Friday, 14 July 2017

The Last Remaining Hope

The last remaining hope of the Brexiters is that the UK will be saved by signing trade deal after trade deal in quick succession immediately after the UK exits the EU.  Whatever happens, any trade increase made possible only by freeing itself from the slavery of EU membership will need to be greater than the drop in trade that arises from the aforesaid act of emancipation.  If that doesn't happen the UK will become poorer than it is today because it will export less and pay more for imports. Another bi-product of a failure to secure trade deals is that the UK will become less open and, as a consequence, less competitive.  I'm sure we can all see a vicious cycle that, once started, will be hard to stop.  It's imperative, therefore, that Liam Fox is a success in his role as Minister for International Trade. Do I hear laughter?  Stop that now!  This is a serious business.


Let's start with the scale of the problem that faces the UK.  It turns out that the EU has trade deals aplenty.  In fact, I counted 45 in total.  Headline figures, however, can be deceptive so we shouldn't just count the number of deals in place but also analyse their comprehensiveness.  It would be fair to say that some of these deals are no more than agreements that trade will be liberalised at some point in the future. The partnership and cooperation agreement with Russia, for example, probably isn't of much value, particularly since it hasn't been updated since 1997 and discusses the EU's relationship with Russia prior to Russia joining WTO Moreover, 4 members on the list are agreements with the EFTA nations.  There are also agreements with many former Soviet republics such as Ukraine and Georgia and Moldova. Geography and history dictates that these are of less value to the UK than they are to Poland and Austria and Romania. That leaves the really big deals that make the news:  Canada, South Korea, Japan, Singapore, Vietnam.  When the UK leaves the EU it will lose all of these trade deals or be unable to participate in them when they are finally implemented.   None of this is good news but the really bad news is that the UK will lose its trade deal with the entire EEA.  The EEA is the largest trading block on the planet: it has a GDP of $18 trillion and a per capita of $34,000.  Losing even a tiny fraction of that is going to be extremely hard to claw back.
 
Liam Fox's latest financial instrument.

What is the current plan to claw back all that lost trade with the EU and its partners?  If Brexit was a person it would be white, it would speak English with a regional accent and it would be very English in its outlook. It's not a surprise, therefore, that the focus has been on other white, English-speaking, Anglo-Saxon economies because nobody in the UK is all that interested in Vietnam or Cambodia. The really big prizes for Liam Fox would be Canada, Australia, New Zealand and the US.  The problem with this list is that Canada already has a comprehensive FTA with the EU. Moreover, Australia and New Zealand have both pledged to prioritise their discussions with the EU over the UK. In these 3 cases the UK will be working hard to match what it would have anyway gained as EU members.  That leaves the US.  A UK/US FTA would really knock the smug, self-satisfied smirk off every Remoaner's fat, ugly face.  How likely is it that will happen?  It turns out there are significant hurdles in the way and that these can all be found in the structure of the US political system.

Why does the US have so few trade deals? It has quite a few with countries in Central and South America but outside of that it has remarkably few.  The only trade deals that it has outside of the Americas is with Australia and Singapore. What's going on?  Well, it turns out that the US, despite being an open economy, is a bit of a nightmare on trade discussions because of the power that Congress has over every live detail
Taken from:  https://usconstitution.net/xconst_A1Sec8.html
We've all heard about the difficulty in getting the EU to agree across all 28 members but it turns out the US has its own problems with representatives in Congress adding provisions at will that protect their own constituents.  The key point here is that, under the U.S. Constitution, Congress writes the laws and sets trade policy.  There are hundreds of representatives in Congress, each with their own woes and wants, making agreement on a moving target like a trade deal an impossibility. They are also renowned for their world-class filibustering skills when faced with something they don't like.  The US responded to this by introducing the Trade Promotion Authority Act.  This legislation temporarily removes Congress from the live negotiation and instead presents it with a Yes/No vote on the negotiated free trade agreement.  Not surprisingly, this was a controversial move.  Complaints about lack of scrutiny and unconstrained executive power have dogged TPA since its inception.

Most of the FTAs agreed by the US were negotiated under the so-called Fast Track system. The first fast track authority lasted a whopping 13 years fro 1974 to 1987.   When that ran out another was enacted to specifically negotiate NAFTA.  After 1995 the scheme lay dormant until 2002, when George Bush narrowly pushed another through Congress with a majority of just 3 votes.  The next five years  were a frenzy of activity with the US signing an incredible 8 trade deals.  That authority expired on July 1, 2007.  The Obama administration then started another fast track authority period in 2015 so that the US could negotiate TPP.  It's clear that the US relies on Trade Promotion Authority legislation to complete trade agreements; without a live TPA the US is simply unable to negotiate trade with anyone. 

What is the current status of the US? Does it have an active Trade Promotion Authority? Yes, it does.  The Obama administration pushed through a fresh TPA back in July, 2015.  It will run out in July, 2021 unless Congress votes to extend it before July, 2018.   Obama fought tooth and nail to implement a TPA so that the US could negotiate TTIP and TPP.  Both of these negotiations have now been cancelled but the TPA is very much still active legislation. 

The UK is obviously in a terrible position.  It cannot expect to complete a trade deal with the US by July, 2021 because it can only begin formal negotiations after it exits the EU in April, 2019.  The losses in EU trade would require a monumentally comprehensive trade deal with the EU just for the UK to tread water.  History tells us that 2 years simply isn't enough for that.  As a consequence, it badly needs the existing TPA to be extended.  Uh oh, that can only happen if Congress takes action in the next twelve months. 

What are the chances that Congress will extend the current TPA?  Previous TPAs were difficult to implement, to say the least, and required persistent pressure and advocacy from the President at the time.  George Bush, for example, made Fast Track a campaign pledge back in 2000.  He managed to push it through Congress with a majority of just 3 votes.  Obama started the process of TPA renewal in 2012 and finally got agreement on a diluted version of his original plan three years later.  The simple truth is that Democrats and Republicans are uneasy with the principle that Congress is denied its basic rights in the US Constitution.

In complete contrast to Bush and Obama, Donald Trump stood on a manifesto pledge of protectionism.  He promised to bring back jobs to the USA and he pledged to do that by cancelling TPP and NAFTA, increasing tariffs on Chinese imports, and categorising nations that run a trade surplus with the US as enemies.  TTIP was already on life support but it's likely he would have cancelled that as well in the event that the EU hadn't already walked away.  Is he likely to commit to pushing free trade legislation through Congress when he is clearly trying to steer the US towards more protectionist policy?  I don't think that is likely.  Even if he was minded to do this he has enough problems already pushing legislation through Congress. It  wouldn't be the smartest move to try to flex his flimsy grip on power with perhaps the most controversial bill he could imagine, especially not one that betrays his core supporters, contravenes his election promises and further alienates Congress.  It is extremely unlikely that Trump even has this on his radar. 
Brexit: The Neverending Story


I think it is unlikely that Congress will ever be asked to extend Obama's TPA.  The UK, therefore, has just two years to negotiate the deepest and most comprehensive FTA in the history of the known universe.  It will have to be deeper and more comprehensive than the UK's current relationship with the EU to even begin making up the losses that will accrue after Brexit.  In fact, even that wouldn't be enough due to the rule of thumb that trade halves as the distance doubles.  The UK/US trade deal would have to include new experimental legislative potions that eliminate the cost of geographical separation and time zones.  Let's face it, none of that is going to happen.  Instead, the UK is faced with another ticking timebomb to complement Article 50.   It will end up trying to do a deal with Congress and simply have to accept that every Democrat and Republican will chip in with a protectionist clause for their local steel plant or farm or chemical factory.  That is not going to end well for the UK.  To be honest, it will probably never actually come to an end. 

The US is simply not in a legislative or political position to complete notional trade deals. The trade deals it was negotiating have all been cancelled and the legislation that made those negotiations possible at all will soon expire.  Moreover, Donald Trump is a protectionist at heart.  He has made it his business to threaten German car manufacturers with punitive tariffs. In the same spirit he has repeatedly criticised countries that run a trade surplus with the US.  Germany is top of that list with an enormous imbalance of around $65 billion in its favour.  Trump's view is that those countries should spend more, specifically in the US.  If Donald Trump was to negotiate a trade deal with anyone the only way he could ever justify it politically is if he attempted to negotiate a settlement that improved US exports to Germany.  He even just about understands that a trade deal with Germany means a trade deal with the EU.  Is he likely to prioritise that over the UK?  Of course he is.  After all, everybody else is doing exactly the same thing. 

Over and out,

Terry

PS Everyone should listen to the Remainiacs podcast.  It's funny, informative, and unexpectedly uplifting.

PPS Many thanks to FT commenter "Pouca" for alerting its readers to the delights of TPA.
 



12 comments:

  1. So, in addition to not knowing that 'no deal' was, in fact, a very great deal worse than 'a bad deal', it seems the only barely sentient UK government doesn't know that a trade deal, bigly or smallly is pretty much out of the question in the next 5-10 years for the variety of reasons you lay out, and that when it comes, if it comes, it is unlikely to be advantageous to the UK.

    I'm entering your: "It's imperative, therefore, that Liam Fox is a success in his role as Minister for International Trade" for an award for comedy line of the year.

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    1. That's about the sum of it, yes. Philip Hammond challenged Liam Fox to prove that his trade deals will make up the shortfall. They definitely won't makeup the shortfall in the short- or mid-term. Long-term predictions are a bit pointless because we'll all be dead by then. Besides, the way that compound interests works means that any long-term gains will need to be stupendous.

      Where is Liam Fox?

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  2. Observing the UK at the moment is like watching a slow speed suicide being committed. I have to slap myself & remind myself that this is going to affect me too. People, and I don't just mean the politicians, have no idea what is coming our way. None at all.

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    1. It is extraordinary. I don't think anyone knows what is coming. Personally, I'm guessing a series of capitulations that avert catastrophe but just leave UK worse off than it started. That is just a wild guess, though.

      The amazing thing is that we are one year in the process and literally nothing has happened yet. Who has the stamina for this? It will go on for years and years.

      Glad to see you back here! Hope all is well.

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    2. Cheers Terry! I visit daily but rarely post as you don't give me much scope to add anything worthy of publishing.

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  3. Thanks for this analysis Terry. I didn't really understand the US position. My main fear had been the kind of deal that privatised the NHS and destroyed Scottish Farming among many other negatives. God knows what this uk government would be willing to give away just to say they had a deal with the US.

    What did you think about Tony bLiar's contribution today re EU change and outer circles of members? Sounded like whistling in the wind to me.

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    1. Yup, the fear of a US trade deal is exactly what you said: "liberalising" the NHS and agriculture markets. Congress would demand all of those things immediately. If a UK/US trade deal actually happened that is precisely what would happen. I do think we can rest a bit easier, though, because of the time limitations of the current TPA. Left to its own devices, Congress has never been able to complete a trade deal.

      I think you're right about Tony Blair's contribution. Nobody is listening, anyway. A smarter government would have started one year ago with Blair's current position. There is always room for compromise, even if it is just the wording that changes eg the tiny technical changes to FoM in Switzerland. Any hope of managed compromise is just gone, though. The UK electorate expect patriotic victory, the government literally haven't prepared anything, the EU are not in a mood for it after a year of aggression from the UK. All that is left is mismanaged capitulation to avoid catastrophe. Quite depressing, really.

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  4. http://www.reuters.com/article/us-britain-eu-negotiations-idUSKBN1A10D8?feedType=RSS&feedName=worldNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Reuters%2FworldNews+%28Reuters+World+News%29

    -
    On Sunday, finance minister Philip Hammond, an advocate for a transition to Brexit, said most ministers now agreed with him: "Five weeks ago the idea of a transition period was quite a new concept. I think now you would find that pretty much everybody around the cabinet table accepts that there will be some kind of transition," he said, saying it would be at least two years.
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    Five weeks ago. The fucking cabinet only started talking about a transitional deal five weeks ago. That's right after the election.

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    1. Well, they could say they needed an electoral mandate! Hmm, that is a particularly weak argument because they never discussed transition phases in the manifesto. We're basically dealing with amateurs.

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    2. Amateur; is that a synonym for 'f'ing idiot'?

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    3. The implication is that they weren't planning a transition before the election. That they actually were going to simply switch out overnight in March 2019.

      Amateurish doesn't even come close. Where the hell is the civil service's advice?

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    4. I think that was very much their plan. They really thought this could be achieved. Gove was yelling at them when he was a back-bencher, "why is this taking so long, just go ahead and do it". That's what they really all thought. Farage thought a US trade deal could be concluded in 3 months, and signed before the UK left the EU. Fox was boasting that the UK would have dozens of trade deals ready to go on day 1 of "freedom". Davis thought he could sign trade deals with individual EU nations. Johnson thought the needs of Italian prosecco manufacturers would trump core EU principles. They all thought BMW's future profits were at the centre of EU policy formulation. While all that was going on, May made everything as hard as it could ever possibly be by proposing that the UK become the North Korea of Europe without any understanding of what she was saying. It is a litany of stupid.

      I honestly have no idea what happened to the civil service. Ivan Rogers was sacked, of course. That was a shot across the bows, for sure. Creating two brand new department(Trade/Fox and DeXEU/Davis) was always going to be an administrative disaster. I suppose they wanted to head up their own department because that gave them more "power" than working with the Foreign Office under Johnson. Brexit now cuts across 5 separate departments: Foreign Office, Home Office, DeXEU, Trade, Treasury. They all have their own tiny view of a huge problem and I would guess they are battling it out as they always do. Why not take the most complicated problem of our era, make it even more complex than it actually is, add human drama and political power-grabs into the mix and then silence the wisest advice? Well, we're about to find out the answer to that question.

      The UK has burned through so many strategies on Brexit. A helpful commenter on FT listed them all: that they can talk to individual nations, that they could discuss Brexit before A50, that they could cherry-pick, that they could threaten withdrawing security cooperation, that they owed nothing, "no deal is better than a bad deal", trade could be discussed in parallel with exit bill. Every single one has failed and they still don't get it.

      Sorry for ranting and raving but it's hard to maintain composure sometimes.

      @hugh Amateur is definitely a synonym for 'f'ing idiot'

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