After the momentous ministerial resignations yesterday and direct challenges from Conservative MPs to the Prime Minister’s authority, we are peering through a glass darkly. Will there be a motion of no confidence in Theresa May? Is her lamentable Chequers minus deal dead? Will there be a new Prime Minister in a matter of weeks? And will there be a complete reset of our attempt to talk our way out of the EU thicket?
For the moment, politics trumps economics. But when the dust settles on this titanic power struggle in the Government, the spotlight will return to the economics of Brexit. Which arrangement offers Britain its best hope of securing its future prosperity, jobs and the Exchequer revenues vital to maintaining high-quality public services?
Is it Mrs May’s spatchcock draft deal with the European Commission handcuffing us to a failing economic model for years to come? Or is it a swift and inexpensive exit under World Trade Organisation (WTO) rules (a World Trade Deal) with a better possibility of taking up the EU’s standing offer to agree a free trade agreement along the lines of Canada’s after we have left?
With her back to the wall, in the Commons Mrs May has again defended the indefensible, dismissing the World Trade Deal option as the road to ruin. Indeed, her government’s tactic is to scare the people and MPs witless about this, so that it is not seen as a viable option.
She should take another look at this as it is the only way out of the mess in which she has landed the country. Trading under WTO rules – the norm for the rest of the world (including such economic minnows as the USA, China and India) – can be our salvation, politically as well as economically.
The Prime Minister is supported in this tactic by the Treasury, which has form in making doom-laden forecasts about Brexit, having said before the Referendum that a Leave vote would cause a serious recession.
The Treasury concocted that forecast by first predicting that leaving the EU would greatly reduce our trade with the EU while failing to stimulate trade with the rest of the world. Second, it said that the great uncertainty unleashed by this would reduce consumer and investor confidence so that demand would collapse.
Both of these forecasts were wrong: the second was proved wrong immediately. The first forecast about long-term trade now does not have much credibility either, judging by the continued record of foreign direct investment flowing into the UK and the highest employment in years.
Faced with this – together with unrelenting criticism from economists – the Treasury and the rest of Whitehall have now admitted their methods on trade forecasting were wrong and have adopted the same sort of methods that we use at Economists for Free Trade.
As former Chancellor, Lord Lamont, pointed out yesterday, it is these long-term trade forecasts that the Treasury is bound to resurrect under revamped assumptions to frighten us again about the post-Brexit outlook. The formula once again will be: trade with the EU will collapse and trade with the non-EU will not be any higher and so confidence will be destroyed by this prospect and the associated uncertainty. Result? Another recession.
Astonishingly, this is the Treasury warning even under a Canada+ deal; it is just even more strident about an exit under WTO rules. They have claimed that, even though trade with the EU is only 12 per cent of our GDP, trading under WTO rules will depress GDP by almost 8 per cent.
So from where in this Project Fear Mark 2 does this collapse of EU trade come? And from where too the lack of achievement in trade with the rest of the world?
The scandal – given the national importance of these forecasts – is that the Treasury has not actually told us how it reached these assumptions. After almost a year of repeated requests from economists, business and over 60 MPs, no serious information has been forthcoming from the Treasury. Thus we have had to piece the picture together from published work on the models they are using, from some two dozen PowerPoint slides they released under protest to the House of Commons and from sketchy information leaked from Whitehall to the media.
This detective work has revealed why Whitehall is so reluctant to admit to its assumptions. The reason is simple: on the basis of the evidence we have, they are weak to the point of absurdity.
They assume that after Brexit the EU will introduce costly border delays on our trade with them; and also new non-tariff barriers in the form of new demands on product standards. Yet we know the EU cannot do either of these things legally under international law. The WTO Trade Facilitation Agreement, the WTO Technical Barriers to Trade Agreement and the Kyoto Convention of the World Customs Organisation all forbid it.
They commit the EU to computerised pre-cleared border processing activities and physical inspections that must be intelligence led (typically only about 2 per cent of shipments).
Standards that have been long enunciated as ‘EU standards’ and to which we currently adhere cannot be arbitrarily changed with respect to our goods. Such discrimination has long been outlawed by the WTO.
Some scoff at this, saying that WTO rules can be easily ignored without much push back. It is not true. WTO law is written into EU law, which itself is a creation of international treaty law. Businesses are expected to abide by this law and its implementation is overseen by all European courts and ultimately by the European Court of Justice.
Furthermore, it is clear that these are mostly half-baked threats from some, mainly French, politicians. It is equally clear that the multitude of ports such as Rotterdam, Zeebrugge, Antwerp, and Hanover are poised to take business from any port – such as Calais – that would attempt to effect such procedures. And the President of the Calais Region has made clear in no uncertain terms that their business interests lie in continuing to process trade smoothly in observation of the law.
What about the Treasury’s de-minimis assumptions on our free trade deals around the non-EU world? They forecast that these will be feeble and extra gains from them trivial. Yet Australia managed, after liberalising its trade protectionism in the past thirty years, to produce an estimated extra 5.4 per cent on its GDP. When we put realistic assumptions about how much EU protectionism could be eliminated in our new trade agreements into the trade model used by the Treasury, we come up with a similar order of magnitude to the Australian case.
The truth is that the EU is a protectionist and bureaucratic organisation that is holding the UK back by erecting large barriers against the best world suppliers and by regulating our economy in a lot of intrusive anti-business ways. It also takes control of our borders away from us.
Compared with the effective surrender of our independence from these EU intrusions that the current government proposals envisage, an exit from the EU under WTO rules promises a strong boost to the economy. We estimate the potential gains amount to an extra 0.5 per cent annual growth on average over the next decade and a half.
Into the bargain we can keep the £39 billion pencilled in for budget payments for a transition period and beyond, and we can get on with Brexit immediately from April of next year. The tariff revenues under WTO terms will rebound in our favour as our prices here are disciplined by world competition. We can also immediately cut prices by zeroing tariffs on a wide range of goods we do not produce here.
In due course, the EU will no doubt agree a free trade agreement, just like those we will be doing all over the world. Then will be the time to reach a sane Canada+ agreement with them. Meanwhile, it is vital that we regain our self-government by leaving the EU now.
To read the piece in full, click here.