Monday, 31 October 2016

Accustomed to mistakes

Have you ever made a humongous mistake? I'd always considered myself completely impervious to mortal frailty in any form until just the other day when I spent a considerable amount of time at work trying to debug a software crash.  It initially bore all the hallmarks of a stack corruption but the real problem turned out to be a simple logical error with some uninitialised variables.  How could I get it so wrong?  Lasting shame burned at my very being, threatening my own sense of identity and worth.  I have a deeply unattractive STEM mindset so any kind of mistake that relegates me to the mass of error-prone humanity is going to hit hard.  Why don't you go right ahead and kick a man while he's down?  Yes, I also made an error in a recent blog post.  To preserve any dignity at all I needed to correct this asap but was then hit with a light dose of man flu, probably related to the harsh reality check on my coding diagnostic skills.   Being human is a bloody curse at times, I tell you.


What was wrong with that last blog post?  Well, I really wasn't clear enough about the difference between the customs union and the single market and might have left the impression that these terms are inter-changeable.  This simply can't be tolerated because even in this low state of indignity I am still better than Liam Fox.  You've guessed it right, this post is going to be about the customs union and why it is suddenly all over the news.

A customs union allows goods to flow tariff-free within its geographic limits.  The important point is that goods from outside the union can pay a tariff to enter the union and then move anywhere within the union without any further tariff or non-tariff barriers. For that to work all nations in the union need to agree a system of Common External Tariffs (CET).  If they don't do that there will be pressure to import goods to low tariff areas in the union and then redistribute them to high tariff areas. Obviously, that would undermine the power of governments to set tariffs so they would respond with systems of certification at their national border to make sure that the correct tariffs are paid on goods sourced from outside the union.

A customs union can be thought of as a deeper level of economic integration than a free trade area because free trade agreements alone don't impose the extra condition of CET.   Canada and the US, for example,  independently negotiate their own trade deals and WTO tariffs even though they are both members of NAFTA.  As a consequence, they need to have further agreements to manage the distribution of goods sourced from outside North America.  The European customs union, on the other hand, applies a system of common tariffs and has no need of further "country of origin" certification checks at national borders.  This freedom leads straight to the complex supply chain that feeds the Nissan car plant:  components can whizz around the European customs union without any delays or costs at national borders because there are never delays or costs at national borders.

The modern world is very complex.
It's time to come clean about that mistake I made in my recent post.  I wrote that the Nissan Sunderland car plant depended on the UK remaining a member of the European single market.  EEA membership would no doubt help their business but membership of the customs union is far more fundamental because it is the only solution that will guarantee a zero-friction customs border.  Norway, as an example, is in the EEA but not in the customs union.  That means it can set its own tariffs for goods entering from outside the EEA but needs to enforce a system of certification to prevent unscrupulous capitalists taking advantage of tariff differences across the Norwegian border.  There are good reasons to remain outside the customs union.  A country like Norway might want to protect its fishing and agricultural industries from global competition with high WTO tariffs.  Alternatively, it might want to pursue a trade deal with Ghana on quite different terms from the Germans and French.   There are also good reasons to join the customs union.  Maybe you are a nation that needs to protect a fragile, foreign-owned manufacturing industry that depends completely on zero-friction borders. Does that sound like the UK?

Car boots, bric-a-brac and jumble sales.  A new department for Liam Fox.
For some time now the government has been signalling loud and clear that Brexit means leaving the European customs union.  In fact, the mere presence of disgraced former and now not former Minister Liam Fox is enough to know that the intention is to leave the European customs union.  The simple truth is that he can only sign international trade deals and reduce WTO tariffs if the UK leaves the customs union.  This message will have worried Nissan because it would have undermined the entire supply chain that feeds their assembly lines.  It worried them so much that they even had talks with the government.  Some kind of understanding was clearly reached because Nissan have now guaranteed that their next product line will be manufactured in Sunderland. The terms of the agreement are being kept secret for the time being.  Personally, I find it hard to believe that the UK government is in a position to commit to the European customs union because they seem to still be in a state of some disarray.  Liam Fox is also still banging on about the UK being a beacon for free and open trade. I don't think the UK will have made this guarantee to Nissan.

What else could the government have promised Nissan instead of ongoing membership of the customs union?  They might have promised a tariff-free deal with the EEA.  I don't think that is enough on its own because it still adds friction to the supply chain in the form of country of origin certification.  Besides, it is not in the government's power to guarantee a tariff-free deal with the EU because it requires 28 countries to agree.  Any agreement along those lines would likely stretch in to the next Parliament.   Anything else?  There's not really much else they can do except for giving them hard cash in the form of technology research grants or infrastructure improvements or employee training schemes.  The government absolutely cannot guarantee to underwrite the losses that accumulate from customs tariffs and delays because that is against WTO rules.  Such a system of payments would be considered as a clear case of discriminatory subsidy by the WTO.  It would also make Liam Fox very sad because it would mark the end of his ultra-libertarian fantasy.  And that makes me sad because his own sense of identity will be threatened just as mine was by all the mistakes I've been making.

It looks like the UK is going to leave the customs union and the single market and, of course, the EU.  A foreign-owned factory has kicked up a stink and the government have offered them a deal in secret.  We're going to see a lot more of this in the next few months and years.  There are other car factories that need their own deal, there are businesses that need EU workers, and there are banks that need passporting rights.   Are they all to get their own secret deal?  Is this taking back control?  Is this free and open trade?  Is this even open government?

Anyway, I hope I cleared up the confusion of my last post.  My personal sense of worth is on the up already but that deeply unattractive STEM mindset is not showing any signs of abating.  Swings and roundabouts.  A bit like EU membership, really.

Over and out,

Terry

PS I won't really feel sad if it all goes wrong for Liam Fox.


 











Monday, 24 October 2016

Time to panic?

About 40 posts ago (40 posts!) I wrote that this blog might involve fact-finding, wild speculation and light-hearted updates on the effect of Brexit on my emotional state.  Along the way there's been quite a bit of fact-finding and certainly some wild speculation but I've not really posted at all about how Brexit has altered my mood. Do you fancy joining me for a post that is 100% grade A unadulterated solipsism? 

I've noticed a darkening of mood in my posts as summer turned to autumn and autumn now gives way to early winter.  Autumn is my favourite time of year so this can't be explained by the shortening days and the misty mornings.  Way back when I started this blog I wrote about the feelings of fear and despair that gripped me as the EU referendum result became clear.  Those feelings have started to return but this time with fewer pop videos and not-hilarious anecdotes.  I know this is completely irrational because I'm not in a vulnerable position where I'm seeking sanctuary or expecting to be tortured or harmed in any way. Nevertheless, a kind of madness seems to have taken hold of UK politics.  I just don't know where this will end.

I watched a documentary about the history of skinheads on BBC4 recently.  Now, I was always more a fan of futuristic pop music like the Human League so I have zero interest in the history of skinheads. It turned out, however, to be a fascinating snapshot of social history.  It portrayed a world back in the 70s and 80s where terrifying levels of racism and violence erupted in the streets.  Some of the footage was really disturbing - mass Nazi salutes; Asian shops being smashed up; fear to leave your own neighbourhood; street movements orchestrated by shadowy far-right political groups.  This all happened in my lifetime.  Will it happen again?  Is it already happening now?  There is plenty of evidence that racial hate crimes are already on the increase, particularly in England.  How long before the EDL morph into something even more repulsive when they finally work out the government will not protect them from the forces of globalisation? The rhetoric from the government does nothing to stop the rise of xenophobia, while the press is doing everything but lighting the fuse.  A recent case involving C4 journalist Fatima Manji springs to mind.

The answer is probably that she's an excellent journalist.
Back in early July there was talk of a tit-for-tat war involving EU and UK citizens living and working outside the nation listed on their passport.  Is this really going to happen?  Back then it seemed so remote that it was easy to talk about it without churning my stomach but now it seems more like a reality.  The relationship between the UK and the EU has taken a path that has ended in outright acrimony and the real talks to leave the EU haven't even started. I've irrationally began to worry this could soon become a thing - letters to your address giving notice to leave, trips to lawyers to begin the appeal process, trains and buses laid on, and braying mobs giving Nazi salutes to the departing workers to round off the whole sorry saga.


A few years ago I lived in central Birmingham. Nobody would ever call Birmingham a beautiful city but it does have a fascinating industrial heritage.  Just take a stroll along the canals but make sure to go past the inviting bars and cafes right in the city centre.   Within 10 minutes you are in a world of abandoned factories and forgotten industry.  If you're tall like me you can even peer through the broken windows and see that there are still machines inside patiently waiting for the workers to return. I'm guessing these all closed in the orchestrated recession of the early 80s.  The current government seem to be on a road to economic ruin, all in the name of "taking back control" and appeasing the rising shouts of racists and xenophobes.  Are we going to see derelict office buildings and ghostly business parks in the near future?  The collapse of the pound is so sudden and so responsive to Ministerial pronouncement that it reminds me of the economy's response to the monetarist experiments of the early 80s.  What would happen if tax revenues from Canary Wharf dip significantly due to banks relocating to Frankfurt and Dublin?  It's not going to be a good time to be poor or reliant on welfare or waiting to cash in your pension.
 
Leaving the EU might lead in time to the repeal of the Human Rights Act and withdrawal from the ECHR.  Are we going to see the return of the death penalty?  That's certainly what David Davis wants.  What about corporal punishment in schools?  Rights of access for wheelchair users?  What about the remains of the right to take industrial action?   Brexit has emboldened everyone who lauds the 50s as a peaceful time of order, conformity and empire. Whatever happened to progressive politics?  Is that era now at an end for the UK?

The endless parade of jingoistic tirades that we see in the press suggests we are sleep-walking towards a future of unquestioning patriotism.  This is perhaps the most worrying turn of all.  Last year on a sight-seeing trip to Heidelberg I got chatting to a Russian who was there on business.  He painted a grim picture of life under Putin's rule where people who disagreed with the rising tide of nationalism just retreated into their own private world.  One thing he said that struck me was that it is no longer allowed to hold dual passport status if you are Russian - applying for citizenship outside Russia means giving up Russian citizenship.  This is designed to stop Russian workers leaving and to punish those that do. Is this the kind of measure we an expect in a post-Brexit UK? Is all of this just a blip that will blow over or the start of something far more sinister?

I've never been more glad to be living and working outside the UK.  I've never given Swiss citizenship any serious thought until now but then I'd never fully appreciated the stability and pragmatism of normal life with rational governance.   I have just 3 years to go before I can begin the process.  What will happen in those 3 years?  Where will the UK be by then?

Over and out,

Terry

PS There is a huge discrepancy between the language of the government and its action.  The government have actually done next to nothing to resolve the many issues of Brexit.  In the meantime, they have been boxed in to a corner by their public pronouncements on migration and trade.  Instead of keeping options open, they are closing them down before they have time to think of balance and consequence. Instead of seeking allies, they are making enemies.  Instead of consistency and unity, each Minister jostles for attention, playing to the gallery. This is not rational in any way, yet opinion polls show huge support for the Prime Minister.  The public is therefore behaving equally irrationally.  The Labour Party, meanwhile, well, I don't want to even go there. This is a vicious cycle that cannot end well. 

PPS Where can we find a cold-hearted rational response to Brexit? Foreign exchange markets.  Bloody heck, what a mess.

Saturday, 22 October 2016

Passport to Pimlico

Have you ever seen Passport To Pimlico?   It's an Ealing comedy from 1949, which tapped into post-war frustration at continuing rationing and the slow rate of reconstruction.  It's a great film but recent events really do make it worth a quick watch on youtube. In the film ancient documentation is unearthed that proclams Pimlico to be a legal part of Burgundy and it follows that the United Kingdom has no juristiction there.  The good citizens of Pimlico immediately abolish rationing and experience an outbreak of much wanted hedonism, very much in the spirit of the sozzled islanders in Whisky Galore.   Eventually, though, there are customs borders, problems with migration, and barbed wire fences.  All of this sprang to mind when I started reading again and again and again that free zones could be a solution to to customs problems caused by Brexit.


There's really has been a lot of talk about creating special zones in the UK to minimise the disruption that Brexit will impose on imports and exports.  There are two types of zone that have been mentioned so far:  1) zones that retain EEA and UK membership and 2) zones that are so-called free trade zones.  The difficulties of achieving the first choice have been addressed in a succinct and thought-provoking article here.  It might be technically possible to achieve it but politically it is way out there with the Andromedans.  The second choice, on the other hand, has significant global precedent.  Could we litter the UK with free trade zones and solve all our problems? The authors of this Brexit bible certainly thought so. Let's find out if they were correct. If you have a busy schedule I recommend that you just get on with your purposeful life because, honestly, you can make a good guess at the answer.

Free trade zones are typically solutions to avoid import tariffs on goods as they transit through an economic area.   In the UK there are already a number of free zones at airports.   Status as a free zone allows the airport to act as a kind of tax-free stop-off point for goods travelling around the globe.  If the goods don't leak out of the airport they are able to avoid paying duties to the UK Customs Authority.  Prestwick airport is one of 5 that have free zone status in the UK.  The others are Liverpool, Sheerness, Southampton, and Tilbury.  Tilbury airport!  Sheerness airport?  You don't see these on the departure board, probably because their main function is to act as a giant warehouse.  China also has a number of free zones dotted around its coast. Components arrive by sea to be assembled in the free zone.  The assembled products are then exported back out to the rest of the world.  Can we solve Brexit problems with free zones?


The flux capacitor is bifurcating on its hysteresis curve.

Let's start our journey at the Nissan factory in Sunderland.  The Nissan supply chain is unbelievably complex with components whizzing around from one place to the next and then back again.  Are we going to make each port of call in the UK a free zone?  This is getting too complicated for my liking.  Moreover, a free zone in Sunderland solves the problem of import duty at the UK border but it doesn't solve the problem if those components make a further crossing to the EEA and back.  The EEA will still impose a duty on the components at their end.  Another issue is that delays and interruptions to the chain break the whole cycle, which is as much about reliability as it is about direct cost.  The only reason the supply chain developed as it did is that  complexity was minimised by open borders. Another issue just occurred to me: how will Nissan stop tariff-free components leaking into the UK car market without operating two production lines?  How will the UK Customs Authority track the components whizzing around the factory?  Hang on, another idea just popped in my head.  Why do we favour Nissan Sunderland over the BMW plant at Cowley, Oxford?   Is it just because Sunderland is on the coast,  thereby reducing the need for a free zone corridor connecting the plant with the outside world?  That does sound unfair.  This idea loses its appeal the more I think about it.

What about Canary Wharf?  Just like Nissan Sunderland it seems a good candidate for special status because it is a self-contained area.  Workers can leave their Canada Water flat in the morning and then travel by tube to the free zone at Canary Wharf where they will carry on selling pensions to Austrians and Hungarians.  Hang on just a second, that isn't right at all.  Giving Canary Wharf free zone status won't make it part of the EU or the EEA.  It will just be a free zone where goods, I suppose, could enter and exit via the Thames without paying any duty.  Yeah, I got confused there just like all the other chatterboxes on this topic.

Imagine for a second a world in which Canary Wharf did have EEA membership.  What would that be like?  Let's start with another question before we really get our thinking caps on.  Do you think that Prestwick was chosen as a rendition transit point because it was a free zone and therefore not strictly policed by the UK government?  I'm not a lawyer but it strikes me that Prestwick was deliberately chosen due to its special status.  So, who exactly will be regulating the fund managers looking after my personal pension?  I would guess the fund managers will be regulated by EU/EEA rules because the whole point is to carry on selling pensions to Austrians and Hungarians.  That's fine, I guess, but I will no longer be a citizen of the EU and my government will no longer be a member of the  EEA.  All control of my most valued financial asset has just been given away to governing bodies over which I have no power at all.  I don't want Canary Wharf to suddenly exist outside the regulations laid down by the UK government.  After all, we've already seen what they can achieve when they are subject to light-touch governance.  Remember, this is all about "taking back control".


This idea is terrible.
It's time to travel up the East Coast to Edinburgh.  Maybe Scotland could be a giant free zone. The border with England is a geographic bottleneck so maybe it could be policed without too much difficulty.  Yay, there is also a ready-made government with its own Parliament. Fantastic, we even know who would govern the zone and that democracy would be protected. What's the catch? Scotland will be the first country in the world to have 0% import tariff on absolutely everything. This creates a huge divergence between Scotland and rUK so that border had better be sturdy.  It also means that Scotland will be the guinea pig for Liam Fox's ultra-libertarian fantasy experiment. Nobody wants that, apart from the Foxmeister, of course.  This one is doomed by association, I'm afraid.

I've only thought about this for about 10 minutes and already this idea is hanging is on a shoogly nail.  What a mess.
 
Over and out,

Terry



Wednesday, 19 October 2016

A Local Shop For Local People

I must thank Tris from Munguins New Republic for pointing me to a fascinating article that  eloquently sets out yet another dilemma facing the government. This time the dilemma is that there are two contradictory versions of Brexit yet only one can ever be delivered.  The first version of Brexit is one where Britain's ability to trade with Europe is left largely unaffected.  Middle class voters, who typically perceive a benefit from global trade and immigration, want to maintain their annual iPhone upgrade without scimping on their weekly shop at Waitrose.  Membership of the EEA or something very close to that is a goal for them, even if they have creeping suspicions about tyrannical bureaucrats stalking the corridors of Brussels.  I  would imagine this demographic is currently experiencing a nasty bout of Brexit vertigo brought on by the currency storm. The second version of Brexit is one which satisfies voters fears about immigration.  I don't have statistics to hand but I would imagine support for these two versions can be strictly delineated along class lines.  One or other of these groups is going to be left sorely disappointed by Brexit.  Welcome to the United Kingdom in 2016.

It occured to me that the dilemma set out by Richard Corbett can be slightly rephrased as a battle between globalisation and protectionism.  For some voters the choice to leave the EU was an almighty blow against globalisation.  I'm quite convinced that those most concerned about immigration are also those who feel the least benefit from free trade with the EEA.  It follows that a vote to stop immigration comes with a mindset that wants "British jobs for British workers".  There is certainly an expectation that British jobs will be protected by the UK government, and that Brexit will mean an end to the stiff competition from international workers, goods and services.  Is there a single Minister propagating that viewpoint? No, there most certainly is not.   The battle in government right now is about free trade priorities: trade with the EEA or with everyone outside the EEA.  Nobody is talking about raising tariffs or subsidising industries or nationalising anything in any form whatsoever.  None of that is going to happen under Conservative rule.  Recent Labour governments don't exactly point us in that direction, either.

There seems to be an ongoing ding-dong between Philip Hammond and Liam Fox.  In the red corner is the Chanellor, who wants to maintain strong links with the EEA.  Jumping up and down excitedly in the blue corner is Liam Fox, who is desperate to stick two fingers up to the EEA so he can get on with signing all his international trade deals.  I've blogged a lot about Liam Fox and how his understanding of international trade has never risen above woeful.  For Leave voters who struck a blow against globalisation, however, the competency of the Secretary of State for International Trade is no more than an academic detail.  The truth is that nobody in government is battling against globalisation;  the argument is about the direction of its vector, not its magnitude.

Today's fun maths fact: a unitary transform preserves the magnitude of a vector.  
Joseph Stalin was the last global leader who successfully managed to erect a shield against capitalist forces.  He did this through decades of repression and tyranny, removing the freedom to travel, controlling the flow of information, enveloping the Soviet Union in a culture of fear and reprisal.  In contrast, closing the borders to a few thousand multi-lingual workers from the EU is not an effective measure.  Capitalism is notoriously wily and cunning - it will always find the path of least resistance faster than any government or economic instrument. If you voted against globalisation you are simply not going to get what you want because the government have no intention of implementing protectionist policies.  Sure, they can make it hard to get a work visa after Brexit but it won't raise the hourly rate of factory workers, improve their working conditions or add to the stock of social housing. Isn't that what people really want or are they truly furious about the availability of Żywiec and pierogi?  On reflection, my question isn't entirely rhetorical.  I've started to wonder if there isn't a good proportion of the population that really do want to bring back the local shopppe for local people, even if it means there's nothing affordable on sale.


 
I wonder who will get the blame when Brexit is delivered but simply replaces one model of globalisation with another?   Farage?  Fox?  Johnson?  The Daily Express?  Whingers and traitors? Who was it that took the blame before the Poles and Romanians?  My guess is they will just carry on blaming the EU.

Over and out,

Terry

PS I'm not advocating Stalinism as a route to prosperity but I would say it was quite effective at keeping out Western capitalism. Stalin probably comforted himself with that exact thought as he spent his final days wheezing on the floor for help that was too timid to intervene and doctors who were locked up in the Lyubyanka.

PPS Think of a number between 1 and 1000.  If you get it wrong I win the right to parade around in a giant hat labelled "winner" for all time, constantly humiliating everyone I beat at this simple game.  Congratulations, you have just cast your vote in the EU referendum.

Monday, 17 October 2016

Will the UK remain in the EEA?


Thanks for reading. Byeee.

What? I need to explain myself? That's highly unusual in the current climate of bluster and falsehood but if you insist...

Let's look at the non-EU members of the single market - Iceland/Norway/Liechtenstein. Norway is a signatory to freedom of movement of people but does have the option of an emergency brake on inward EU migration. It has never used this option or even threatened to put it to use. To all intents and purposes it is a full signatory to the freedom of movement of people in the EU. Iceland is in rougly in the same positon. As with Norway it has a transitional agreement for nationals of Croatia, the most recent member of the EU. If you want to go to live and/or work in Iceland this is very much an option at your disposal but do pack as quickly as you can because time is running out. Liechtenstein is a special case because it is allowed to place a cap on inwards EU migration to the whopping value of 72. We need to remember that Liechtenstein is a micro-state with a population of less than 40000. Extrapolating from Liechtenstein to any other nation is almost pointless. 



What about Switzerland? Switzerland is an EFTA nation, outside the EEA and a signatory to the freedom of movement of people in the EU. How did it end up outside the EEA yet still signed up to its most controversial principle? Well, it signed 120+ bi-lateral treaties to gain tariff-free access to the market sectors it thinks are important to its economy. Switzerland is actually very closely integrated with the EU and the EEA, especially in the adoption of standards. Crucially, the only access Switzerland has to the EEA financial sector is life assurance. Swiss banking is rather different to what goes on in Frankfurt and Canary Wharf; an industry founded on discretion probably doesn't want to open itself up to nosy EU regulation. Even with limited access to EEA financial markets, Switzerland is still a signatory to the freedom of movement of people. They tried to change that recently but backed down to a compromise that offers negligible change. If you want to move to Switzerland to live and work this is very much an option. To all intents and purposes it is a full signatory to the freedom of movement of people and will remain that way for the foreseeable future. If it wasn't I would be writing this from the chilly autumnal fog of Zurich.

What have we learned? Full access to the single market requires the adoption of the freedom of movement of people in the EU. I think everyone knew that 10 minutes ago, except, of course, for leading members of the government. The bombshell is that even partial access to the single market still requires adoption of the freedom of movement of people.  Hmm, not really a bombshell but it might be if you are a member of UKIP or work in a senior political role.  Johnson/Fox/Davis/May have made it clear that the freedom of movement of people will soon end. Even if they changed their minds the press would throw a hissy fit and make sure they have another think about it. What kind of access to the EEA can the UK expect? Limited access. If the government puts its rhetoric into practice the UK will be trading with the EEA under WTO rules for a wide range of product and service categories. This is not good news but it does explain the collapse in the value of Sterling - confidence in the ability of the UK to trade with the outside world is waning fast. It is probably a good time to start a new business as a chimney sweep or a knocker-up.  Anything Victorian will see you right. 

Over and out,

Terry

Friday, 14 October 2016

The Fox Dilemma

There is a curious dilemma at the heart of the Tory government. I've not seen much written about this topic so I thought I'd give it a whirl. Here is the dilemma: the government have been promoting the (BNP) mantra "British jobs for British workers", while also saying they are going to be a "beacon for free and open trade". Taken together these form an economic and political conundrum. It is simply impossible to satisfy both at once.



 If you've stuck with me through my tedious blogging about international trade you will know that free trade deals result in the movement of jobs to workers. This is often referred to as "off-shoring". The EU is quite different to a regular trade deal because it allows workers to freely move to jobs. In my view this is one of the least trumpeted advantages of EU membership over a trade deal like NAFTA (or whatever will be cobbled together after the UK severs its ties with the EEA).

When Liam Fox realises his vision of free and open trade he will slash UK import duties from the low rate they currently have to an even lower rate. Free and open trade, after all, means lowering your WTO trade barriers. Meanwhile, when the UK government turns off the tap of EU workers there will be significant staffing issues at businesses reliant on EU employees. If you run such a business the pressure to move your jobs abroad will become ever greater. There are two forces to stop you doing that. The first is that British workers fill the vacancies without any impact on production costs or quality. I don't see that happening on its own because we need to ask ourselves why UK businesses became so reliant on EU employees in the first place. Now, I don't actually know why that happened but we need to recognise that it did happen and that nothing has materially changed to undermine the circumstances that led us there. The second force is high import duties. High import duties make it more advantageous to manufacture goods on-shore because they can be sold more cheaply than goods that need to pay an extra tax at the border. On the other hand, if import duties are low there is less disadvantage to off-shore production.


I hope I've explained the dilemma clearly. "British jobs for British workers" will require significant trade barriers designed to halt the off-shoring of UK jobs.   "Free and open trade" will require lowering trade barriers, which in turn will encourage UK jobs to move off-shore.

If you're really on the ball you will be jumping up and down and yelling at the screen, "Terry, you fool, you forgot about the low value of Sterling!". That's right, I didn't mention that and it is vitally important. A low value of Sterling encourages jobs to remain on-shore because it pushes down manufacuring costs relative to off-shore costs. Only with a low value of Sterling can the government solve the dilemma. In fact, you could even argue that the market have strongly adopted that view -  I think everyone is aware of the current state of Sterling.


Source: xe.com

I do not believe for a second that the government takes a positive view of the Sterling crash because it will push up the price of all imports. Let's think about this for a second. If you manufacture cars in Sunderland you almost certainly import a lot of component parts: paint, steel, batteries, tyres, ABS systems, electronics, fuel gauges etc. The cost of all these parts will go up as the pound weakens. The more complex your business, the more you are likely to be dependent on importing specific components and tools and, don't forget, expertise.  These purchases will be performed in Euros and dollars.  As a consequence a weak pound is mixed news for business - a balance between higher component costs but lower labour costs.   For employees, however, it is terrible news because a huge chunk of what they buy in the shops will be more expensive. In short, they are still earning the same number of pounds per week but it buys them a lot less. Clearly, the simplest businesses will benefit most from a falling pound because they depend most on labour costs alone. Fruit picking springs to mind. This is not spelling out a vision of a high value knowledge economy, is it? What happens if you run one of those high value knowledge businesses and really need to import specialist skills from abroad? A weak pound makes the UK a far less attractive destination. In summary, if the government's policy is to maintain a weak pound then we just have another dilemma: how will they develop a high value knowledge economy simultaneous with a weak currency? I don't believe they can.  

This is what happens when you lose all the battles but win the war anway.
When the government lies to us I expect the press to sniff that out and expose their falsehoods with gusto and verve. Why is this not happening? When the government are floundering out of their depth propagating confused messages I expect that to be exposed, too. Why does the UK press label people like me as a traitor and whinger and tell us to shut up? Disagree with me all you like (and I do encourage that) but you do need to promote a cohrerent argument.  On the plus side, it turns out I am part of a shadowy liberal elite. Whodda thunk it?

Over and out,


Terry

Wednesday, 12 October 2016

I don't do dirty work, sucka!

Have you ever applied for a job only to learn later that an internal candidate was already lined up for the role? I witnessed it many times in my previous career as a wannabe academic.  How does it work?  Maybe a university wants to promote a promising researcher so that they too can enjoy the endless glory and wild financial excess of lecturer status.   Perhaps they even threw hints at the eager researcher that if they took on a punishing teaching load and helped improve the departmental research rating they would "do well" in the future.  There's a catch, though, because they need to adhere to equal opportunities legislation:  they can't just make an offer without throwing the process open to any potential candidate.  All the department needs to do is create a role with a very specific wishlist tailored exactly to their researcher.  Sure, half a dozen applicants will tick 5 or 6 of the boxes but only one will tick them all.  You might say that the open market was rigged to favour a specific outcome.  Welcome to the world of non-tariff barriers.

Don't bother applying, this one's reserved for a time-traveller.
In previous posts I argued that Liam Fox's assertions about post-EU free trade opportunities are no more than bluster - the UK will not magically gain access to any financial lever that could significantly alter its current trading position. The loss of influence on  EU non-tariff barriers, on the other hand, will likely be a blow to the UK.

Non-tariff barriers come in various forms but they are typically a set of product standards designed to favour a local manufacturer.  Advantage might come from advance warning on a change to the standards.  It is rumoured that Dyson missed out on advance warning of a change to EU standards on vaccum cleaner power measurements.  He's been campaigning against the EU ever since, claiming that it is all rigged towards German manufacturers. Alternatively, it might be a labelling standard that specifies a geographic location.  Scotch Whisky springs to mind here.  Anyone can distill whisky and sell it in the EU but it can only be labelled Scotch Whisky if it is made in Scotland.   If you've ever tasted Swiss Whisky (Swissky?) you'll be glad that the good name of Scotland's greatest product isn't sullied by inferior rock juice.  How else might favour be bestowed?  Do you remember the hullabaloo about incandescent light bulbs?  That was a clumsy attempt to favour manufacturers of CFL (Compact Fluorescence) bulbs.  If you have a devious and villainous mind I bet you could come up with at least a dozen nefarious schemes before you reach the end of this post.

[Note: Dyson should spare his anger for the UK government, which actively supported the new rules on vaccum cleaner testing.]



A bottle of the finest Swissky.  Ein kleines Dram, bitte.
The well-worn metaphor of tents and directional toiletting seems to fit here.   Dyson's anger at the EU and his claims that German manufacturers were foremost in the minds of EU legislators won't be changed by Brexit.  Let's imagine for a second that Dyson's claims are correct and that EU legislators deliberately protected German vacuum cleaner producers. What will change after the UK leaves the EU?  That's right, they will still favour German manufacturers.  If his claim is a paranoid fiction then leaving the EU will have the same outcome:  EU legislators will definitely favour non-UK manufacturers after Brexit is complete.  In fact, they have probably already removed Dyson from their spreadsheets.  Dyson, of course, will still be required to abide by EU legislation on vacuum cleaner efficiency if he wants to continue selling his product in the EU27.  His business is not enriched by Brexit in any way at all.  UK consumers will still be faced with a range of vacuum cleaners that conform to EU standards because nobody is going to manufacture product solely for the UK market.  If you think you are going to be spending happy evenings reading samizdat vacuum cleaner user guides you are going to be solely disappointed.  Staying in the EU really is a "win some, lose some" deal.  After all, the EU has 28 nations so sometimes the interests of one will trump the other.  Leaving the EU is more like "lose some, lose some more, lose them all".

Liam Fox probably thinks these non-tariff barriers are, erm, barriers to free and open trade.  He seems like a high-minded chap taking a principled and brave stance, Britain leading the way and all that.  The question is whether leaving the EU will change anything anywhere in any way at all. I don't think it will because everyone is at it, even the exalted (by Liam Fox) US.  A recent case at the WTO concerned country-of-origin food labelling standards that were seemingly designed to favour the US over its NAFTA partners, Canada and Mexico.  The WTO helpfully maintains a handy list of all ongoing trade disputes.   It is a stupendously huge list and they are pretty much all involve non-tariff barriers.  Everyone is up to their neck in this - the US, Canada, India, China, Chile, the EU. Everyone.

There is no reason to think that the UK won't impose its own non-tariff barriers when it goes it alone. Imagine that a major donor to the Tory Party decides that their business is being undermined by cheap imports.  Import tariffs are not an appropriate lever because free and open economies maintain low tariffs.   Liam Fox has banged on about this so much that it is stuck in my brain like a shit song off the radio.  What else can be done?  Hmm, labelling, country-of-origin, technical standards, inspection, testing, quarantine.  Do us a favour, old boy, eh? 

If you start reading a lot about trade you soon come across terms like "managed trade".  They crop up again and again and again.  Even if you're an avid supporter of free trade, it is a fact of life that vested interests undermine it at every turn.  Free and open trade will remain a chimera as long as there are borders and lobbying groups and a hungry press demanding a rapid response to economic crises.  As members of the EU we had preferential access to the biggest trading block in the world.  It might have been "managed trade" rather than Liam Fox's ideal of  free trade but we did have preferential access there.  We will never have a deal like that again and when we leave it we will have nothing.  There is no upside. We will just be left defending legal cases from the US because we want to eat meat washed with water instead of pesticide.

Over and out,

Terry

PS That is really enough about trade.

PPS I don't really think Liam Fox is high-minded and principled.

PPPS No pop video today.  I could only come up with "Through the barricades" by Spandau Ballet. Nobody wants that. Ok, you're twisting my arm.  This time a weak word-play on the effect of vacuum cleaners. What a racket!

Sunday, 9 October 2016

Are you free, Mr Fox?

Do you remember Liam Fox's bluster that he will make the UK a beacon of open and free trade?   I've clearly not forgotten because this is probably my 4th blog about it.  Yes, I know visitor numbers are falling off a cliff but this an itch I just need to keep scratching.  I believe top curmudgeonly comedian Stewart Lee calls this "refining the audience". The good news, if you're still here, is that you must have a hell of a lot of spare time on your hands.  Congratulations!

Anyway, back to the Foxmeister - he has been banging on and on and on that EU membership is a hindrance to free and open trade.  Is he right? Let's find out together.  Now, this is a very boring post so here is the answer to save you reading the rest:  he is as factually wrong as a factually wrong thing could ever be and there are solid WTO statistics to back up this assertion.

The good thing about organisations that are committed to openness and freedom is that they are typically open and free with their data.  Did you know that anyone with an internet connection can rock up to the WTO website and download all their data on trade tariffs to a range of formats?  Why has Liam Fox not done this? It is very easy to do if you have enough patience to look at spreadsheets.  Why did I do this?  Why haven't I got a more satisfying hobby like tattoooing my face or sticking pencils in my ear?  Well, I wanted to find out if the EU could be accused of protectionist or mercantile practices.  Let's find out what I found out.  Before we do that it's time for a pop video with a semi-approriate song title.  This time it is a pop song about data compatibility when choosing a mate.


I suppose one measure of free and open trade is the tariffs that are applied to imports.  This being the case, how does the EU compare with other nations?  This is not a simple question to answer because there are 97 principle categories of product at the WTO.   Within each category there are scores more sub-categories, such as "Vinegar and substitutes for vinegar obtained from acetic acid".  This is truly thrilling stuff, isn't it?  For each sub-category there are applied rates for 2014, 2015 and 2016.  On top of that it also lists the bound rate for each sub-category; that is, the maximum rate that can be legally applied to any other WTO nation.  To make matters worse some nations publish rates per kilogram rather than per unit value. Did you know that Switzerland applies duties to footwear by weight? You can keep that under your hat for small-talk at your next dinner party.   Anyway, to come up with an answer to my original question we need a method that makes the job a bit simpler.  In the interests of fairness, I shall tell you my method so you can replicate it if you wish or refute my findings by telling me that my method is nonsense. 
Imagine doing this for a living? Thankfully it is just a hobby for me.
Let's take a snapshot of a few countries and a few product categories.  For each we will list the bound rate (the maximum allowed rate) and the average applied rate for 2016 (the current rate applied at the border and must be less than or equal to the bound rate).  If I make a little table to present this data it should be fairly easy to determine if the EU is already a beacon of free trade or if it is applying mercantile practices.

What countries shall we choose?  I chose Australia, Canada, Brazil, EU and the US.  I wanted to find out how the EU fared against other developed countries but also to compare against a developing nation. Liam Fox probably wants the UK to be more like the US so it seems a good choice to include Uncle Sam.   There are many people in the UK who would like the UK to be more like Canada and Australia so these seem a good choice to add to the mix.  Brazil, on the other hand, is a developing nation but also a significant player in global trade. 

Which product lines?  I chose "Iron and Steel" because it is a political hot potato and it seemed like it might be a bellweather of national intentions.  After that, I chose "Footwear" because I need new shoes for the winter.  As a 3rd category I chose "Guitars, harps and other string musical instruments (excl. with keyboard and those played with a bow)" because I'm always salivating over potential ukulele purchases.  I think these represent a good spread of imports. They certainly affect my humble existence.

As I promised earlier, here is a table I made using OpenOffice, which is both open and free.

WTO tariffs for 2016 with bound rates listed in brackets.
Let's have a look at this data.  If you take a quick squizz at the table you can see applied and bound rates for all 3 categories and all five countries.   Now, the first thing that hit me was the gap between Brazil and the developed nations.  It is clear that Brazil applies much higher tariffs than any of the developed nations.  Brazil also has the highest difference between the bound rate and the applied rate.  For example, Brazil applies a rate of 10.5% to imported steel but has a bound rate of 34.3%.  This is very much expected because in general developed nations trade closer to the bound rate and are less prone to tariff fluctuations that might arise from political upheaval.   Having said that, Australia does have an unexpectedly large difference between applied and bound rate. It looks as though it struck a high bound rate some time ago but has since changed its mind.  What else can we learn? The EU and the US have very low steel tariffs but are beaten by Canada, which applies zero tariffs to imported steel.  If I wanted to import ukuleles I should probably move to Canada rather than the US.  I'm also guessing the hot Australian weather means they get through a lot of shoes and need to keep import costs to a minimum.  On the whole, though, there's not really much between Canada, the EU and the US.  Australia does seem to apply higher tariffs than the other developed nations, especially to steel.  The differences between the developed nations, however, start to seem quite insignificant as soon as you bring Brazil into the mix.

I would strongly argue that if the US is a beacon of free and open trade then so is the EU.  Leaving the EU will not turn the UK into a beacon of open and free trade because EU membership has ensured that it already is one.  We know this to be true because the EU trades with import tariffs very close to those of the US.  Every time Liam Fox bangs on about post-EU opportunities for free and open trade please remember that he is either a conniving liar or an incompetent fool who lacks the ability to read a simple spreadsheet.

What can Liam Fox actually do when the UK leaves the EU?  He does have the ability to reduce import duties to zero, if he wishes.  When he does that, however, he can wave Auf Wiedersehen to all those bi-lateral trade deals because he will given away his most valued negotiating position. Is he a conniving liar?  Is he an incompetent fool who lacks the ability to read a simple spreadsheet?  You decide.

Over and out,

Terry

PS I can't believe I just wrote 3 posts in a row about WTO tariff barriers. What is wrong with me?

PPS Guess what's coming next?  You guessed it - non-tariff barriers.  Nurse!




















https://www.wto.org/english/tratop_e/tariffs_e/database_explanation_e.htm

Monday, 3 October 2016

Sinitta's "GTO" performed by Liam Fox and Tim Martin

I really love the Global Trade Organisation.  I think I've loved it ever since Sinitta sang a top 40 smash hit about it back in the 80s.  That was a strange time for pop, wasn't it?


Hang on, what do you say? It's the World Trade Organisation?  WTO, not GTO?  It's about a sports car with a cheeky penis metaphor?  Oh no, I've made a fatal error in my misunderstanding of the body that regulates international trade.  That is most embarrassing. Can I still keep my job negotiating trade deals on behalf of the UK? Thanks!
"We haven't got a trade deal with the US, we haven't got one with China, we haven't got one with India, and particularly the US is an enormous trading partner. It doesn't cause a problem, we can trade under WTO rules." - Tim Martin,  Head of Wetherspoons UK, 
We keep hearing about the WTO as if it is something new but it most definitely is not. The UK already trades with most of the world under WTO rules and has done since its inception in 1995.  When BAE Systems sold 72 Eurotyphoon fighters to Saudi Arabia back in 2006 that deal would have been governed by WTO trading rules.   When UK arms manufacturers sold 600 assault rifles to the government in Sri Lanka back in 2008 that was also conducted under the auspices of WTO regulations.  There are 164 nations in the WTO so pretty much everything the UK sells to non-EU countries is governed by the WTO, be it Mini Coopers or craft beer.   We are already trading with the US and India and China under WTO rules and have managed that for 21 years ever since the inception of the WTO.   Prior to the founding of the WTO we traded with the US and India under the General Agreement on Tariffs and Trade (GATT).  Bloody heck, that was back in 1948.  If we believe we are falling behind in international trade then we can only blame ourselves because we've had a total of 68 years to work it out.  Leaving the EU won't help here.
"The UK is a full and founding member of the WTO, though we have chosen to be represented by the EU in recent years. As we establish our independent position post-Brexit, we will carry the standard of free and open trade as a badge of honour." - Liam Fox, 29th September, 2016.
When Liam Fox says that we are a founder member of the WTO that is a bit of a porky pie because the WTO began with a whopping 123 nations back in 1995.  That's right, there are 123 founder members of the WTO.  Back then the UK was a member of the EU so all negotiations with the WTO were performed through the EU because it acts as a single trading block.  It would really be more accurate to say that the UK has always been represented at the WTO by the EU, not just in recent years.  I'm splitting hairs here but I do have limited renown as a born pedant.  Hey, I know it's annoying but it's my blog and I'll write what I damn well like.  Come back! Come back!  I'm sorry.  It won't happen again.  I promise. Hah, fooled you.


What levers does Liam Fox have at his disposal to make the UK a beacon of free and open trade?  Not that many, it turns out, because membership of the WTO already pushes member nations towards the ideal of free and open trade.   Quotas, for example, are no longer allowed.   Ditto with discriminatory practices at the border - you can't favour one nation over another in a sly or underhand way.  There are only really two levers that he can pull and these are both to do with tariff barriers that can be applied as an import duty.  In essence, each nation lodges a price list with the WTO for different types of goods.  Each price on the list has two rates: a bound rate and an applied rate.  The applied rate is the rate actually applied at the border.  There is freedom to move this up and down over time with the caveat that it can never exceed the bound rate.  In difference to the applied rate, the bound rate is pretty much impossible to change.  You might like to think of the bound rate as kind of long term intention, while the applied rate gives nations a bit of wiggle room in the short term.

A pictorial representation of the UK's post-Brexit economic strategy - stick a Union Jack on it and no one will notice that it's nonsense.
Remember when I said there were two levers: the bound rate and the applied rate?  Well, only one of those can be shifted.  The UK is a long-standing member of the WTO so its bound rate is already established and is set to the be the rate negotiated and collectively agreed by all EU members. It is not at all clear that we can just go back to the WTO and say that we'd like to modify it because, hey,  we changed our minds.   There is talk about being recognised as a new member, free to instantiate a bound rate and set an applied rate.  Hmm, didn't Liam Fox just boast that we were a founding member?  I really don't think that argument will fly.  That leaves just one lever:  the applied rate.

The ability to set the applied rate is indeed a new freedom open to the UK.   Now, I don't know about you but leaving the EU is a huge kerfuffle, and all for access to a single economic lever that was already partially at our disposal.  We need to find out if this single lever is a sticky lever that is hard to control or if it glides freely like a drawer in a Magnet kitchen.  If you start reading about WTO tariff rates you soon come across a measure called The Binding OverhangWho the hell makes up this terminology? It sounds more like something you'd hear on Cowboy Builders on Channel 5.  Anyway, the binding overhang is the difference between the applied rate and the bound rate.  A large difference between these two values is typically associated with economic uncertainty because a low applied rate could be easily changed back to the much larger bound rate.  In fact, it is generally the case that developed countries have a much smaller binding overhang than developing nations.  I would guess this comes down to a question of stability in the long-term economic outlook of a country.  Actually, I don't need to guess it because it explicitly says it on the World Bank's explanation of WTO tariffs.

If the UK is forced to accept its current bound rate then a reduction in the applied rate will lead to a large binding overhang, often associated with the economic turmoil of developing economies.  Let's imagine Liam Fox wants to help the UK's nascent sex robot industry and immediately slashes the applied rate for imported steel.  It's time to put that imagination of yours to good use. I want you to conjure up an image of Jeremy Corbyn standing triumphantly in front of 10 Downing Street in the year 2020.  Are we all there?  His first act as Prime Minister is to reset steel tariffs back to the bound rate. He probably has his eye on crucial Labour votes  protecting jobs in Port Talbot, or maybe he had a bad experience with a sex robot.  Playing wiff-waff with trade tariffs will not be popular with our international partners.  They simply won't trust the lowered rate in the long term because it can easily be reset to the bound rate on a whim.  The UK really needs to trade with an applied rate that is close to its bound rate.   Hmm, that leaves zero levers for Liam Fox.  Somebody please have a whip round to get him a Tonka Toy for Christmas.

Look at all the levers to keep Liam Fox occupied over the festive break. We need one for Liam and one for his good friend Adam Werrity.  Please dig deep, if you'll pardon the pun, the tariffs on this are a killer.
Approximately 50% of UK exports are to the EU, where they experience zero tariff barriers.  That's right, a rate of zero.  You don't get more free and open than that. This is so free and open I'm not even sure they classify as exports at all. This is now under threat so that we can have unfettered access to a single economic lever over which we will exert very little practical control.  We can slap Union Jack stickers all over it to our heart's content but we won't have the ability to actually use it for anything. I can't find any upside here.  Can you?

Over and out,

Terry

PS All of this pre-supposes that the UK would attempt a radically different WTO tariff agreement from the one negotiated by the EU.  Just as it is with the ECHR, I've not seen anyone put any flesh on this idea. What exactly is wrong with the way that the EU negotiaties with the WTO? Are tariffs too high?  Too low? Too tailored to the Germans? Liam Fox obviously has a strong view but despite all of his bluster and verbiage I still can't work out what it is.  Let's investigate this later for the sake of theoretical completeness.  Stay tuned.