Brexit – breaking the impasse

Brexit – breaking the impasse

The original deadline for Brexit, 29th March 2019, is less than 4 days away. Debate continues, resolution seems so far away. What can be done to ensure an “orderly withdrawal”?

The key is in the provisions of Article 50, the mechanism for leaving the EU. A critical word is “agreement”. By definition, agreement includes at least two parties to a transactional arrangement.

Paragraph 1 of Article 50 states that “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.” In the case of the UK, the constitutional requirement is approval in parliament. At the same time, “It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament”.

In the event of both parties being unable to come to a mutual agreement, paragraph 3 applies:

“The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”

The time period expires on Friday, 29th March 2019, albeit that provisional unanimity to extend was apparently given last week. The provision is that parliament will agree this week or present an alternative approach.

Parliament has been clear that there are some unacceptable parts of the so-called Withdrawal Agreement. Most pertinently, is what has become known as the `back stop’. The House of Commons refuses to accept the backstop, the EU refuses to remove it. Therefore, there is no agreement between the two parties. The default position is therefore to leave on Friday.

The Withdrawal Agreement can be seen from different perspectives. In public at least, there has been little opposition in the UK to a “divorce settlement” of £39 billion. Article 50 does not include any formal arrangement over payments. A break can be clean with no liabilities on either side. The £39 billion can be seen as a generous offer.

Other provisions on the Withdrawal Agreement include other generous provisions. The UK could reclaim fishing waters from 11 pm on Friday. A transitional situation has been proposed.

It is hard to find any similar concessions from representatives of the EU.

Through a series of votes, parliament has indicated that “no deal” is an unacceptable option, even though that is the default position. There appears to be an impasse.

With four days remaining, there are other options. Article 50 notice can be revoked, surely a message of revolt from parliament that the will of British people will be ignored. There are still 4 days left to find a compromise.

Ultimately, any treaty has to be agreed by a qualified majority the people of the EU according to their own constitution al requirements. The British government can therefore be expected to respectfully put a case to the people of the EU.

What should that message include?

On 23rd June 2016, the UK gave a message. We are part of the European family with shared histories, sometimes amicable, sometimes not. As with all families, we make pursue different directions, Children leave home to discover the world and gain independence. We simply chose a path that does not follow the ideal of “ever closer union”.

Given our past, we also have close ties with others around the world, not least a voluntary, liberal liaison with countries in the Commonwealth. We seek to develop our own relationships on a different basis with other friends. Moving in with a new partner does not mean that we ever want to ignore our close family.

We enjoy home cooking, we want to be able to enjoy the same treats that we have for decades, if not centuries. We are happy to provide a market for EU cheese and wines. We are also happy to provide markets for other goods. We buy Skodas from the Czech Republic, Peugots that were once made in the UK, now from Slovakia, BMWs from Germany, VW from all parts of the EU.

Our trade gives Germany alone a €50 billion trading surplus. We have been generous in offering managed access to British fishing waters over a transitional period. We have had no intention of devastating EU fishing ports in the same way that ours have been since the 1970s. Sadly, those allegedly negotiating on your behalf do not share the same spirit of compromise.

Any job losses, in cars, wine, cheese and many other areas are down to both parties who can not reach an agreement, predominantly those who will not compromise on anything. We can buy what we want from other friends around the world.

After nearly 3 years, enough is enough. EU negotiators and leaders have shown no appetite to avoid “no deal”. So be it.

Here is a final offer to the people of the EU.

We do not wish to be protectionist to either the EU or our global friends. After Friday, we can agree to Free Trade Agreements (FTAs) with our other friends. Your leaders don’t want to be a part of that free trade network.

However, agreement to progress to an FTA can keep doors open. Article XXIV of the WTO suggests that if we all agree to work towards that end, we can trade on the same basis as currently. The EU car industry is going through a difficult time, not least down to corporate interests in falsifying information about vehicle emissions.

We do not wish to impose tariffs on EU goods but are left in a position where we have to. Lack of reciprocity of protectionist measures leaves us with no bargaining power. We want to keep your incomes and wealth growing. Please bear in mind that we also have our social responsibility to other partners. We wish to help markets develop in other countries and aid through trade.

We are still prepared to be generous. There is no obligation under Article 50 to pay you anything. As a nation, we are considerate. We are happy to keep paying into EU funds during the current budgeting period. That ends in December 2020. However, the British people decided that we wish to support environmentally friendly and sustainable agriculture, divert resources where we choose and not be subject to the vagaries of EU bureaucrats.

Britain is more than happy to give you the opportunity to adjust. Please let your leaders know that you want that period of adjustment too. Let’s agree to push for future FTAs. If your leaders do, then relationships will be maintained. If your leaders wish to cut off their noses to spite their faces, you have your ways of removing them – or actually you don’t. That is why we have chosen to leave.

Whatever happens, our people have close bonds. We may not be living in the same house but that doesn’t mean we shouldn’t be able to share a beer or two over football or when our interests coincide. We want to spend time with you on holidays and you are welcome to visit us. Just let’s have the freedom to grow.

Brexit tariff reduction

News has broken that in the event of “No Deal”, up to 90 % of tariffs will be removed. Confirmation seems to have come from a refusal to deny from Greg Clark, Business Secretary.

Naturally, views have been expressed, from all political vantage points. The opposition can be expected to oppose. Some in government have expressed reservations.

The announcement seems to have been leaked to Sky News. Greg Clark was later quizzed on Radio 4, indicating that formal notification will be made depending on the results of votes in parliament next week.

Perhaps the decision should have been made known in parliament first. May’s government has already been deemed to be in contempt. However, the substance, if and when all is revealed, is far more important.

In short, Sky  News were apparently told that “only the 10-20% of the most sensitive items would retain their protection, including cars, beef, lamb, dairy and some lines of textiles”. The devil will prove to be in the detail.

The motive, apparently, is to prevent shop prices increasing, therefore anti-inflationary. There may be more to it.

Perspectives always create debate. An obvious position is that such a move leaves the UK “nothing to negotiate with”. There is a wider context.

Tariffs are currently decided at EU level. The recent imposition of tariffs on rice from Cambodia and Myanmar is a case in point. Market share for Italian grown rice has halved as consumers in Italy have moved to cheaper options.

From a UK perspective, all this does is to increase rice prices for British consumers. The impact on British farmers is negligible if any. The same can be said for thousands of commodities, bananas, wine, oranges and lemons, in fact the majority of fruit and veg items that appear on supermarket shelves.

The benefit comes to consumers with the removal of taxes on healthy produce. Instead of having to pay high EU prices for oranges, these can be sourced from other countries at a lower price; South Africa, USA, Brazil. Whilst increase in choice provides consumer benefit, there may even be a positive effect on the nation’s health.

The larger benefit goes to those who spend a higher proportion of their income on food, specifically the lower paid. Wading through economic theory and reminded of Keynes’ Circular Flow model, there is a knock on effect to the wider economy, income being made available to spend elsewhere. The lower paid are less likely to save so the benefit is multiplied.

Whether or not there is likely to be a detrimental effect on farmers depends on two main factors. Will British produce still be protected? As has been referred to, beef, lamb, dairy and other products from overseas would appear to retain tariffs.

The other critical factor is how the government reorganises payments to farmers. If tariffs are to be removed in some areas, then by implication, the UK will not have to follow the Common Agricultural Policy (CAP).

Payments can be made to protect land, husbandry and the environment rather than to manipulate markets. Of course, this may mean that farmers have to reassess how they look at costs and incomes. If incentives are land management based and sufficient, then output costs depend on marginal rather than average revenues.

This would not be new. Historically under CAP, farmers have often made losses on crops, the subsidy being higher than the loss. The onus is on DEFRA to process the figures with the government to make the right decisions.

Several parliamentary select committees have heard that productivity growth has been hampered by protectionism. USDA figures show British agricultural productivity from 2001-12 averaged 0.8% annual growth as compared to the developed country average of 2%. There is still ground to be made up.

Of course, there will also be losers. French, Italian and Spanish wine makers can expect to lose market share in Britain as tariffs are removed from USA, Australia, South Africa and South America.

Similarly, the Republic of Ireland will be subject to those tariffs on beef and dairy products. Their major export markets for beef, Irish Cheddar and Irish butter will see their products more expensive in the UK. However, this may provide other opportunities for UK farmers.

So what about manufacturing?

Some answers may be provided by further select committee hearings, notably involving the economist, Patrick Minford. For those who are unaware, Minford is maligned by many but has some outstanding credentials. He was one of a group of economists associated with the Thatcher government of the 1980s.

Much of his work related to the breakdown of the trade off between inflation and unemployment, referred to as the Phillips Curve. The late 1970s to early 1980s saw both increasing inflation and unemployment.

Minford is also known as a ‘supply side’ economist. Here is an attempt to summarise that particular school of thought.

A market is essentially where buyers and sellers meet. Demand from buyers is determined by a variety of factors, notably price, price of other goods, incomes and tastes. Supply is based on profit, in turn the difference between revenues from consumers and costs of inputs. For some goods, environmental factors, technological progress and government intervention also apply.

In general terms, the higher the price, the less will be demanded, conversely, the more suppliers are prepared to supply. Economists love their graphs. We are used to seeing the following:

In a normal market, if the price is set too high, what is supplied will not be sold. If the price is too low, the supplier will see that goods sell too quickly. The market will find its balance or equilibrium, on our graph at a price of p1 and output of q1.

If Minford is right and world prices for commodities are lower (without tariffs) than EU prices, British suppliers will be able to make more profit at any given price. This has the effect of shifting supply, diagrammatically, to the right:

We can see that our market produces more, resulting in a lower price, or at least with no inflationary pressure.

The same basic principle applies to a whole economy. If we can reduce costs by increasing productivity, whether that is in pure costs, technological progress or by any other means, we can experience economic growth without unnecessary increases in price. For Price, in a whole economy we can think of the Retail Price Index (RPI). For Quantity we can think of Gross Domestic Product (GDP).

In a nutshell, the essence of supply side policies in a free market leads to lower prices, higher output and incomes and potentially higher employment to meet that increased output. If Britain is capable of more supply, we will attract inward investment.

In the shorter term, the Business Secretary seems to have suggested selective removal of tariffs. Among those is the car industry, although it is suggested that car components will be tariff free.

According to the European Automobile Manufacturers Association, the EU accounts for 85% of UK car imports, roughly 69% of cars on British roads. However, the supply chain is heavily integrated. The cost of producing cars in the UK will therefore remain the same if components are imported from the EU, potentially reduced if sourced elsewhere.

If EU finished cars are to become more expensive, then there are opportunities for those manufacturers staying in the UK to target that 69%, for example Jaguar to replace BMW and Mercedes fleets, the Astra or Corolla to replace the Focus or Golf.

In the longer term, technologies are changing. Diesel and ultimately petrol are forecast to be in decline. Any tariffs that are collected can be redirected into infrastructure investment in electric vehicle technologies as illustrated by representatives of Nissan, with a view to FTAs in the future, thus competing on a world stage.

Should the extensive removal of tariffs be welcome or a threat?

Much depends on perspective. If on goods which are not produced in the UK, then there is an opportunity to improve quality of life, reduce costs and simulate growth for the future. If the objective is to maintain existing ties with the EU, then there may be some concerns.

On balance, the threat to one of the top export markets for EU output might just be enough to prompt the EU to make realistic concessions on the flawed Withdrawal Agreement.