Friday 13 March 2020

Viral Brexit

Despite news coverage being inevitably swamped by the coronavirus pandemic Brexit is still ongoing and indeed there are several points of comparison or connection between the two. For Britain, unlike any other country, is now embroiled in these two simultaneous upheavals - one of which is entirely of its own making.

One comparison comes with the scenes of panic buying of, in particular, toilet rolls, soap, hand sanitiser, paracetamol and some dried foods, like pasta. It’s been widely remarked upon that this shows little of the Blitz spirit that some Brexiters are so fond of invoking. In fact, a better point to make is that the Blitz spirit is itself something of a myth, as the historian Angus Calder has shown, and, anyway, we really need to drop this constant preoccupation with World War Two.

Panic buying and supply chains

In any case, the real connection is the complexity, and accompanying fragility, of modern supply chains. It has now been widely discussed how manufacturing firms, especially in the auto and aerospace industries, use cross-border just-in-time (JIT) production techniques which mean that even small delays have a massive impact on them.

Perhaps less widely understood is that similar techniques are commonly used in retail and distribution industries. The days of carrying massive stocks of inventory ‘just in case’ (JIC) of demand peaks are largely gone. Rather, JIT distribution has become the norm. This, combined with the consumer expectation of a wide variety of goods being available, especially year-round supplies of seasonal foods much of it sourced from the EU, creates a situation where extra delays very quickly translate into shortages which in turn provoke panic buying. It is not a sign of some degeneration of national spirit, but simply an artefact of modern economies since, at least, the 1980s.

Of course, some may say that it is a terrible system that ought to be supplanted by a more locally-based economy, more extensive inventory holding and a changed expectation of speed of delivery and extensiveness of availability. Against that, many would resent the reduction of choice and the higher prices such a shift would entail.

But regardless of that debate, it is a fact that once the transition period is over, even if a trade deal is done, there will be – on the government’s own admission, now that the promise of frictionless trade has belatedly been dropped – new border frictions because of customs checks and formalities. For frictions, of course, read delays. These will be somewhat greater than they would have been if the government sticks to its latest decision that the UK will also leave the EU’s ‘safety and security zone’ (£). In the absence of a trade deal, the frictions will be further increased, and there will also be price increases due to tariffs.

Thus it is a reasonable expectation that the panic buying occasioned by coronavirus fears is only a small taste of what is likely to occur next January, because some and perhaps many businesses will not be able prepare in that timescale. In due course, that will settle down as businesses adapt to the new situation, but in doing so the costs which frictionless trade and international JIT production and distribution had stripped out will be re-instated, meaning either that businesses will cease to be viable or that prices will increase, or both. Other things being equal, those costs will be permanently locked in to the British economy.

Regulation and Brexit at any cost

Beyond the complexity of modern supply chains lies the complexity of modern regulatory systems. Again, the vast majority of consumers are, entirely reasonably, completely unaware of these. As with the plentiful supply of a cornucopia of goods in the shops it is simply assumed, in countries like the UK at least, that these will be of a certain standard and quality, and will be safe. Most of us don’t know much more than that ‘they’ wouldn’t allow goods in the shops otherwise - and have little idea who ‘they’ are or what ‘they’ do. That only changes when something goes wrong and regulation is revealed as being the necessary infrastructure for a safe and commodious life.

The European single market might better be described as a regulatory union, and that would certainly be a better description of the EU than a ‘federal super state’. But of course such a regulatory union does imply a supra-national system for making and enforcing regulations, hence removing the need to do this on a national basis. Yet it is this to which Brexiters object and it is now driving the government to ever more hardcore and, frankly, bizarre extremes. I wrote in last week’s post (in an analysis quoted in the FT this week [£]) about how this has led to the ridiculous decisions not to participate in the Unified Patent Court, the European pandemic warning system and the European Arrest Warrant (leaving the safety and security zone, mentioned above, is yet another example from last week).

Within hours of posting that blog it was announced that, additionally, the government will not seek to maintain any form of membership of the European Union Aviation Safety Agency (EASA), and will develop its own national system. This is to cost an estimated £30-40 million a year to develop, against an annual EASA contribution of £1-4million (£). Less widely commented on, at a Select Committee session this week Michael Gove also confirmed that the government would not seek participation in REACH, the chemicals industry regulatory system, a major blow to that industry which will add significantly both to costs and supply chain friction.

These are yet more, and perhaps the most significant, examples of how Johnson’s government is taking an even harder line than May’s, yet more examples of doing so despite the very clear warnings of the damage they will do to some of Britain’s most important industries, and yet more examples of Brexit being enacted in ways not even mentioned in the Referendum or in the recent election campaign.

As for cost, it hardly seems to matter anymore, witness the National Audit Office report this week showing that last year the government spent £4.4 billion on preparations for Brexit*. Hence, presumably, the government’s latest refusal (£) to publish economic assessments of its preferred trade deal with the EU, whilst happily doing so for the tiny benefits of a deal with the US (all of 0.16% more GDP growth over the next 15 years). It is not unduly cynical to suppose that those assessments show how damaging such a deal will be, not least because we already know from the 2018 assessments that a ‘Canada-style’ deal, as the government is seeking, would mean a 6.7% reduction in GDP growth over 15 years compared with not leaving the EU, and a no deal (pretty much what the government now call an ‘Australia-style’ deal) would mean a 9.3% reduction.

Of course, to the Brexit Ultras it is perfectly clear. Brexit does indeed mean exiting any and every body that has any connection whatsoever with Europe, and cost is totally irrelevant. Yet it is highly doubtful whether that is what most voters, or even most leave voters, want. On the contrary, I would imagine that most people understand very well that, as with international sporting bodies, there’s no terrible loss of ‘sovereignty’ in belonging to such regulatory organizations. Equally, if they were widely understood, the mounting costs of Brexit would surely alarm voters – they certainly increasingly alarm businesses (£). If the Labour Party elects an even half-way competent leader, s/he will have plenty to work with.

Coronavirus and expertise

The need for international bodies and cooperation is another Brexit-relevant lesson of the coronavirus pandemic. It is a reminder of how interconnected we are. People travel around the world for work or for leisure and with them they carry diseases, the responses to which may be nationally inflected but entail international cooperation and information-sharing. This is not just a general observation. As regards coronavirus specifically, by the time a vaccine is (hopefully) developed the UK will be outside the European Medical Agency (EMA) and therefore its fast-track drug approval system as well as its joint procurement scheme. Potentially, this means Britain getting any vaccine later and at greater cost than the EU.

Notably, the coronavirus epidemic shows the importance of expertise. No doubt people find this easier to accept about medical and scientific matters than they do about economics and business. Yet one shouldn’t draw too sharp a distinction. For one thing, the epidemiology of a new virus isn’t a precise science and is open to interpretation amongst experts. In any case, the scientific evidence about the virus still requires political judgment in order to formulate policy. On the other hand, although economic and business knowledge often entails assumptions and contested facts it also contains a wealth of technical expertise and practical experience which politicians are foolish to disdain. Equally, there are just as many crackpot theories and claims about the virus swirling around social media as there about Brexit.

The point is more that the response to coronavirus has not so much discredited the Brexiter ‘we’ve had enough of experts’ line as it has served as a reminder of how Brexit has debased trust in politicians. Having seen the lies and incompetence of their approach to Brexit, it is very hard to trust Johnson and the other Brexiters who now run the country to be honest and to make sensible decisions about coronavirus. Personally, I’ve never held the view that politicians in general are liars and charlatans (I think that the Paxman [sic] ‘why is this lying bastard lying to me’ line is part of a mindset that has traduced politicians and deformed politics). But Johnson and some of the other Brexiters seem congenitally incapable of telling the truth, and in winning Brexit they have come to believe that this doesn’t matter and, even, that it is a strength. That is a serious problem in the context of coronavirus policy, where public trust is central.

Coronavirus and Brexit entwined

That aside, the backwash of Brexit runs through almost all that is happening in politics. The revolt against the Huawei decision was led by prominent Brexiter Iain Duncan Smith, supported by Liam Fox, Esther McVey and David Davies and is partly about their desire to see post-Brexit UK in lock step with the US. And although, for now, Johnson has seen them off it also reveals how, despite his large majority, the Prime Minister is still vulnerable to backbench rebellions of the sort that the ERG would be only too willing to mount if he ever showed any sign of softening (or just being more practical in) his Brexit stance.

As for the budget, whilst largely reconfigured in terms of coronavirus mitigation, and in any case apparently unconstrained by the once sacrosanct notion of ‘not maxing out the credit card’ (one can only imagine the screams of horror from the Tories had a Labour government delivered it), it was underlain by the fiscal damage Brexit has already done and will continue to do. The costs of Brexit didn’t even get mentioned in the budget speech but, lurking in the undergrowth of the OBR report, they were there. There was no Brexit dividend – on the contrary – and real business investment has scarcely grown since the Referendum. Even before the effects of coronavirus started, economic growth had sunk to zero.

Indeed, this really points to what is emerging as the central issue for the coming months. Brexit on its own implies a major national upheaval. Coronavirus on its own implies the same. The two together are overwhelming, and this really matters given the time frame of the negotiations. It’s clear that the UK and many EU countries are going to be fully occupied by the virus for at least three months and very likely more. So that alone brings us to June when decisions about extending the transition period will have to be made and when the UK has already threatened to leave the talks if an acceptable deal is not in sight.

Time and governmental capacity

The government has stated that it won’t seek an extension to the transition period because of coronavirus (I still think that might change, as per my last blog, and next week’s face to face negotiations have been cancelled, though it is not clear if they will occur remotely), which means that even if the talks continue the already tight timing gets tighter. Hardly will coronavirus outbreak be, hopefully, slowing down than it will be the summer holiday season, and many medical experts anticipate a second coronavirus spike later in the year. And apart from having to negotiate a future terms deal, the government has also to develop all of the new regulatory systems to replace REACH, EASA etc in the same rapidly shrinking time frame.

Even without coronavirus, but especially with, it’s very unclear that the UK government has the administrative and political capacity to do all that it has set itself, or that businesses and organizations which are also grappling with both coronavirus and Brexit can have the necessary processes in place for the end of December. Apart from anything else, civil servants, business people and indeed politicians get sick just like anyone else. And that’s if you can get the staff – it was reported this week that the government is struggling to recruit trade negotiators, not just for the EU talks but for all the other trade deals it wants to make.

A self-inflicted double whammy

It seems inevitable that coronavirus will continue dominate the news and public concern for several weeks, at least, whilst much less will be heard of Brexit. But it is important to realise that, uniquely amongst the countries suffering from the virus, Britain has the double whammy of combining that with dealing with Brexit. Whilst it is tempting to think that coronavirus has shown the relative triviality of Brexit (and globally that’s probably true) it will hopefully be a relatively short-term crisis, whereas Brexit will impact over a longer time frame. For Britain, the two are now intertwined shocks, interacting with each other.

Of course they are also very different in that, unlike coronavirus, Brexit is a totally self-inflicted damage. Granted, Brexit is now a fait accompli, but driving it on in such a tight timescale and in such a doctrinaire and costly form is solely down to government dogma. It is entirely unnecessary anyway, but doing so whilst facing the biggest public health crisis in decades is little short of demented.

*This spending was on work for both ‘deal’ and ‘no deal’ (i.e. no Withdrawal Agreement) scenarios. It is not possible to fully disaggregate the money spent on each, but on my reading (see especially p.22 of report) at least £1.2 billion of spending (not allocation, which was higher, but spending) was specifically on no deal preparation.

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