but to do that they need to know basic details about those pros and cons. Unfortunately, the UK government cannot do this right now. We've waited for over a year for any kind of credible consensus to emerge from Cabinet.  We're still waiting.

5.  It is not in the EU's interest to rush into an agreement on a transition deal.  UK businesses are currently moving their operations to EU soil so that they can carry on trading in the EU after the UK ceases to be a member.  The EU's interests are best served by granting the transition deal only after UK business has taken flight to the EU.   This is the one and only time that the expression "cake and eat it" can be correctly applied to Brexit.

6.  The transition deal will be, in actual fact, an extended period of negotiation and preparation. Two years just isn't enough and many figures in the UK government have finally acknowledged that more time is required to secure an orderly, negotiated Brexit.  The government are therefore signalling that a transition deal is a necessary condition for an orderly exit from the EU and that without one the exit is guaranteed to be disorderly.  How will they respond if agreement on a transition deal just isn't possible?  A failure to secure a transition deal ought to end the political reputation of everyone involved.  It should also lead to a fundamental rethink on the practicalities of exiting the EU.

7.  A transition deal will only be granted by the EU if the UK accepts pretty much all of the obligations of EU membership.  The UK government cannot agree even on this point.  Liam Fox, for example, is adamant that freedom of movement will end on 31 March, 2019.  That position rather diminishes the chances of the UK ever entering a transition phase.

8.  All treaties between the UK and the EU lapse on 31 March, 2019.   The EU will simply go through every relevant document and strike out "United Kingdom".  The only way that the UK can temporarily restore its relationship with the EU is through new time-limited treaties that approximately replicate the existing treaties to whatever extent is required.  This is a problem because the EU requires unanimous agreement on all new treaties. If I was to criticise one feature of the EU it would probably focus on the slow pace of internal agreement on almost any topic.  Meanwhile, the clock is ticking away.

9.  Due to time restrictions, the only options that could ever be made available to the UK will be very close to existing legal templates.  The most obvious of these is something akin to  EU membership with budget contributions, full participation in the 4 freedoms, the role of the ECJ, and the Customs Union.  The further the UK wishes to travel from that template, the less likely it is that the EU will unanimously agree and the longer it will take to negotiate.  That annoying clock is still there marking the passing of time.

10.  The UK cannot meet the obligations of EU membership while also rewriting all of its law to exclude the influence of EU courts, treaties and technical agencies.  Will the Repeal Bill have to wait for a later time? Only the EU can answer that but given that the EU is governed by process and law I think we can all guess the answer.

11.  Will the EU allow the UK to negotiate and/or sign FTAs with third parties while also a member of the European Customs Union?  This is exactly the kind of tricky and controversial detail that will take time to agree.  The clock is still ticking.  Will someone please stuff it in a drawer or something? Honestly, it is doing my head in.

12.  An interim period of effective EU membership has all sorts of consequences for the exit agreement. For example, the EU might decide to shift the cut-off date of permanent residence status to the date when the EU exits freedom of movement rather than the date when the UK ceases to be a regular member of the EU.  It might also have an effect on the exit bill because the UK might end up naturally meeting all of its financial obligations just through a prolonged period of budget contributions.

13.  There is no guarantee that the EU will agree to an extended period of negotiation.  The UK are behaving as thought it is a done deal and can be unilaterally agreed.  It doesn't work like that.

14.  This one is a bit of a curiosity but the 2011 European Union Act means that in certain cases treaty changes in the EU end up being put to to a UK referendum.  Let's ponder Clause 4(4)(c) for a second: "in the case of a treaty, the accession of a new member State."  Personally, I like the inherent recursion of that one.  Perhaps 4(1)(i) is more to the point: "the conferring on an EU institution or body of power to impose a requirement or obligation on the United Kingdom".   This last point is really just a curiosity but I found it rather entertaining and wanted to end on a weak chuckle.

Over and out,

Terry

 PS I really wanted to write something more detailed about the transition deal but I've been busy all weekend.  I'm afraid this will have to do.










Thursday, 27 July 2017

Clucking Mad

I am a truly massive snob so being ahead of the curve has always been important to me. When I was young it was all about being into a band before anyone else, collecting all the early 7" singles, seeing them live in front of 50 people in an unglorified toilet. When they signed to Warner and made it to Top of the Pops I would likely just have yelled "sell-out" at the screen, complained about the commercial production on their new album, and looked around for another to follow. I don't want to blow my trumpet too loudly lest I become the Mr Bighead of Brexit but I'm happy to say that this blog was one of many that were ahead of the Brexit curve. The problem I now face is that Brexit has just signed with EMI and their powerful marketing department have splashed stories about their debut album "Chemically Washed Chicken" all over MSM. All the things that the cool kids were talking about 9 months ago have suddenly become massively popular with squares and suits and johnnycomelatelys. So what should I do now that MSM is regularly spewing out articles about FTAs, regulatory frameworks, harmonisation, investor-state disputes, EU technical agencies? What am I supposed to do now that Brexit scepticism has gone mainstream? Well, it turns out these mainstream stories are actually pretty terrible and often completely miss the point.


Liam Fox's recent trip to the US has led to a flurry of articles about how a US/UK FTA would force the UK to accept imports of chemically washed chicken. It would be fair to say that MSM is frothing at the mouth at the prospect of being forced to eat poisonous McNuggets. Michael Gove, in his role as Environment Secretary, has even been forced to unilaterally declare that the UK would ban chemical chicken. This is very much a chicken and egg problem because it turns that the US also has inferior standards on eggs. Their low standards on chicken husbandry means that dirty eggs need to be washed, dried and refrigerated to be fit for human consumption. Unfortunately, these processes breach the integrity of the shell and allow persistent bacteria to enter the interior of the egg.   As a consequence, the rate of salmonella poisoning in the US is more than 50 times the rate in the UK. We can thank the European Food Standards Agency for that because it forced farmers to raise their hygiene standards through a complete ban on egg washing. I'm confident we're going to see this pattern repeat itself across almost every agricultural product category. Michael Gove might not realise it but he just removed agriculture from the US/UK FTA. Liam Fox should be furious but he won't be because he won't have realised it, either.

The problem with agreeing a UK/US FTA is much, much deeper than just chickens and eggs and standards of animal husbandry. Literally every area of human commerce where the US and UK have different regulatory standards will lead to significant difficulties. It doesn't matter which side has higher or lower standards because that isn't what matters here. The only thing that matters is that the regulatory standards are different. Let's look at the egg industry to see the difficulties that arise from regulatory difference. That's right, the egg industry. This is exactly the kind of fascinating chat you get here. Eggsactly.

Breggsit!
UK egg manufacturers will have made significant investments over the years to conform to EU standards. As a consequence, they're in a great position to have their produce included in a UK/EU FTA. After all, UK egg inspectors are already trained to EU standards, UK egg producers already meet the standards, and UK egg law already enforces the standards. It should be a simple step for the EU to recognise that the UK egg industry is equivalent to the EU egg industry. The UK can also easily recognise that the EU egg industry is equivalent to the UK egg industry. All of the egg boxes for a successful FTA are now ticked. Consumers can carry on shopping in the supermarket safe in the knowledge that they are unlikely to be poisoned by a meringue. Producers, too, can carry on manufacturing eggs safe in the knowledge that their investment in chicken hygiene is being put to good use and that their eggsport markets haven't been threatened.

"Andrew, you should see the size of the US mega-chicken. Eggs like footballs."
What would happen if Liam Fox signed a FTA with the US that allowed US eggs to be sold in the UK? The first thing he will have to do is change all UK legislation on egg hygiene and chicken maintenance so that it more closely matches the rules in the US. Egg inspectors will need to be trained in these new standards, egg manufactures will need to invest in washing and drying equipment, the egg logistics industry will need to move eggs around to new egg treatment centres. Egg delivery vehicles will be need to be adapted to include refrigeration. Supermarkets will also need to adapt their stores to keep eggs refrigerated. Their egg inventory system will also need to change because eggs will now have a different shelf life. This is an eggspensive and disruptive change for a relatively small industry. What are the benefits? Well, the first thing that will happen is that the EU will ban all UK eggs because the UK's equivalent egg status will be completely lost. Hey, that's not a benefit. What are the benefits? Well, the second thing that will happen is that imported eggs from the US will be able to undercut UK eggs because US manufacturers have already absorbed the cost of conforming to US/UK egg legislation. UK egg manufacturers will need to pay for all of this disruption to the UK egg industry, pushing up their unit cost. Supermarkets are going to buy as many US eggs as they can for the simple reason that they are cheaper than UK eggs. Cut off from EU markets, UK egg manufactures will struggle to sell even to their own domestic market. Hey, that's not a benefit. What are the benefits? I suppose UK egg manufactures can now eggsport their eggs to the US just in case there are any US consumers who like paying significantly above market rate for a standard egg. That's not a benefit, either. What are the benefits? The simple truth is that there aren't any benefits. Cutting yourself off from your biggest market by rushing egglong into a set of new regulatory standards doesn't have any benefits.

I chose eggs in the paragraphs above because repetition of the word "egg" always makes me laugh. Having said that, I could have literally chosen any area of human commerce where US standards diverge from UK ones and the UK decides to adopt the US version for the purposes of signing a FTA. I could have chosen financial services and discussed the regulatory complexity of the Dodd-Frank Act but it would have been too boring. I could have chosen pharmaceuticals and embarked on a long and tedious discussion of the Medicare Act but we all have lives to lead. I could even have chosen a comparison of the Volcker Rule in the US and the Capital Requirements Directive IV in the EU but it wouldn't have been as funny as eggs. In every instance the message remains the same: geography dictates that the EU will remain the UK's biggest export market; any legislative move away from EU standards limits the UK/EU FTA by destroying the UK's "equivalence" status; any move towards US standards comes at a significant cost to UK industry; the US has already absorbed those costs and therefore produces with lower unit cost; the maxim that trade halves with distance means that the prize of access to US markets is much, much smaller than the prize of a comprehensive FTA with the EU.

The problems I outlined above are eggsacerbated by the fact that the US is by far the larger partner and any compromise on standards is going to be closer to the US version than that of the UK. The UK is also politically desperate for a UK/US trade deal because it is relative easy to spin it in a positive light, even if turns out to have major flaws. That desperation makes any compromise even more likely to favour the US. Moreover, the ticking timebomb of the Trade Promotion Authority means that July, 2021 is the last chance the UK has to sign a trade deal with the US. After the TPA expires the UK will be negotiating live with 400+ Congress Representatives. That has never led to a successful outcome. The pressures just keep adding up on the UK to compromise away its ability to complete a meaningful FTA with the EU. Obviously, the sensible move would be to conclude the EU FTA first and then look further afield. In fact, it is the only sensible move.

If you're a regular reader of this blog you'll already have realised that this post is basically a repeat of a previous one but with some terrible egg jokes. In that old post I presented FTA negotiations as the mathematical optimisation of a contracting decision space: each FTA consumes the decision space, leaving less for the next. Compromise is a finite resource and should be used wisely, not frittered away on chemical chickens and dangerous eggs with a capricious partner half-way round the world. This is the real story that MSM is missing. Instead of asking Liam Fox why he thinks it is a good idea to willfully endanger the promised UK/EU deal, it bangs on about glowing hens and radioactive eggs.  If that's the competition, we're all ahead of the curve and we'll stay there until Liam Fox privatises it and starts charging us rent.

Over and out,

Terry

PS The stupidity of the UK's current political leaders if absolutely jaw-dropping.  They still don't understand the most basic points of international trade.  Even the idea that economic gains come at political cost is beyond them.  It's depressing to even say this but Fox is behaving as though he still believes trade agreements are entirely about tariff barriers and that disputes over standards harmonisation are tiny details to be ironed out at the end.  It's even more depressing to note that Gove thinks a comprehensive FTA can be a cherry-picked subset of product categories that he alone decides for his own advantage.

PPS I have very little confidence that a UK/US trade deal will be completed before 2021.  Anything after that requires Congress to agree an extension to the current TPA.  Besides, the UK will still be hammering out its FTA with the EU and trying to stabilise its tariff schedules at the WTO for years to come.

PPPS The UK might anyway be forced to accept food products banned by the EU.  The EU, for example, forbids the import of hormone-injected beef from the US.  The US took its case to the WTO and won.  In response, the EU kept the ban but compromised on increased quotas on beef from the US that does meet EU standards.  The US would be within its rights to lodge a fresh case against the UK if it chooses to uphold the ban.  Taking back control.