Brexit: it’s time to seize the day

There was rather too much ‘shock-and-horror’ reaction to a recent interview with Sajid Javid, the UK chancellor, who merely said that Britain could diverge from European Union rules after Brexit. ‘There will not be alignment, we will not be a rule-taker, we will not be in the Single Market and we will not be in the Customs Union – and we will do this by the end of the year.’ Businesses, he suggested, should get on with adapting to these unfamiliar circumstances.

The ‘surprise’ shown by business organisations seemed a tad overdone. What did they, or anyone else following developments since the 2016 referendum, expect? That Britain would forever remain a rule-taker from the European Commission? The truculent reaction to what Javid said is not credible from those with even a rudimentary grasp of the meaning of sovereignty: a nation deciding its own laws and regulations.

Countries do not often adopt fully aligned, identical rules to others in order to trade with them. For instance, the Chinese and the Americans today export a lot to customers in the EU without aligning to Single Market rules. Indeed, the recognition of regulatory ‘equivalence’ – rather than exact congruence – has become a common practice in postwar economic relations. Countries accept the flow of products and services that accord with regulations established by others as long as regulatory goals are shared. This is what is meant by ‘outcome-based equivalence’.

Why should any future UK-EU deal be different in this respect to the hundreds of other trade agreements between sovereign nations? A reason for doubt could be the European Commission’s desire to ‘have its cake and eat it’. It appears that some EU politicians want to treat Britain as a ‘third country’ but also want to retain control over Britain’s rules and regulations, as if it were still a member state. Javid was simply reminding the world that the General Election mandate prevents the British government from going along with such a half-in, half-out position.

Certainly, regulatory comparability between countries is helpful in several ways. The setting of global standards – published by bodies such as the International Organization for Standardization, or the International Telecommunication Union – and the harmonisation of technical regulations are often expedient. Common technical regulations, in areas from household equipment to machine parts to car accessories, aid operators in how to use these items. They assist, too, with product development, and also facilitate cross-border trade.

This is because when any producer wants to export into another territory, it needs to meet the product standards set by that sovereignty. Thus, when many countries voluntarily adopt the same international standard, that makes it easier for a producer within an adhering territory to sell into foreign countries. It does not need to remodel or even tweak its products to meet multiple national requirements.

Adopting such international standards and rules – whether established by another nation, multinationally, or globally – is a sovereign decision. It does not mean abandoning sovereign rights, nor does it imply being controlled by other political institutions. Governments decide on which standards to stipulate: their own, or those shared with some other countries. They resolve to align with other existing regulations, or they don’t, depending – hopefully – on their assessment of their country’s best interests. This choice may be informed by immediate economic considerations. But it may also be informed by other factors that might incur an economic cost, at least over the short term. For example, a government could commit to a wider experimental approach to developing new products or services, rather than being restricted by onerous regulatory restrictions.

That’s why the departing governor of the Bank of England, Mark Carney – no enthusiast for Brexit – as well as his successor Andrew Bailey, have both made clear that there is no point in London, as a world financial centre, being a rule-taker from Brussels. Carney urged the British government to avoid aligning its financial regulations with those in the EU after Brexit. ‘It is not desirable at all’, he told the Financial Times, ‘to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction’. Quite right.

The British government should adopt a similar independent approach in setting aside the precautionary principle deployed by the European Commission. This principle means that in the case of ‘scientific uncertainty’, the EU often adopts a high level of caution with regard to debatable risks. This holds back innovation, not least in areas such as genomics and new materials, and leads to banning certain products.

This risk-averse approach is the basis, for instance, for the EU famously prohibiting hormone-treated beef. The fact that many other advanced beef-producing countries, such as Canada, Australia and the US, approve it as safe to consumers indicates that political and protectionist influences are at play in the EU.

Where there is genuine ambiguity about the human impact of some foodstuff, the sensible approach is to let people decide for themselves on the information so far available. Appropriate labelling allows consumers to make their own choices about what type of beef to buy. The same perspective is applicable to the infamous ‘chlorine-treated chickens’ that other countries produce, but which are also outlawed in the EU.

Furthermore, it is clear that the EU maintains its ban on chicken imports for overtly political reasons. In 2005, its European Food Safety Authority concluded there was not a health risk: ‘exposure to chlorite residues arising from treated poultry carcasses would be of no safety concern.’ In fact there is some evidence, though not unequivocal, that food poisoning rates from eating chicken are higher in the EU, with its so-called ‘safety’ ban, than in the US. The prohibition has been maintained, then, as protection for EU chicken farmers.

Change is good

Regaining sovereign decision-making on such regulatory issues, and many others, necessarily implies that UK-EU trading arrangements will change when Britain finally leaves the clutches of the EU next January, at the end of the transition period. The statement repeated by some politicians since the referendum that ‘things will remain exactly the same’ was always illusory bunkum.

The reality of independent policymaking post-Brexit seems still to be objectionable to aloof business organisations. It is also likely that some of their representatives decided to express ‘shock’ about Javid’s comments in order to reiterate to their members their continued favouring of the status quo – the same stance they, and others among business leaders and most of the political classes, have maintained ever since they opposed Brexit during the referendum campaign. However, the vast majority of these organisations’ business members will have been fully aware of this trajectory of change ever since the referendum result.

In this regard, Javid’s declaration that ‘there will be an impact on business one way or the other, some will benefit, some won’t’ was another statement of the obvious that should also not have caused controversy. If a business is geared primarily to importing parts from EU countries, assembling them in Britain, and re-exporting the final product to the EU – a rough summary of Britain’s Japanese-owned car assembly plants – then leaving the EU’s Single Market has indisputable implications. Such firms need to adjust their operating models.

But the prospect of change should not incite such anxieties. This should not be alien to a healthy business. Conditions are always evolving. Signing a trade agreement with China or Australia will also invite businesses to adjust. Indeed, the failure to adapt to change has been a prominent business weakness in recent decades. Reshaping and transformation are exactly what a lot of businesses could do much more of, instead of drifting along sustained by cheap debt and other state reliefs.

A plan for 2020 and beyond

What stance should the government take in the forthcoming trade negotiations between Britain and the EU? The EU is a protectionist institution that seeks to defend itself against outsiders. During the talks, it will attempt to impose constraints on imported goods and services. The latter include not just financial and business services, but also critical areas like transport and communications.

The straightforward objective of the British government should be to avoid as many EU constraints on these as possible. A trade deal – a ‘Canada +++’ arrangement, as it is dubbed – that formalises cross-border interactions is itself a technical matter that ministers should delegate to people knowledgeable in such documentation. But three overarching principles that would help the government in achieving its big-picture goal should guide the discussions. We can sum these up as: resist procrastination; retain perspective; rescind protectionism.

Resist procrastination. The British government should maintain its unequivocal stance that it will not request any extension to the transition phase. The hard deadline for concluding the bulk of any UK-EU trading terms will be 31 December this year. The message to the EU’s team is for it to negotiate in good faith towards this date, rather than keep wasting time repeating how difficult everything is.

How long does it take to conclude a trade deal? This is a ‘piece of string’ question. From recent experience, it can be any time between four months and 10 years. The timespan is determined not by technical complexity but by political motivation.

As illustration, a review of recent US trade deals from the Peterson Institute for International Economics found they take, on average, one-and-a-half years to sign. One of the US’s quicker deals was with Jordan, which took four months to sign, while one of its longer ones was with Panama, at 38 months.

It is striking, too, that after Norway decided – by referendum in September 1972 – not to join the European Community, a Norway-EC trade deal was signed within eight months, on 14 May 1973. Thus, under the right pressures, even the Brussels bureaucracy can act at speed.

Retain perspective. Second, the government should not allow trade negotiations to impede, or even distract from, the immediate task of addressing Britain’s productivity malaise. The best trade agreement ever will do nothing directly to revive economic dynamism. Trade is simply the act of completing the production cycle. There is no point producing a good, or being capable of providing a service, unless the good or service is sold. Thus trade is an outcome, not a precondition, of successful production.

These sales will mostly be within the home market, reiterating the importance of domestic matters. Some sales, though, will be abroad. In Britain’s case, exports are equivalent in value to about 30 per cent of gross domestic product, of which fewer than half go to EU countries. Even these figures exaggerate the role of trade for providing jobs and prosperity.

Exports, especially goods exports, contain imported components – so-called intermediate goods and services. Hence the amount of value added by domestic production contained within its exports is less. The OECD estimates Britain’s export share of domestic value-added at about one-fifth. So both logically, and also numerically, foreign trade, with EU countries or anywhere else, is subordinate to the dynamic of production. This means that the prevalence of low business investment, minimal productivity growth and a shortage of quality jobs are the real burning issues for the new government to address. All these are of greater urgency and superior relevance for reviving increasing levels of prosperity than where businesses might trade.

Trading agreements are even more peripheral to fixing production. Trade deals negotiated with anyone – the EU, the US, China or wherever – don’t directly generate trade. That only happens when firms are able, due to the quality and price of what they produce, to sell in foreign, or even domestic, markets.

Thus the forthcoming Budget announcements on 11 March will be an indicator of greater importance than news from the trade talks of what the new government is doing for growth. In particular, for how it is translating its messages favouring economic development into meaningful actions. One trade-related government declaration that would demonstrate that its thinking is heading in the right direction would be to take a firm stand against modern protectionism.

Rescind protectionism. One of the benefits of Brexit in shaking up Britain’s trading arrangements is that it offers the opportunity to roll back protectionism in all its forms, tariff and non-tariff. While tariffs are generally recognised to be economically damaging, the escalation of non-tariff barriers by developed countries is in fact of greater long-term detriment to the world economy.

Over the past half-century, in response to their ever-more anaemic domestic industries, Western governments have enormously extended barriers to imports of a non-tariff variety, also known as ‘behind-the-border barriers’ and as ‘technical barriers to trade’. Regulatory requirements, often under the auspices of ‘health and safety’, the use of various state subsidies and public procurement rules have all been employed – deliberately or by effect – to prop up declining businesses.

The imminent changes in Britain’s external relationships should be taken as a moment to reverse those measures. This is not simply a technical repositioning – it requires a political reckoning, since Britain has been fully party to, and often leading, the EU’s augmenting of protectionism. Revoking this approach starts with appreciating the injury inflicted, economically and to international concord, as a consequence of the proliferation of state protectionist policies.

It is self-evident that new tariffs have an immediate detrimental effect on exporting businesses in the territory targeted. These businesses will either lose sales and revenues, or will have to make compensating price reductions, if those are feasible and still make money. Either way their commercial position will be hurt. In the longer run, though, businesses in the targeted countries will adjust in some way – some might contract and others expand. However, the graver problem from protectionism from developed countries is the harm done to the tariff-imposing nation. Protectionism’s drawbacks primarily impact within domestic production, because businesses are being mollycoddled and protected from pressures to refresh and revitalise themselves.

As a policy approach, protectionism – traditional tariffs and murkier non-tariffs – is driven by homegrown difficulties, which, perversely, it aggravates. Import prices will likely increase, hitting local firms’ supply costs (as well as consumers). Protectionism often also invites retaliation abroad, thereby restricting export sales by indigenous producers. But the greater domestic damage arises from its pampering effects on local business.

By cosseting companies, protectionism relaxes pressure on them to undertake the investments needed to innovate and take productivity forward. These firms muddle through and are able to avoid, or at least postpone, making technological change. This is a fundamental barrier to productivity growth and to rising prosperity.

Adam Smith’s classic critique of protectionism made these core points 250 years ago. He ridiculed the belief that a country could cure domestic depression and unemployment by ‘beggaring all their neighbours’. Trying to shift demand away from imports on to home-produced goods doesn’t do anything in itself to improve productivity. These measures, he argued, divert resources into, or keep them in, less productive uses (1).

In periods of depression, protectionism thus helps to sustain, not overcome, entropy. As the late Paul Samuelson, America’s first Nobel economics prize winner, explained, protectionism breeds ‘economic arteriosclerosis’ (2). Shielding existing businesses provides them with a cloak for outdated practices. Weaker, zombie firms are given a lifeline for survival, perpetuating congestion effects on the wider economy. Protectionism dulls the incentive for industries to transform and improve. At a countrywide level it evades the need for wholesale economic restructuring.

During the trade talks, Britain should point out these consequences. An EU imposition of barriers that restricts British companies wanting to do business in EU territories will, in the long run, be of greater loss to the EU than it is to Britain. This has nothing to do with the relative volumes of two-way trade that some commentators focus on. It is because protectionist practices always economically undermine the country imposing the constraints.

Britain should go further in utilising the restored freedom in its trading policies as a result of Brexit and give an international lead against self-harming protectionism. On top of any economic considerations, reversing Britain’s protectionist practices would reject today’s injurious politicisation of trade policy. Brexit was a political decision about extending control over laws, borders and money that has very little direct consequence for the economy, positive or negative. On the other hand, trading is an economic matter, and one that should have little to do with political objectives. Yet increasingly, trade is being used as a political weapon.

For example, it is now known that the Trump administration privately threatened Britain, France and Germany with a 25 per cent tariff on cars exported to the US unless they took action against Iran over alleged violations of the 2015 nuclear agreement. One European official equated the threat to ‘extortion’. Such weaponisation of trade to determine other countries’ foreign policies will generally have economic implications for those at the receiving end. That’s why it is done.

Rather than just condemning this, it would mean a lot if Britain publicly set a plan to roll back its own protectionist practices. By rescinding trade protectionism, Britain would be standing against the politicisation of trade that is becoming so endemic on both sides of the Atlantic, ratcheting up international tensions.

Proclaiming the goal of reaching zero tariffs on all imports gives an example of both national self-interest and simultaneously international leadership. In parallel to the UK-EU talks, and to any other trade negotiations the government is initiating, it should announce a programme to remove all tariffs and quotas on imports within a transition period of, say, 10 years. The pace of moving to zero levels will vary between industries depending on the current levels of global protection that Britain inherits next January, giving adequate, but not excessive, time for sectors and the wider economy to adjust. Having broadcast this perspective, the government should then move on to start repealing the non-tariff barriers as well.

Conclusion

The current EU is institutionally and culturally disposed to make liberalising trade arrangements hard to achieve. Britain should not succumb to such EU pressures, as it did throughout the Withdrawal Agreement negotiations. Instead, the government should begin to demonstrate ‘taking back control’ by exerting its sovereignty in setting its own economic rules and standards, as well as driving through a programme for economic transformation at home. Rescinding its legacy protectionist ways will be a necessary and decisive step in this direction.

Phil Mullan’s new book, Beyond Confrontation: Globalists, Nationalists and Their Discontents, will be published by Emerald Publishing later this year.

(1) Wealth of Nations, by Adam Smith, Book 4, Chapter 3, Part 2, paragraph 9

(2) ‘Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalisation’, by P Samuelson, Journal of Economic Perspectives, 18(3),2004