Theresa May’s hopes of a “deep and close” relationship with the EU after a Brexit in which we leave the EU’s Single Market and Customs Union have been dealt a fatal blow by the EU’s intransigence.
Even her Chequers proposals look likely to be unacceptable. Even though these effectively mean remaining in the Single Market and by tying ourselves to EU standards make trade deals difficult, they ask for some ability to control immigration and do not accept the Customs Union.
The European Parliament has threatened to veto them. But in any case all along she has failed to see that this circle cannot be squared. The EU defines itself politically in its roadmap to political union in terms of the unified market and polity behind a customs wall.
In the federalist canon the four freedoms including migration are sacred political commitments. In continental history this is nothing new. Bismarck united Germany in a customs union. The EEC started out as a Coal and Steel Cartel, morphed into the EEC Customs Union, and is now using these institutions to form a political union.
We are up against a religious idea here and regardless of economic consequences the EU has revealed that it will not budge on it.
Its repeated mantra is that “you cannot cherry pick parts of a union”. So it has finally dawned on this government that since the only “deal” available from the EU will be one in which effectively we do not leave but remain subject to EU rules without a voice in their creation, we had better think about leaving without an EU trade deal at all.
Having no trade deal is not the same as having no agreements on a wide range of non-trade areas where there have to be arrangements. These include visas, citizen rights, security, airline permissions and much else that is needed for citizens of the UK and the EU to carry on their ordinary lives.
Failure to agree on these basic things would be a dereliction of government duty that will have citizens up in arms; no government can risk that.
Trade is not in this category however because it can carry on perfectly well without an EU trade agreement. Most countries in the world do not have a trade agreement with the EU and yet their EU trade growth has been very strong- stronger than the growth of intra-EU trade in fact.
This happens because they trade under WTO rules, which enforce seamless customs border procedures and non-discrimination in standards. The seamless customs are made possible by modern computers and communications which mean that almost all cargoes are cleared before arrival.
The standards rules mean that once the EU or any other WTO member has announced their proposed domestic standards, these must apply without exception to all foreign exporters. Of course, this does not prevent a country announcing silly standards designed to keep out foreign suppliers; here there is no discrimination but in practice only home suppliers can supply the product.
The famous example is Japanese ski boots whose weird dimensions are apparently required because of the special Japanese snow: the regulations mean that no foreign producers would bother to supply them. But the point to take away from this is that the EU Single Market has created standards that are largely uniform across the EU and have been agreed by 28 countries, including so far ourselves.
Our export firms meet these EU standards; and EU export firms meet our standards, which now happen to be the same. There is no conceivable and legal way that either the EU or we could change these standards in order to keep out each other’s exports. This would be blatant discrimination, to be slapped down at once in the WTO courts.
Over time EU and our standards will change. But export firms on both sides are quite used to this as they have to adapt to such changes all over the world where they have export markets. In no country do politics and product requirements stand still, given the way consumer preferences and technology are changing.
We plan to liberalise our standards to modernise our economy for these changes. Export firms from the EU and elsewhere will adjust if necessary, to participate in our market. Because it will very likely be liberalisation they will probably not need to change much if at all as more types of products are deemed acceptable.
This government has said time and again that “no deal is better than a bad deal”. As only a bad deal looks as if it will be forthcoming from the EU, it had better formulate its “no deal” policy sharpish. But this is not at all difficult. Nor does it involve “crashing out” of EU trade or of anything else.
What will happen at end-March 2019 is that the UK will continue trading with the EU but now under WTO rules. Because both sides’ exporters satisfy the other’s product standards, they must continue to have the relevant permissions to enter each other’s markets without hindrance. Because borders must be seamless they will continue to pass through ports unchecked, pre-cleared by computer, with all relevant information per-entered into these computers costlessly straight from the loading logs.
So trade will continue as now quite uninterrupted. Yes, customs officers will in principle have to “handle” extra trade, namely UK-EU trade which they previously registered but otherwise ignored. But customs officers in the UK and around the EU in the key channel-facing ports have expressed confidence in their ability to adjust. Given that after a bit the trade will go through quite routinely via their computers, that is a reasonable view.
The novelty will just be tariffs. As a third country in the WTO we will announce our tariffs for all imports from all countries of the world as of April 2019. The EU will also apply its existing MFN tariffs to us as a third country.
Our choice of tariffs could well from pure administrative simplicity simply be the same as these: after all we already levy them against non-EU countries as part of the EU.
These EU tariffs on food and manufactures average a rather small 4 percent. They are much higher on food, nearly 20 percent, but food is a small part of trade. On manufactures they are closer to 3 percent. The main trade barriers on manufactures, which take total protection up to about 20 percent, are via inappropriate standards, put in place like the Japanese ski boots case to keep out the foreign supply.
There are also standard barriers on food, estimated at around 6 percent. Neither of these standards barriers will apply to UK-EU trade, as we have seen. But they are relevant to thinking about our trade agreements with non-EU countries, such as the US, that are particularly incensed by these barriers.
When we leave, our free trade objectives mean that we have to set two main trade policies in place. First, we have decide exactly what tariffs we will apply; our ultimate aim is to get rid of them altogether but we can do this partly by direct action and partly by FTAs with most of the world.
Second, we have to negotiate FTAs over both tariffs and standards with the non-EU world, starting with the US, our biggest trading partner and a main world supplier of high-quality food and manufactures.
On tariffs there are several things we can do to hasten our movement into free trade. We can immediately abolish all tariffs on goods we do not produce; these tariffs were there to protect continental producers, not our affair. We can abolish all tariffs on parts for manufacturing, so freeing our manufacturing industry’s supply chains to incorporate best-value inputs from all over the world. We then get to the tariffs that protect our own producers of manufactures and food.
Here we can announce a programme of intended tariff and non-tariff-barrier reduction via FTAs; this programme could include adjustment assistance and certainly any planned direct long run Treasury payments such as to farmers for environmental services.
These policies will reap us important gains from free trade, which we estimate at 4 percent of GDP. By avoiding all the involvement in the Single Market rulebook we also gain the ability to set our own pragmatic regulations over the next few decades of fast technological change. This, too, gives us significant gains which we estimate at a minimum of 2 percent of GDP.
We regain control of our borders, enabling us to stop the 20 percent subsidy to unskilled EU immigrants. And of course we stop entirely our £12-14 billion a year net payments to the EU. The effects on prices and wages mean that average household will gain around 8 percent, while the poorest household will be 15 percent better off. The Treasury will get about 10 percent extra revenue, around £80billion. This will allow it to end austerity, spend intelligently on public projects and make tax cuts, further boosting the economy.
Furthermore because we will be doing all this without any trade deal with the EU, we can do it all at once and without paying them that £39 billion for a trade deal that has not materialised.
The tariffs that we and the EU levy will be paid by EU producers and importers facing a UK market in which world prices set the competition level. No doubt in time the EU and we will therefore do a trade deal to get rid of these tariff barriers between us; but they are more a pinprick of a nuisance than a major driver of trade.
A World Free Trade deal under WTO rules is not just better than a “bad deal”. It offers us the unalloyed gains of Brexit and soon, in a way that no one else, the EU included, can stop. It is time this government embraced it firmly as its main Brexit policy.
To read Professor Patrick Minford’s piece for the The Express in full, click here.