Tuesday, 19 September 2017

Fox: He's Got Magic

How's Liam Fox  getting along?  Why, he must be close to signing off on a bumper crop of FTAs by now.  After all, that is what David Davis promised back in 2016.  The job of making that happen fell to the hapless Liam Fox when he was appointed Secretary of State for International Trade.  Davis specifically promised a negotiated trading area 10 times the value of the European Union that would involve Indonesia, South Korea, Australia, New Zealand, the US, Canada, Hong Kong, China and India. They promised all of that by March, 2019.  Like charismatic salesman at a street market they also promised a deep and special FTA with the EU that would replicate all of the current advantages of EU membership but without any of those pesky obligations.  Depending on which spokesperson was available at the time, our putative relationship with the EU was described as akin to Canada (with its CETA FTA) or similar to Norway (membership of EEA) or it would be like Switzerland (byzantine system of 120+ bi-lateral agreements) or it would be a bespoke deal that must never be specified lest its magical allure wears off. That is quite an impressive list, isn't it?  How is Liam Fox getting on?  How is he getting on?


Astonishingly, we're approaching the half-way point between the referendum result and the UK's imminent and guaranteed departure from the EU.  Assuming a linear trajectory, we should be roughly half-way through the list of trade negotiations by now, meaning that a trading area just 5 times the value of the European Union should be completed or nearly there.   Let's start counting on our fingers how we're doing.  The EU?  We haven't started any trade discussions with the EU.  India?  We haven't started any trade discussions with India. The US?  Despite some well publicised meetings aimed at generating news headlines we haven't started any trade discussions with the US.  South Korea?  We haven't started any trade discussions with South Korea.  Canada?  The Prime Minister is there right now and she is discussing issues related to trade but we are most definitely nowhere near negotiating a FTA with Canada. Japan? We haven't started any trade discussions with Japan.   Don't worry, I'm not going to torture you with more of this "we haven't started any trade discussions with country X" because I think we all knows where this is going to end up.  The UK has literally failed to start a single negotiation in all the time that has passed since the referendum result.  What went wrong?  Do shout out the answer if you feel like. Yes, Liam Fox is a good answer but it's not the whole story.

There are just so many issues here that they would be hard to fit into a single blog post.  I need to filter somehow or other so I thought I'd order them by their entertainment value. That's right, this post is now guaranteed to become more entertaining as it proceeds.  Before you all ask for your money back let's start off with the enormous pile of contractual obligations that will be declared void on EU departure day.  When the UK leaves the EU every single contract and treaty involving the EU and third countries will no longer apply to the UK. The Financial Times identified a truly incredible 759 treaties that will need to be ratified just for the UK to tread water.  These include fisheries agreements with Iceland, transport agreements with Santiago, nuclear agreements with Australia, regulatory cooperation agreements with New Zealand, customs agreements with Japan.  It is a truly astonishing list and I haven't even mentioned the trade deals yet.  The list contains a staggering 295 trade treaties, 202 regulatory cooperation treaties on everything from company takeovers to data sharing, and 65 transport agreements.  Before embarking on a free trade negotiation with the UK any one of these treaties can be used as a bargaining chip.  Even for third nations more than willing to talk trade with the UK it remains the case that all of this has to be sorted out first because trade cannot take place if aeroplanes can't take off and land.  On exit day, the UK will be faced with the kind of international relationships enjoyed by North Korea and South Sudan.

This brings us to the problem of government capacity.   The UK Civil Service is overburdened with a regulatory maelstrom.  It has to arrange the completion of 759 international treaties by 31 March, 2019;  identify any others that the FT might have missed; negotiate a complex exit deal from the EU; implement the entirety of EU law into UK law but without referencing any EU institutions or courts; ramp up UK mirrors of all EU technical agencies;  massively increase the UK border capacity; prepare UK business for customs of origins checks; prepare UK border control for customs of origin checks; implement a tariff payment and rebate system;  plan for the transcription of EU treaties into politically acceptable Free Trade Agreements; hire and train tens of thousands of staff.  To be honest, I'm just an amateur blogger so that probably only scratches the surface of the work that needs to be done. To make matters worse, instead of handing this work to established departments with existing procedures and expertise, Whitehall has been asked to play a prolonged game of musical chairs in the newly formed Department of International Trade and Department for Exiting the EU.  I think we can all agree it is a lot of work but is it an insurmountable goal? Luckily, we don't need to guess an answer because Liam Fox admitted that capacity was an issue and that he was "simply unable" to make it work.   Just in case you missed it let's repeat that one more time: Liam Fox admitted in public that the UK does not have capacity to complete the jobs required to smoothly exit the EU.

Can it get worse?  Yes, of course it can get worse.  Liam Fox is forbidden by EU law from signing trade deals before the UK exits the EU.  There is some legal debate about whether the UK can even negotiate trade deals while still a member of the EU but that is a moot point because a) it will seriously break down trust between the UK and the EU by turning the UK into a trade competitor and b) the UK has anyway used up all its capacity on negotiating its escape from the ghost of Jacques Delors.  When David Davis and Liam Fox made all those promises were they deluded or telling an outright lie?

Let's imagine Liam Fox invited his mate Adam Werrity round and all his mates and all their mates.  I'm not sure the universe could handle that concentration of raw talent but let's imagine that it could and that they all agreed to bat for UK trade at the weekend.  Let's imagine they chose Canada as their first port of call.  How might that go?  To work that out we need to think about the career goals of a typical Canadian trade negotiator.  My guess is they'll want to do this quickly so they can catch the ice hockey highlights on the gogglebox.  The last thing they want to do is to promise the earth to their boss only to find out that it will be a rocky ride getting there.  As a consequence, the first question they'll ask is if the UK is going to be a regulatory annexe of the EU. Does the UK intend to uphold the regulatory standards of the EU but through a different legal mechanism or does it intend to completely change to a new set of standards?  If the UK commits itself to EU regulatory equivalence then it might point to a favourable outcome using CETA as a template. This is great for Canada because everything they invest to make CETA work will also benefit the Canada/UK deal.  It also creates a Canada/UK/EU trading zone with all the attendant benefits of scale.  The problem is that neither Liam Fox nor Adam Werrity nor any of their mates nor David Davis knows the answer to this basic question.  The UK truly cannot decide a course for its future.  On the one hand, it cites a "deep and special" partnership with the EU and publishes position papers that foretell a future of EU equivalence.  On the other, meanwhile, the bumbling Foreign Secretary publishes a 4000 word hymn to Brexit that once again threatens to turn the UK into a low tax, low regulation economy.   Which is it to be?  The truth is that nobody knows and nobody will know until the UK finalises its relationship with the EU. Until that happens nobody will seriously discuss trade with Liam Fox because it would be a waste of time.

If you're a news fanatic you'll probably have noticed that Theresa May has been over in Canada talking to Justin Trudeau and that issues around trade have been discussed.   It's quite clear that Theresa May has convinced the Canadians that the UK will be a regulatory annexe of the EU because it seems that everyone is keen for something like CETA to continue with the UK after Brexit.  Despite Fox and Hammond and Johnson all making headlines with their incessant talk of an economy diverging from the regulatory standards of the  EU, May has unilaterally convinced a foreign head of state that is all mere chit chat and that the UK will be nothing more than a regulatory extension of the EU.  She must have spent her time outlining her vision for the UK's relationship with the EU as something akin to today's situation but with a few cosmetic changes here and there.  With that decided, the UK and Canada can use CETA as a template.  Except, of course, it hasn't been decided at all.  Theresa May might have decided in her own mind but I think we all recognise that the situation is fluid, at the very least. Would Jacob Rees-Mogg accept the UK automatically mirroring EU Regulations and Directives even if freed from the clutches of the ECJ?

We now see the only way forward for the UK.  If the UK is to sign any trade deals at all in the next 5 years or so it will have to become a regulatory annex of the EU.  Only by following that path can it relatively painlessly repair all the trade deals that it breaks by leaving the EU.  That brings us to the second most entertaining problem.  The EU is currently in trade talks with Japan and has voiced an interest in starting trade talks with Australia and New Zealand.  These countries also have capacity limits of their own and will prioritise their resources for the biggest fish.  Given that the EU has a population 8x that of the UK and includes Germany, already a larger market than the UK, it is obviously going to talk to the EU first.  It is going to choose the EU anyway because they have stable governance and are able to commit to long-term plans and initiatives.  Moreover, they know that they can just take the deal they strike with the EU and the UK will fall in line. Is this a good thing?  Well, no, because the UK will end up adopting trade positions that don't reflect the needs of its economy.  Trading conditions that might benefit Audi in Stuttgart probably don't necessarily apply to a payroll services company in Solihull.

Now we come to the most entertaining problem.  The problem is that the UK is supposed to be free to take control of its own trading affairs but we've just seen that the only political solution that has any chance of diverting the Brexit bus from the cliffs is to be, in the words of both Johnson and Gardiner, a vassal state.  Surely, though, the UK can go ahead and forge its own trade deals with its nimble legislative processes?  Well, this is where it gets really hard.  The truth is that, apart from the US, the EU pretty much has it covered with anyone interested in doing substantial trade deals and harmonising with EU standards to a meaningful degree.  Huge parts of the world actually run protected economies.  Brazil and India, for example, both fall into that category.  In comparison, the EU's WTO tariff rates average 4.8% and are much lower than the world average of 9% and insignificant compared to WTO bound rates that often run as high as 39%.  The trouble is that a trade deal only really has to liberalise trade relative to where it is right now and that might not mean very much in terms of real value.  A trade deal with a divergent and protected economy half-way round the world will have even less monetary significance and be even harder to sign.  Besides, if they know the UK will just fall in line why would they bother with the UK until they've sorted out a deal with the EU?

The simple truth is that the most stable outcome is guaranteed to be worse than the trading conditions enjoyed today by the UK.  I don't think anyone voted to be a regulatory annexe of the EU, to take on 2nd hand trade deals that we didn't influence and don't reflect the needs of the economy.  This is not an attractive option at all.  What are the alternatives?  What about the low tax, low regulation economy everyone keeps mentioning?  I've kept the best for last because the fantasy of Fox and Minford is to become a "beacon of free trade" by slashing as many tariff and non-tariff barriers as feasible and turning the UK into an economic free-for-all. Who would sign a free trade agreement with the UK when they already have complete and unfettered access to the UK's economy?  Nobody.

Over and out,

Terry

PS The US is a special case because it looks like TTIP has been abandoned so there won't be an existing FTA for the UK to adopt.  I've blogged about the specific issues of TPA and Congress in more detail but let's just say that we are dealing with a President who consistently wants more tariffs rather than fewer.   Trump is now on record as having said: "So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs."

PPS There is still one issue that I haven't deal with.  If the UK manages to agree an extended period of negotiation beyond the 2 years laid out in Article 50 then it is most likely it will not be allowed  to sign trade deals for its duration. The Canada/EU deal, for example, will cease for the UK on 31 March, 2019 yet the UK will not be able to enforce any proposed agreement with any 3rd party for some years after that date.  The EU could concede on this point but what will that cost? Never forget who holds all the aces.


6 comments:

  1. You promised this post would be about Princess Diana. Well, I've read it twice and I can't see her name anywhere. She's not heavily disguised as this Werrity blokey you're on about, is she? That's probably treason if she is, you know that, dontcha?

    Given the complexities of detaching the UK from the EU, it's hard to get your head around the idea that this immeasurably inept prime minister presented her A50 letter before she had the inkling of a plan, then wasted a couple of months having a needless General election, before actually addressing the matter seriously (having surrounded herself by a sack of ferrets instead of a Cabinet of ministers).

    Then to allow a senior Cabinet member to challenge her in the public forum of a once-respectable newspaper and to brush it off with: "oh Boris is Boris" (a bit like "Brexit means Brexit"), kinda puts the icing on a cake of incredible incompetence.

    I don't think any of them has a clue about how to do this without causing civil war in England. Cliff edge is economic madness, but the alternative is EU membership by any other name, only probably more expensive and with absolutely no input at all. How long would that satisfy the hard right of the Tory Pary?

    Getting back to the title of this article, ie talking about incredible incompetence (as we were), Old Liam looks like making an even bigger mess of this job than he did the last time he was entrusted with ministerial responsibilities. Hard to imagine but post Trump and Brexit, anything is possible.

    More Princess Diana in the next blog please.

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    1. The thing about Brexit is that it leads to a lot of broken promises. That Di promise turned out to be a big fib. I should really turn that around and say that I never even mentioned Di in my last post and made no reference to any future post about her. I don't even blog. In fact, I didn't exist until yesterday so could never have said that. Anyway, you interpreted my words incorrectly. It's all your fault, really.

      Liam Fox is just absent. Why was Theresa May talking trade with Justin Trudeau? Isn't that a job for Liam Fox? What exactly is he doing? The truth is that he probably isn't doing much work of any real value because there is nothing yet for him to do. His only role is to jostle and manoeuvre behind the scenes for his vision to become official policy. Meanwhile, the clock just keeps on ticking away.

      It is odd that ministers of state are now openly campaigning against each other. It suggests a weak Prime Minister. We know that to be true but she is also attempting to take control again. How can that happen? She can't sack anyone because that might launch a leadership bid. At the same time, she can't just have them all sniping at each other because it means policy is ambiguous at a time when firm and clear decisions and stability are important. Bit of a mess, really.



      It looks like May is attempting to take control. She's already taken over Fox's responsibilities and civil service shuffles suggest she is going to take over Davis's too.

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  2. I'm on sabbatical from the East Neuk at the moment for a few days in Glasgow, as the sheer annoyance of having Willie Rennie as my constituency MSP is getting me down.
    Despite all the stuff you so eruditely expound above, with which I wholly agree, wee Willie is busy telling the Fib Dem conference that him and Anas Sarwar will be running the next Scottish government because the SNP are dead meat and independence has been crushed so there!
    The whole unionist political establishment in Scotland is in full war mode against independence despite the looming catastrophe of Brexit.
    Wee Willie still seems to think he can stay in both the UK and the EU, and that Vince Cable will become PM of the U.K. And the fairies will make it right.....
    Round my local East Neuk pub, where as you know I do my serious research, a lot of people just have their fingers in their ears, or get really angry if Brexit or Unionism are criticised by the unfair use of things like facts.......
    I try to use the excellent arguments and analyses provided by the likes of yourself, and my own somewhat terrier like arguing skills, but mostly meet either scorn, apathy or downright hostility (there are exceptions).
    What will it take for these people to see what's coming?

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    1. "What will it take for these people to see what's coming?"

      That's a brilliant question. I have no idea, to be honest. It seems like it would need to be fairly serious like grounded planes, shortages in the supermarket to backed up border queues, price hikes, visa requirements, unemployment. All of these are possible but I sense that Brexit will just be a slow decline rather than a sudden collapse. That just makes it more inevitable than ever.

      This will take a charismatic political leader to really spend time spelling it out to everyone. I'm amazed the SNP aren't making more of this, to be honest. The independence movement in general doesn't seem to be doing much in this direction either. Perhaps they know more than me and don't think they could ever get people interested. Perhaps they are scared of the complexity it adds to the independence arguments. I honestly don't know. Don't come to this blog looking for answers! I only ask questions.



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  3. Its like watching a slow motion car crash.

    All the hallmarks of yet another Great British disaster like Dunkirk and the fall of Singapore are there to see but yet unbelievably the BBC and dead tree media continue to talk Brexit up.

    When reality about Brexit crashes in on the people of the UK as it surely will, there will be hell to pay amongst the so called political leaders who created the mess.

    I sincerely hope that the YES and SNP leaderships are up to the job this time of picking up the pieces and leading Scotland towards independence and out of this Brexit madness.

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    1. It is exactly like watching a slow motion car crash but one where the passengers are having a massive argument about who gets to drive.

      I do hope there will be hell to pay but... I thought that about Iraq and there didn't turn out to be a great deal of political or legal justice.

      I'm also hoping SNP and Yes know how to play this. They have been rather quiet about this of late.

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