Thursday, 27 July 2017

Clucking Mad

I am a truly massive snob so being ahead of the curve has always been important to me. When I was young it was all about being into a band before anyone else, collecting all the early 7" singles, seeing them live in front of 50 people in an unglorified toilet. When they signed to Warner and made it to Top of the Pops I would likely just have yelled "sell-out" at the screen, complained about the commercial production on their new album, and looked around for another to follow. I don't want to blow my trumpet too loudly lest I become the Mr Bighead of Brexit but I'm happy to say that this blog was one of many that were ahead of the Brexit curve. The problem I now face is that Brexit has just signed with EMI and their powerful marketing department have splashed stories about their debut album "Chemically Washed Chicken" all over MSM. All the things that the cool kids were talking about 9 months ago have suddenly become massively popular with squares and suits and johnnycomelatelys. So what should I do now that MSM is regularly spewing out articles about FTAs, regulatory frameworks, harmonisation, investor-state disputes, EU technical agencies? What am I supposed to do now that Brexit scepticism has gone mainstream? Well, it turns out these mainstream stories are actually pretty terrible and often completely miss the point.


Liam Fox's recent trip to the US has led to a flurry of articles about how a US/UK FTA would force the UK to accept imports of chemically washed chicken. It would be fair to say that MSM is frothing at the mouth at the prospect of being forced to eat poisonous McNuggets. Michael Gove, in his role as Environment Secretary, has even been forced to unilaterally declare that the UK would ban chemical chicken. This is very much a chicken and egg problem because it turns that the US also has inferior standards on eggs. Their low standards on chicken husbandry means that dirty eggs need to be washed, dried and refrigerated to be fit for human consumption. Unfortunately, these processes breach the integrity of the shell and allow persistent bacteria to enter the interior of the egg.   As a consequence, the rate of salmonella poisoning in the US is more than 50 times the rate in the UK. We can thank the European Food Standards Agency for that because it forced farmers to raise their hygiene standards through a complete ban on egg washing. I'm confident we're going to see this pattern repeat itself across almost every agricultural product category. Michael Gove might not realise it but he just removed agriculture from the US/UK FTA. Liam Fox should be furious but he won't be because he won't have realised it, either.

The problem with agreeing a UK/US FTA is much, much deeper than just chickens and eggs and standards of animal husbandry. Literally every area of human commerce where the US and UK have different regulatory standards will lead to significant difficulties. It doesn't matter which side has higher or lower standards because that isn't what matters here. The only thing that matters is that the regulatory standards are different. Let's look at the egg industry to see the difficulties that arise from regulatory difference. That's right, the egg industry. This is exactly the kind of fascinating chat you get here. Eggsactly.

Breggsit!
UK egg manufacturers will have made significant investments over the years to conform to EU standards. As a consequence, they're in a great position to have their produce included in a UK/EU FTA. After all, UK egg inspectors are already trained to EU standards, UK egg producers already meet the standards, and UK egg law already enforces the standards. It should be a simple step for the EU to recognise that the UK egg industry is equivalent to the EU egg industry. The UK can also easily recognise that the EU egg industry is equivalent to the UK egg industry. All of the egg boxes for a successful FTA are now ticked. Consumers can carry on shopping in the supermarket safe in the knowledge that they are unlikely to be poisoned by a meringue. Producers, too, can carry on manufacturing eggs safe in the knowledge that their investment in chicken hygiene is being put to good use and that their eggsport markets haven't been threatened.

"Andrew, you should see the size of the US mega-chicken. Eggs like footballs."
What would happen if Liam Fox signed a FTA with the US that allowed US eggs to be sold in the UK? The first thing he will have to do is change all UK legislation on egg hygiene and chicken maintenance so that it more closely matches the rules in the US. Egg inspectors will need to be trained in these new standards, egg manufactures will need to invest in washing and drying equipment, the egg logistics industry will need to move eggs around to new egg treatment centres. Egg delivery vehicles will be need to be adapted to include refrigeration. Supermarkets will also need to adapt their stores to keep eggs refrigerated. Their egg inventory system will also need to change because eggs will now have a different shelf life. This is an eggspensive and disruptive change for a relatively small industry. What are the benefits? Well, the first thing that will happen is that the EU will ban all UK eggs because the UK's equivalent egg status will be completely lost. Hey, that's not a benefit. What are the benefits? Well, the second thing that will happen is that imported eggs from the US will be able to undercut UK eggs because US manufacturers have already absorbed the cost of conforming to US/UK egg legislation. UK egg manufacturers will need to pay for all of this disruption to the UK egg industry, pushing up their unit cost. Supermarkets are going to buy as many US eggs as they can for the simple reason that they are cheaper than UK eggs. Cut off from EU markets, UK egg manufactures will struggle to sell even to their own domestic market. Hey, that's not a benefit. What are the benefits? I suppose UK egg manufactures can now eggsport their eggs to the US just in case there are any US consumers who like paying significantly above market rate for a standard egg. That's not a benefit, either. What are the benefits? The simple truth is that there aren't any benefits. Cutting yourself off from your biggest market by rushing egglong into a set of new regulatory standards doesn't have any benefits.

I chose eggs in the paragraphs above because repetition of the word "egg" always makes me laugh. Having said that, I could have literally chosen any area of human commerce where US standards diverge from UK ones and the UK decides to adopt the US version for the purposes of signing a FTA. I could have chosen financial services and discussed the regulatory complexity of the Dodd-Frank Act but it would have been too boring. I could have chosen pharmaceuticals and embarked on a long and tedious discussion of the Medicare Act but we all have lives to lead. I could even have chosen a comparison of the Volcker Rule in the US and the Capital Requirements Directive IV in the EU but it wouldn't have been as funny as eggs. In every instance the message remains the same: geography dictates that the EU will remain the UK's biggest export market; any legislative move away from EU standards limits the UK/EU FTA by destroying the UK's "equivalence" status; any move towards US standards comes at a significant cost to UK industry; the US has already absorbed those costs and therefore produces with lower unit cost; the maxim that trade halves with distance means that the prize of access to US markets is much, much smaller than the prize of a comprehensive FTA with the EU.

The problems I outlined above are eggsacerbated by the fact that the US is by far the larger partner and any compromise on standards is going to be closer to the US version than that of the UK. The UK is also politically desperate for a UK/US trade deal because it is relative easy to spin it in a positive light, even if turns out to have major flaws. That desperation makes any compromise even more likely to favour the US. Moreover, the ticking timebomb of the Trade Promotion Authority means that July, 2021 is the last chance the UK has to sign a trade deal with the US. After the TPA expires the UK will be negotiating live with 400+ Congress Representatives. That has never led to a successful outcome. The pressures just keep adding up on the UK to compromise away its ability to complete a meaningful FTA with the EU. Obviously, the sensible move would be to conclude the EU FTA first and then look further afield. In fact, it is the only sensible move.

If you're a regular reader of this blog you'll already have realised that this post is basically a repeat of a previous one but with some terrible egg jokes. In that old post I presented FTA negotiations as the mathematical optimisation of a contracting decision space: each FTA consumes the decision space, leaving less for the next. Compromise is a finite resource and should be used wisely, not frittered away on chemical chickens and dangerous eggs with a capricious partner half-way round the world. This is the real story that MSM is missing. Instead of asking Liam Fox why he thinks it is a good idea to willfully endanger the promised UK/EU deal, it bangs on about glowing hens and radioactive eggs.  If that's the competition, we're all ahead of the curve and we'll stay there until Liam Fox privatises it and starts charging us rent.

Over and out,

Terry

PS The stupidity of the UK's current political leaders if absolutely jaw-dropping.  They still don't understand the most basic points of international trade.  Even the idea that economic gains come at political cost is beyond them.  It's depressing to even say this but Fox is behaving as though he still believes trade agreements are entirely about tariff barriers and that disputes over standards harmonisation are tiny details to be ironed out at the end.  It's even more depressing to note that Gove thinks a comprehensive FTA can be a cherry-picked subset of product categories that he alone decides for his own advantage.

PPS I have very little confidence that a UK/US trade deal will be completed before 2021.  Anything after that requires Congress to agree an extension to the current TPA.  Besides, the UK will still be hammering out its FTA with the EU and trying to stabilise its tariff schedules at the WTO for years to come.

PPPS The UK might anyway be forced to accept food products banned by the EU.  The EU, for example, forbids the import of hormone-injected beef from the US.  The US took its case to the WTO and won.  In response, the EU kept the ban but compromised on increased quotas on beef from the US that does meet EU standards.  The US would be within its rights to lodge a fresh case against the UK if it chooses to uphold the ban.  Taking back control.

8 comments:

  1. It's eggstrordinary. The whole Brexit nonsense facade is coming apart at the seams, like a poorly built pantomime backcloth, but still the Brexiteers chant "Oh no it's not!"

    Not being under the jurisdiction of the ECJ is more important than cancer treatment, airline safety, food safety or indeed sanity. I think it was Chico Marx, in Night at the Opera, who said "Everybody knows there ain't no Sanity Clause"........ Well that's certainly true of UK Brexit plans, which don't seem to have any content at all.

    Some in the media are beginning to point these "technicalities" out, as you say, but few seem brave enough to say it's all nuts. The rabid Leavers in England, and some in Scotland too, are not listening, and I actually think the UK government is now scared of what it's done but listening only makes them more scared.

    Too many Scots seem willing, if not eager, to scuttle their own lifeboat and cling to the disaster rather than contemplate going their own way. I'm rather disheartened at present. I think I'll go to the pub.... But then it's holiday season so it will probably be full of rich Tory Unionists here to enjoy the hols in their second homes which lie empty most of the year.

    Man, I'm depressed. Is there any ray of light?

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    1. Neither Tory nor Labour seem to have a consistent position. They were both sure what they wanted but now they've just about worked out that what they wanted would have been a disaster and probably not even achievable. Now they're grasping at any policy they can, often in direct contradiction to party colleagues. Gove says he is happy with a transition period with all EU obligations, then the immigration minister says only a few hours later that FoM will end on March 31, 2019. Fox says chlorinated chicken is a mere detail, Gove immediately bans it. Corbyn says hard Brexit, Gardiner backtracks on everything he ever said and agrees, then McConnell says nothing is off the table. Nobody knows what they want. I don't now how much longer the EU will bother with this.

      It's a bit depressing to read that this isn't yet changing people's minds on independence. I'm sure it will happen in the end. Not sure if I can offer a ray of light but the good news is that independence support doesn't seem to be falling. I would also guess there will be another push for a referendum in the autumn. Nothing happens in the summer.

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  2. President Trump has promised a big trade deal very quickly, and as I recall, the Daily Diana was over the moon about it.

    I'm a big less enthusiastic.

    Firstly, I wonder, will, by 2019, President Trump still be president? Perhaps, but only if he has pardoned himself and his family.

    Secondly, even if he is president, he will have forgotten what he promised off the top of his head 2 years before.

    Loyalty is not one of his few qualities.

    But trade deals are endlessly complex, and must be negotiated at length. They almost undoubtedly cannot be completed in a couple of years.

    Trump still doesn't know stuff like this. He thinks that he's doing deals the way he used to in Trump Inc.

    But even supposing Trump remembers and May hasn't done anything to upset him in the meantime (his ego is fragile), and even supposing that they manage to hammer a deal out by 2021, it will almost undoubtedly be a deal that will suit America, and pretty much ONLY America.

    And May and Fox have made it obvious that they are desperate for a deal. Never a good negotiating technique!

    So maybe there will be a deal, but it will be on America's terms because they are bigger and have good trade negotiators and because the UK is small, has no negotiators and is desperate.

    And the complexities of the eggs demonstrate what that will mean for us.

    Frankly, I'm not really going to trust eggs that could be contaminated with salmonella, and may be ok becasue they have been washed and refrigerated for a voyage over the Atlantic, and transferred to refrigerated trucks and thence into a refrigerator in a store... And of course we'll have to keep them in refrigerators in the house. How much will these eggs cost after all that has happened to them? I'd probably be cheaper flying to Iceland and buying my hygienic eggs in Reykjavik supermarket, except that if we aren't in Open Skies it will cost £1000 to fly to Iceland.

    So that's just the eggs. Now there's bacon, sausages and black pudding, not to mention tomatoes, and tattie scones. And that's just breakfast.

    I could say that I'm wondering if Mr Fox knows what he has bitten off... but that would be silly. Of course he hasn't a clue.

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    1. If the UK does complete a FTA with the US by 2021 it is either a nothing deal covering a tiny volume of trade or the UK completely capitulated and blew its chance of ever completing its EU FTA. I genuinely don't think this will happen. As you said, Trump opens his mouth and words spill out. Also, Fox's trip to the US looked much more like PR than real talks. The US lists all ongoing trade talks across its government websites and they are empty.

      I think the US really does make cheaper food than in the EU. The lower cost of chicken care is a huge saving because it is over the entire life of the chicken. Each chicken only sends a couple of eggs per day to the washing system so that only uses up a matter of seconds per chicken per day. The chicken is alive all the time and costing the farmer 24 hours a day in space, heating, lighting, food etc.
      The actual additional cost of egg washing per chicken ought to be tiny relative to the savings made from reducing chicken conditions. The problem is that UK farmers have to absorb the cost of setting all this up on top of their historical spending on meeting higher EU standards. They are doomed.

      Liam Fox really hasn't got a clue. He probably needs Werrity back.

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  3. Replies
    1. Thanks for the ovation. I need to stop these egg puns now.


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    2. Ouch! That one actually hurt!

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    3. I need to poulet myself together. Only hen will it stop.

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