Friday 3 December 2021

Brexit discredited

This week saw the publication of an update of one of the major studies of the impact of Brexit on UK trade, conducted by John Springford of the Centre for European Reform. It uses a method which compares the actual UK economy with the ‘doppelganger’ UK that didn’t leave the EU single market and customs union. The doppelganger is calculated on the basis of a basket of other countries that closely mirrored UK performance prior to the pandemic and thus provide a good comparison with what has happened to the UK as a result of Brexit. This latest version shows that UK worldwide trade in goods in September 2021 was 11.2% lower than it would have been but for Brexit (and this is still before the UK has introduced full controls on imports of EU goods).

This is consistent with the findings of other studies and, for that matter, with most pre-referendum and post-referendum but pre-Brexit predictions. There is also the beginning of an evidence base about the impact on services trade. Data on what has happened since Brexit are unclear and particularly difficult to disentangle from the pandemic, but a new study by Jun Du and Oleksandr Shepotylo of Aston University suggests that even in the period after the referendum and before Brexit or the pandemic (2016-2019) UK services exports declined by 5.7% a year on average as a causal impact of the vote to leave.

That’s your GDP!

Springford points out that it is not easy to translate the effect on trade into the effect on GDP, but, overall, and consistent with other estimates, he suggests that it looks as if UK annual GDP will be 4%-5% smaller by 2030 than it would have been had Brexit not happened. These are not ‘teething problems’, but long-term damage to national prosperity.

There’s a well-known story about Professor Anand Menon, head of the UK in a Changing Europe thinktank, giving a pre-referendum talk in Newcastle. When he spoke of the likely impact of Brexit on GDP, a heckler called out ‘that’s your bloody GDP, not ours’. It’s a story that has come to stand for the disconnect between ‘experts’ and ‘ordinary people’. But although there are longstanding and good arguments against the use of GDP as an economic measure, it’s wrong to dismiss it as an abstraction that is irrelevant to everyday life. Ian Mulheirn of the Tony Blair Institute calculated that the entirety of the tax rises in the March 2021 budget were attributable to the negative economic effect of Brexit and, hence, tax revenues.

So it may not be ‘our’ GDP, but it is our taxes or our public services. And, despite revisionist claims that Brexit was about ‘freedom at any price’, this is emphatically not how it was presented to the electorate. On the contrary, every warning of its costs was dismissed as Project Fear. Yet as I argued in a recent post, Brexiters seem to have largely given up claiming that Brexit is economically beneficial or denying that it is economically damaging. On the other hand, some, especially on the free market Right, who supported Brexit – notably Spectator Editor Fraser Nelson – are beginning to question its economic rationale.

The strange case of Thatcherite Brexiters

Such questioning opens up the conundrum of why a project which erected barriers with the UK’s largest trade partner should have been so dear to those who regard themselves as free traders. A version of the same contradiction is that so many who are ardent Thatcherites are so opposed to membership of the single market of which she was an enthusiastic architect. In a recent speech to the Centre for Policy Studies – a free market, small state thinktank which Margaret Thatcher co-founded - Boris Johnson went so far as to describe this enthusiasm as having been her “blind spot”.

The apparent contradiction is in many cases explained by the Brexiters’ naïve idea that free trade means tariff-free trade, and hence not to realise (or care) that the single market is about eroding non-tariff barriers (NTBs) as well as removing tariffs, or at least to underestimate the significance of its doing so. Thus in a major speech in February 2020 David Frost – without presenting a shred of evidence – opined that the impact of NTBs and of customs costs was exaggerated by unnamed studies “in some cases by an order of magnitude”, and this clearly informed his approach to the trade negotiations with the EU which were then beginning. Given what has since happened to British trade, it is a line which deserves to go down in history in the same way as, say, that of the record label executive who supposedly rejected the Beatles on the grounds that guitar music was on the way out.

No doubt this is in part ignorance, but I think that it grows from a deeper soil which is the way that many Thatcherite free traders hold a quasi-philosophical belief that markets are a ‘natural’ phenomenon which exist prior to, and function better without, regulation. It is a view of markets, including international trading markets, which is wholly naïve at a conceptual level and unworkable at a practical level. Conceptually, it ignores all those things – from contract law to weights and measures regulations – which are prior conditions for effective markets. Practically, it ignores how creating shared, supra-national regulatory frameworks enables rather than restrains international trade, and in particular services trade. Hence they don’t understand markets in general, or the single market in particular. As regards Brexit, this has had two calamitous effects.

Trade, regulation, and sovereignty

Firstly, it explains why – as is beginning to be more widely discussed than perhaps it was at the time – the Trade and Cooperation Agreement (TCA) was so thin, and effectively little more than mainly tariff-free trade in goods. It’s very important to be careful about this, though. It certainly doesn’t mean that the TCA is worthless, as some Brexiters will undoubtedly argue when it comes up for review and they revive their ‘trading on WTO terms’ fantasy. Without the TCA many industries, notably auto, would massively shrink or even disappear entirely. The real issue is that by opting for a Free Trade Agreement (FTA) rather than single market membership there was inevitably considerably less liberalisation of NTBs and of services trade. As I’ve argued endlessly on this blog, one of the fatal flaws in the entire hard Brexit case was the idea that any FTA, even one more extensive than the TCA, could replicate or even come close to single market membership.

Secondly it explains why far from reducing regulatory red tape Brexit has dumped truckloads of it on British businesses (and also private citizens, for example when travelling or when sending presents to friends and family in the EU). In particular, it has exposed, or may come to expose, firms which trade with the EU to double regulatory and certification requirements – as, for example with the chemicals industry - one for the UK and one for the EU. That’s hardly surprising, as it is exactly the kind of duplication that a single market avoids. Reintroducing it not only hampers British businesses but in some cases will mean EU firms no longer servicing the British market because it isn’t large enough to be worth meeting separate regulations. This is a disadvantage for British consumers.

This also means that Thatcherites are now finding that the scope for post-Brexit regulatory divergence is far less than they had imagined, and government efforts to find examples have not been very fruitful. The big exception is immigration policy with respect to EU countries, but the new restrictions this allows are not economically beneficial for businesses as current labour shortages show and – unlike for many leave voters – immigration control wasn’t a central concern for free market Brexiters. Boris Johnson, like the Lexiters, may now be (dubiously) asserting that it has led to wage increases for workers, but that is hardly a priority for Thatcherites, to say the least. State aid may conceivably come to become (£) an area where divergence is actually beneficial to the UK, but then Thatcherites aren’t very keen on that either.

There are other examples of divergence, ranging from banning live animal exports for slaughter to allowing market traders to use imperial units only, but, whilst these may be important for some, sweeping regulatory reforms are proving elusive (for a detailed listing of where there is and is not regulatory divergence, see the UK in a Changing Europe tracker). For example, there is much talk of creating a more flexible data protection regime than the EU’s GDPR, but doing so would be far more costly for British businesses (£) because for global purposes GDPR is the standard they have to reach. The UK is too small to become a global standard-setter, so exercising its sovereignty in this way just leads back to the problem of duplication. One quiet acknowledgement of that came to fruition this week (£) when it was confirmed that the UK will be able to continue its membership of the European Committee for Standardisation (CEN) and its electrical engineering counterpart (CENELEC). They are not EU bodies, per se, but they do set a huge range of single market standards and these will apply to the UK as well.

In short, because they don’t understand markets and regulation, the rhetoric of Thatcherite Brexiters founders when it meets reality. For with a few exceptions regulatory divergence is uneconomic. Thus, in practice, having regulatory sovereignty is either damaging (when it is used) or pointless (because it isn’t used). Yet Frost, most notably, continues to trot out the line that regulatory divergence is the raison d’etre of Brexit, and a key test of its success. If that is so, he might as well admit that it is destined to be a failure.

Britannia Unchained?

Of course for many Thatcherite Brexiters, such as some of the authors of Britannia Unchained, the real prize was to be deregulation of labour and environmental standards. Indeed it is common to see some – both remainers and leavers - confidently announcing that ‘this was the whole point of Brexit’. That is wrong simply because the only ‘whole point’ of Brexit was that it didn’t have a whole point: it was an assembly of contradictory agendas of which such deregulation was only one, albeit an important one given the power of its adherents. But it turns out that, at least for now, their power is less than they hope and others fear.

For to the chagrin of such Thatcherite Brexiters, here, too, Brexit does not live up to their naïve model of sovereignty. The level playing field provisions of the TCA may not have been as extensive as originally envisaged in the Political Declaration with the Withdrawal Agreement, but nevertheless they exist and constrain the UK through non-regression clauses on labour, social and environmental standards. Indeed free trade agreements in general, including CPTPP membership if it happens, increasingly mandate labour, human rights and environmental standards. It can certainly be argued they do not yet go (nearly) far enough, but the point is that they exist and put constraints on sovereignty in the Brexiter sense of the term.

Moreover, there are domestic constraints. Thatcherite Brexiters like Professor Patrick Minford may be happy to see whole swathes of manufacturing industry and agriculture disappear, but that isn’t something that any government could readily countenance. Nor is there much public appetite for shredding labour and environmental standards. In fact, the government has been quite wary of using Brexit in ways which hard core Thatcherites would wish – not, for example, making use of the freedom to remove the cap on bankers’ bonuses, something bemoaned by Fraser Nelson and others. In part this is because of the peculiar nature of Johnson’s 2019 election victory and his reliance of the ‘red wall’ seats.  The pandemic has also had the effect of, if only temporarily, extending the scale of state activity and intervention.

From these constraints arise the now widely made criticism from the Tory Right that “this isn’t a Conservative government”. It’s certainly the case that Johnson is very different to Thatcher, and not just as regards the single market. She was moralistic where he is amoral, if not immoral. She adhered to a version of business rooted in the thrifty shopkeepers of her childhood. He says ‘f*** business’. But an irony of Thatcher’s legacy is that her image of capitalism was entirely different to the rootless, credit-fuelled ‘casino capitalism’ that her policies begat. If Johnson has any kind of business base it is with hedge funds and private equity firms on the wilder end of that footloose, global capitalism who increasingly fund the modern Tory Party.

However, Johnson is similar to Thatcher in relying, as does support for Brexit, on an uneasy and contradictory coalition of socially traditionalist and protectionist nativists with socially indifferent and free market globalists. In fact it’s quite likely that the electoral coalition that brought Thatcher to power and kept her there included many of the actual individuals, as well as the broad sociological groupings, who were to vote for Brexit in 2016. This (along with the specific ‘red wall’ inflection) means that Johnson is highly constrained in the extent to which he can give the free market, deregulatory Right its head.

Notions of the nation and of national sovereignty are at the fault line of this politics, as they were for Thatcher. Whilst basing much of her appeal on a flag-waving campaign to make Britain great again, the logic of her support for economic globalization undermined the nation state, and the idea of ‘British business’, in particular, became hopelessly antiquated. At the same time, and again as a result of policy decisions, the British economy became far more services based (and hence its international trade needs became far more bound up with removing NTBs than removing tariffs). In some respects, Brexit was a reaction against these changes, but conflating them with EU membership was a catastrophic error, and indeed the post-Brexit acceleration of the sell-off of British businesses illustrates this.

An incoherent and undeliverable strategy

The consequence of that error has been to try to square the circle of nativism and globalism by imagining post-Brexit ‘Global Britain’ to be an independent nation state, trading tariff-free with the world*. Unfortunately for Johnson’s government, the world has moved on from such a model (if indeed it ever existed) to one of national inter-dependence, regionalized economics and increasingly globalised regulation. To the extent that Brexit Britain has a strategy at all, it is to adopt an Eighteenth-Century approach to the Twenty-First Century world, something underscored by Frost’s repeated references to Edmund Burke’s political philosophy as its guiding light.

Such a strategy is totally incoherent and undeliverable for both trade and international relations. At the level of trade it is what gives us a government crowing about trade deals of almost no economic value, simply because they were made by the UK, or endlessly talking about Britain’s ‘world-leading’ qualities whilst presiding over a country which is arguably actually ‘undeveloping’. At the level of international relations it is what yields continual antagonism (£) with the EU, and France in particular, as national sovereignty keeps bumping up against that of others, whilst leaving the UK if not isolated and friendless then at least the object of international ridicule and distrust.

This might at least be a formula for creating a certain kind of national solidarity. It would be a nasty, embittered and chauvinistic one, for sure, but it could be viable in a functional sense. However, the reality is that it fails to deliver even that. For as the Brexit vote, and the high levels of continuing opposition to it, show, at least half the country, if not more, are heavily invested in the world of national inter-dependence, regionalized economics and globalised regulation and are unimpressed, if not repelled, by that offered by Johnson and Brexit. That cleavage is most obvious between Scotland and the rest of the UK, but also significantly divides different parts of the English population. So as well as being externally incoherent Johnson’s Brexit cannot function as a nation-sustaining project either, and will very likely be a nation-ending one as well as initiating an unresolvable culture war within England.

Brexit discredited

It may seem we have come a long way from the trade figures with which I began but that is not so. Those figures are not just about the economic damage of Brexit, but are the most readily quantifiable barometer of the flawed political theory of sovereignty which underlies it. It has become a myth that the case for Brexit was a non-economic one – much of the Vote Leave campaign was explicitly economic – and only about regaining sovereignty or ‘taking back control’. The proposition was that by taking back control, good economic outcomes would become possible, as would good non-economic outcomes but at no economic cost.

Thus the economic case and the political case for Brexit were always inextricably intertwined, and as each becomes discredited so does the other.


*It’s true that there is another version of this Brexit strategy which puts particular weight on trading relations with the ‘Anglosphere’ and/or the Commonwealth. It is still trotted out by, for example, Dan Hannan who spoke recently of how EU membership had “artificially” (cf. my point above about markets being ‘natural’) diverted trade from Britain’s “cultural hinterland” (apparently referring to some, at least, of what used to be that entirely natural entity the British Empire). But although there are traces of that thinking in its policy, even this government isn’t quite so detached from reality as to explicitly frame a strategy in these delusional, neo-imperial preference, terms.

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