The British political class is riven with dissent over what type of Brexit is most desirable. This is because, after two years of Brexit argy bargy, few Brits really understand the issues – and least of all in the Labour Party.
A discourteous proposition
Last week Monsieur Barnier, the EU Chief Negotiator, threw a document at Mr Davis (aka Brexit Bulldog). The document outlined the terms on which Britain might be offered a transitional period after Britain leaves the EU on 29 March 2019.
According to this document, if Britain refused to implement rules laid down by Brussels during the transitional period – during which it would retain no representation in Brussels whatsoever – or, if it failed to cough up its dues (as determined by Brussels), then the EU would resort to a range of sanctions. One of these might be to deny landing rights to UK aircraft entering EU airspace. Another would be to impose penal tariffs on UK exports.
It is very unlikely that Monsieur Barnier consulted the Spanish or the Greek governments about these putative sanctions – given that both economies rely extensively on tourism from the UK. And it is doubtful whether it would be legal to deny UK aircraft landing rights under the Warsaw Convention and other international accords that set out the laws of flight. The transition period itself, we were told, is not even a done deal. It is therefore reasonable to suppose that Monsieur Barnier was just winding Mr Davis up.
Mr Davis certainly found the treatise discourteous. But Monsieur Barnier succeeded in his main intention – which was to spread panic through large parts of Britain’s querulous – and generally ignorant – political class.
Actually, the transition period should be the least of our worries – even for the Brexit Ultras, as I call them. Any unwanted regulation imposed during the transition period can be enacted with a sunset clause… The real issue is whether we remain in the Customs Union.
Make me an offer!
The received wisdom is that Mrs May’s government is paralysed by a scrimmage between the hard-line Brexiteers (of whom Mr Johnson, Mr Gove and Dr Fox) and the at-heart Remainers (chiefly Mr Hammond). As a result, it is said, she cannot decide what she wants. Yet the essential vision set out in Mrs May’s Lancaster House speech in January last year and then her Florence speech in September, as far as I can see, still stands.
Britain will leave the EU Single Market and the Customs Union and will negotiate a free trade agreement as a third-party state which, all being well, will remove the threat of tariffs on the trade of goods. There will be some accords recognising equivalence in the trade of services – particularly in the financial sector. (Though, actually, there never was a full single market in services.) In this way, Britain will regain control of her borders – and will pursue her own progressive immigration policy – and will have the freedom to negotiate trade agreements with non-EU states. I did not say getting to this destination would be straightforward.
To remain in the Customs Union would entail that, like Norway, Britain continues to make regular contributions to EU coffers and would be obliged evermore to embrace the four freedoms, of which freedom of movement plus the supremacy of the European Court of Justice (ECJ). We would not be independent members of the WTO and would not be permitted to make trade deals with other states. Such an outcome would be a mockery of the British people’s vote on 23 June 2016. We are now beyond the notions of Hard Brexit versus Soft Brexit (language that I first gave to the world in these pages, by the way). The choice now is between Real Brexit and Fake Brexit. I believe that Mrs May understands this perfectly.
The choice now is between Real Brexit and Fake Brexit. I believe that Mrs May understands this perfectly.
The desired outcome is achievable because the EU wants a deal as much as we do and its member states wish to continue trading with us on – as far as possible – the same terms as before. That is what Mr Hammond meant in Davos when he said that the re-alignment in regulation would be “modest”.
So why is the CBI, and much of UK big business (with some notable exceptions like JD Wetherspoon’s Tim Martin) insistent that the UK must remain in the Customs Union? The CBI, you may recall, backed joining the Exchange Rate Mechanism (ERM) back in the late-1980s and then joining the euro in 1999. It backed Remain in 2016. Apologists for the CBI will claim that it is risk-averse; critics will say that it has tunnel vision.
The deep state in Britain – the civil service, the Foreign Office, the Bank of England, the BBC, the clique of academic millionaires who run our universities – has been instinctively Remain-inclined since the outset. The European administrative state represents for them an agreeable status quo. Chris Beckerton of Queen’s College Cambridge believes that since the referendum, British diplomats have been challenged to adjust[i]. They continue to act as if their role was to seek consensus and compromise in a multi-national state – when they should be acting like old-fashioned diplomats tasked with advancing the interests of their homeland.
Consequences of the Customs Union
Any state which is a member of the Customs Union pays zero tariffs on goods imported from other EU countries and waives all customs formalities. This facilitates free movement of goods (frictionless trade) between EU countries. On the flip side, all states in the Customs Union must apply the same external tariffs on goods imported from outside the EU – and these are determined by Brussels. (The tariffs collected are handed over in their entirety to Brussels less a “collection fee”.) Member states cannot strike separate arrangements with third party countries because trade policy is monopolised at EU level.
So what about a Customs Union – a variant on the current arrangements? The change of article has become fashionable in recent weeks, especially on the Labour side. Turkey was offered a form of Customs Union some years ago – as a temporary measure. The deal does not cover all goods. The key problem for Turkey is that the country does not have access to beneficial tariff reductions on exports arising from new trade deals (such as that with Canada). Turkey does, however, have to apply reduced import tariffs to be able to move goods freely within Europe.
If there is, eventually, a trade deal between the EU and Japan, then Turkey will have to apply reduced tariffs on Japanese imports but would not be permitted to reduce tariffs on Turkish exports to Japan. If the Turks then approached the Japanese to do a bilateral deal, as Mark (Lord) Price the Trade Minister has pointed out[ii], what incentive would the Japanese have to do a deal? Mark Price writes:
The EU-Japan trade deal [will be] worth about £6 billion to the UK economy. The current government plan, post-Brexit, is to transition that deal into a UK-Japan agreement… If we were to join the CU on anything other than a temporary basis, that value would be lost as Japanese goods become cheaper in the UK but UK businesses paid higher [tariffs] on exports to Japan than their EU counterparts.
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So, if we were to remain in the Customs Union, any future trade deals struck by the EU would apply to Britain asymmetrically. We would be obliged to match the concessions made by the EU, but any reciprocal concessions made by the other party (Japan, India – whoever) would apply only to the EU-27 and not to us. And it turns out that the EU is currently working on trade deals with Vietnam, Singapore, and Indonesia – not to mention with the USA. If UK businesses were faced with reduced import costs with no countervailing reduction in export tariffs, many might wish relocate to the EU.
But even putting these short-term economic considerations aside, the Customs Union is objectionable – as even Mr Corbyn has recognised – because it is protectionist. The French and German elites who crafted it were not renowned for their passion for free trade in the great tradition of the British economist David Ricardo (1772-1823). The purpose of the Customs Union is – and always was – to protect certain European vested interests from French farmers to German chemical manufacturers.
Traditionally, it was the left that championed free trade. There is a strong economic case that free trade reduces global inequality, raises the condition of workers and even tightens environmental standards. The European left, however, and much of the Labour Party, seem to have forgotten this.
For the fact is that the EU customs regime imposes tariffs of up to 20 percent on imports of food. A few weeks back I wrote, in the context of Africa and Kenya in particular, that the best way to give a leg-up to developing countries is to buy their products and to invest in their economies rather than throw so-called aid money at them. Kenya’s agricultural products are fabulous and we shall surely buy more of them once out of the Customs Union.
A comprehensive free trade agreement with the EU will be much preferable to remaining in any form of Customs Union. We start, unlike Canada and Japan, from a position of 100 percent regulatory alignment (to use the current jargon) and any recalibration of those regulations will be to improve them. A free trade agreement, Lord Price admits, will not be as “frictionless” as the current dispensation; but the EU-27, which will continue to enjoy a trade surplus with the UK, has an interest to find as smooth a way of facilitating the movement of goods as possible.
Who might benefit from exiting the Customs Union?
It is low-income families who spend a higher proportion of their disposable incomes on such essentials as food and footwear that are most disadvantaged by these swingeing external tariffs. Just think how much even a ten percent drop in their grocery bills might mean for them.
Moreover, we British consume a larger proportion of non-European foodstuffs out of our total grocery purchases (Indian tea, Chilean and Australian wine, Kenyan pineapple etc.) than our European neighbours. This makes me think that the leading UK supermarkets – Tesco (LON:TSCO), Sainsbury’s (LON:SBRY), ASDA (owned by Walmart (NTSE:WMT)) and Morrison’s (LON:MRW), which account for nearly 70 percent of UK grocery sales between them – could be well placed to profit by sourcing more of their foodstuffs from outside the EU. (I know there will be cries of What about the food miles? But don’t put that question to hard-pressed African farmers!)
This suspicion that Britain may seek markets elsewhere could be another source of Monsieur Barnier’s discourtesy. The BBC’s Europe correspondent Katya Adler revealed last week that Brussels is “terrified” that Britain will become a “super-competitive” country on Europe’s doorstep, post-Brexit[iii].
Brexit is not just a British affair
The prevailing view of the mainstream media – articulated sombrely by Martin Wolf[iv] in the Financial Times – is that Brexit is an entirely British phenomenon which arises out of the decline, not just of Britain in the world, but by the standing of its political institutions. This is alarmingly ahistorical: future historians will wish to contextualise Brexit within the framework of the tensions in play in the European Union as a whole.
Britain is not alone in feeling frustrated with the EU. Germany’s experience of the Single Market and of the currency union is quite different from that of the UK but equally problematic. Germany’s economic performance, while admittedly accumulating high trade surpluses from exports of high-quality manufactured products (cars and so forth), has been characterised by low aggregate domestic demand and high savings rates. Labour market reforms (unlike in France) have led to a decade-long squeeze on wages. Germans, although comparatively rich in GDP-per-capita terms, often do not feel well off.
This is why there is so much popular opposition in Germany to Yanis Varoufakis’ proposal for large fiscal transfers from Germany to Greece and elsewhere in the South. “We have had it tough”, say the Germans. “Why should they get a free ride?” This unease will only intensify as further integration of the eurozone (driven by President Macron and others) accelerates.
It is very unlikely that other states will leave in the immediate future – members of the eurozone have effectively pushed away their escape ladders. It is becoming clearer that Mr Varoufakis’ description of the eurozone as Hotel California is poignantly accurate. You can check out – but you can never leave.
But the non-eurozone periphery may well call time in due course. I explained last week that Eastern European states such as Hungary and Poland, where the slogan of the Vichy France – God, family, motherland – still has traction across large swathes of the population, are diverging from the increasingly progressive and pro-immigration West. And if Britain prospers outside the EU, then in five years’ time the Swedes may well consider their chances outside too.
For now, if you are a Remainer then it is Britain that is dysfunctional; and if you are a Brexiteer it is Europe that is dysfunctional. It will take at least a decade to judge who was correct.
Why I’m still whistling…
With every passing day – despite the continual undermining of Mrs May’s stature by the mainstream media – it becomes clearer that the Labour party doesn’t have a clue about its European policy. Meanwhile, Mr McDonnell is going to nationalise the railways, water and other utilities costlessly [sic] by buying the shares in those companies in exchange for newly issued government bonds! (If you can’t see what is both absurd and inequitable about this proposition I shall explain that shortly.) Thankfully, the Tories are now leading in the opinion polls.
I wouldn’t blame the great British public for feeling bored that the same arguments offered by the Remain camp during the referendum campaign are being endlessly re-cycled. The ultra Remainers want an exit-from-Brexit – if possible by means of a second referendum; and if they can’t get that then they want Brexit to be a monumental failure so that they can say I told you so!
And Mrs May, head down, just gets on with it, ignoring the barrage of animadversion from the chattering classes… My best guess is that she will re-confirm soon that Britain shall withdraw from the Customs Union – if not on 29 March 2019, then on 31 December 2020.
As a sterling-based investor I would not buy European assets at the current exchange rate of €1.12. When the hurly-burly’s done the pound will recoup some of its losses. Monsieur Barnier’s discourtesy gives me hope: sometimes it pays to be contrarian – and optimistic.
[i] In his essay The Brexit Iceberg in Brexit and Beyond: Rethinking the Futures of Europe, UCL press. Available as a free download.
[ii] We must think outside the Customs Union box, Mark Price, The Sunday Telegraph, 04 February 2018.
[iv] Financial Times, 08 February 2018. Available at: https://www.ft.com/content/ddb1ab46-0b57-11e8-8eb7-42f857ea9f09