Brexit and Trade: An Interviewer's Guide to Exposing Nonsense
Journalists conducting interviews on the trade side of Brexit face a huge challenge. The field is packed with confident but utterly clueless chancers who prey on the technical nature of the subject to spout nonsense laden with enough impressive sounding terminology to appear credible.
The interviewer rarely feels confident enough with trade policy’s intricacies to really challenge the verbal onslaught they’re experiencing and thus inadvertently add credibility to what is objectively nonsense. Inspired by a twitter exchange, I wanted to create an evolving guide to help.
Since not every organization has the budget for my surprisingly affordable trade policy training packages (hint hint), the goal is to provide sample follow up questions to expose the shallowness of some of the most common and most offensively silly arguments one hears around trade and Brexit.
I’ll be building this out as I go (including adding an index if it grows large enough and there’s sufficient demand) so if readers have ideas for improvements or additional content please send them my way or tweet at me.
Part 1: Basic Facts
The following statements are largely uncontroversial among economists not named “Minford” and trade experts not making that sweet sweet tobacco lobby money down at the IEA.
Brexit's Major Impact
The biggest Brexit trade impact under any scenario will be a degradation in the terms under which the United Kingdom and the European Union trade with one another.
Around 50% of the UK’s trade occurs with the European Union.
The EU Customs Union and Single Market offer UK firms considerable access to sell into the EU and significantly reduced costs and administration when doing so. Any agreement with the EU short of full membership in the CU and SM will offer significantly less access, especially in services.
EU's Obligations under WTO Rules
The European Union's obligations under international law are to treat the UK as they do any other WTO Member with whom they don’t have a free trade agreement or customs union. That's it.
Only an agreement with the EU can change that reality. There are no legal tricks, loopholes or magic prophecies written on ancient Byzantine scrolls which can alter this.
The EU has repeatedly stated at both negotiator and leader level that any post Brexit trade agreement will require, as a precondition, the Irish Backstop.
No-Deal Brexit
Experts have good faith disagreements about the exact extent and duration of damage and disruption from a No-Deal Brexit, but there is near universal agreement it will be considerable. The UK and EU have, over the last four decades, heavily interlinked the way they operate and the way their businesses, bureaucracies and institutions work. Leaving without a deal kicks over without replacement many of the legal agreements and structures which enable that.
A number of institutions (including the government) have written extensively on the implications of No-Deal. The general sentiment is perhaps captured best by the Centre for European Reform's Sam Lowe in a piece entitled, "No-Deal Brexit wouldn't be the end of the world - just very, very, very bad".
Sample of what the UK can expect under a No-Deal includes:
Tariffs:
- The UK and EU currently charge no import taxes on one another's goods. In a No-Deal Brexit, they would be obliged to tax one another's imports at the same rate as they do those of other WTO Members. This will make little difference in many sectors, but will be devastating in others (like lamb) as EU tariff peaks lock UK producers out of what is currently their only market. The UK can unilaterally reduce its own tariffs, but the EU has given no indication it plans to do so.
Trade Administration
- The paperwork currently required to conduct trade between the UK and EU is minimal. So much so that business which trade exclusively with the EU do not even have to register as exporters. This will change in a No-Deal, abruptly imposing the considerable costs and challenges of trade bureaucracy on thousands of UK businesses.
Supply Chains and Port Disruption:
- The significantly increased paperwork required to conduct trade with the EU will need to be processed, at or near the border. Even if the number of vehicles physically inspected remains constant, the time required to verify paperwork and delays caused by shipments with incorrect or incomplete papers could grind UK ports (most notably Dover) to a halt. This could in turn disrupt supply chains which rely on smooth and consistent deliveries from the continent to function.
Services:
- The EU's obligations to provide the UK access to its services market under WTO rules are considerably more modest than those in goods. In a variety of sectors UK firms and UK individuals will lose the right to sell services (like insurance) into the EU, to operate EU branches or to travel to the EU to undertake work in person. For example, UK trucking firms and UK truck drivers would lose the right to perform 'cabotage' services within Europe, and so would not be able to deliver goods between destinations within the EU. This is just one example, economy wide the damage could be considerable.
Government:
- Leaving the EU requires the UK to significantly adjust how it handles a variety of processes where existing models rely on the presence of EU laws and institutions. The UK government is working on it, but reports suggest it is still well behind its target.
Part 2: Statements and Follow Ups
Here are statements one constantly hears in relation to Brexit, and some suggested follow ups.
"Article 24 Will Fix It"
Statement:
“In a No-Deal, Article XXIV of the WTO would allow us to ‘freeze tariffs’ with the EU and keep things the way they are for two to ten years.”
Suggested follow ups:
“Invoking Article XXIV requires the EU’s consent, which it has explicitly ruled out. Are they lying or bluffing?”
“Are you aware elimination of tariffs under Article XXIV would actually raise the paperwork requirements on British exporters beyond even just trading on WTO terms alone?”
"What would eliminating tariffs via Article XXIV instead of a transition period do for UK services firms?"
Explanation:
Article XXIV of the General Agreement on Tariffs and Trade is the part of the WTO rules which allows Members to create Free Trade Agreements and Customs Unions. Ordinarily, all WTO Members have to charge identical tariffs on similar products, regardless of where they are sourced from. Article XXIV allows two or more Members to charge lower tariffs on one another's goods provided they jointly sign, and transparently notify to the WTO, a comprehensive and reciprocal trade agreement.
This article has been invoked in the Brexit context because of a provision in it which allows parts of an incomplete Free Trade Agreements to be implemented on an interim basis while the final details are agreed. Prominent figures have suggested that should no deal be reached with the EU, an interim agreement under Article XXIV to eliminate all bilateral tariffs could serve in place of the transition period. Some have gone as far as to suggest the Article is a secret weapon which could be used to compel the EU to provide tariff free access to its market for up to ten years. None of these are credible options.
They are not credible because they rely on the following absurd assumptions:
- That the consent of the European Union is either unnecessary to invoking Article 24, or would be forthcoming.
The former is absurd, because Article XXIV is explicitly based on jointly notifying the WTO of a new arrangement. It can't be used to compel anyone to do anything.
The latter has been explicitly rejected as an option by the EU and envisages their dropping hundreds of pages of carefully negotiated Withdrawal Agreement legal text for a hastily scrolled note saying "no tariffs."
- That the bilateral elimination of tariffs would be an adequate replacement for the transition period.
While preventing or delaying the imposition of EU tariffs would come as a relief to some heavily exposed sectors like beef and lamb, it would do very little to mitigate the disruption of a No-Deal on the UK economy. Tariffs are a No-Deal problem, they are not the No-Deal problem.
If the UK leaves without a deal and thus immediately becomes a separate customs territory with standards and regulations completely independent of the EU, border checks and their resultant paperwork will need to be imposed. Even if tariffs between the UK and EU are eliminated, UK exporters will still be faced with the need to provide exponentially more paperwork to demonstrate that their goods are sufficiently of UK origin to enter tariff free (so called 'Rules of Origin declarations') and that they comply with EU standards and regulations. This will slow border traffic, disrupt supply chains and significantly increase business operating costs.
Article XXIV would also do nothing for the access of UK services firms to the EU market, where the barriers are regulations and visas, not tariffs. UK firms would lose the ability to provide services into the EU market, without the benefit of a two year transition period during which better access might have been negotiated or mitigating steps taken.
In summary, any discussion of Article XXIV is a distraction because it assumes the solution to a political impasse in negotiations with the EU lies in invoking a legal loophole that is neither a serious option nor a remotely adequate solution.
"We'll Sign Bold New FTAs"
Statement:
“An independent trade policy will allow the UK to strike cutting-edge, ambitious free trade agreements with some of the world’s largest and fastest growing markets.”
Suggested follow ups:
“For any potential FTA partner, what is something the UK is currently prevented by a foreign government policy from selling competitively?”
“Has that country indicated it might remove that barrier for the UK?”
“Has that country ever removed that barrier in an FTA with someone else?”
"What do you envision the UK trading for these concessions?"
Explanation:
If someone is going to claim future trade agreements will make everyone wealthy, they need to be able to point to the barriers they’ll remove and provide a credible explanation for how they’ll do so. A lot of protectionism, like for example that of the US services market, isn’t going anywhere.
I have written more fully on this in the past.
"With Regulatory Sovereignty we can Spur Productivity"
Statement:
“Once the UK regains full sovereignty over its regulations, it will be able to kick-start its productivity and innovation to compete globally.”
Suggested follow ups:
“Can you name an EU regulation that’s currently damaging UK productivity and innovation?”
“What does it do, and why is it there?”
“Did the UK oppose its implementation?”
- “If the UK diverges from EU regulations, will UK firms still be able to sell into it?”
Explanation:
Changing regulations is a proposal which always sounds best in the abstract. While EU regulations aren’t perfect, most were at least intended for a legitimate purpose. Anyone invoking a golden age of regulatory freedom should be challenged to spell out the specifics, and their implications for public welfare.
Alignment with EU regulations is also in many cases a prerequisite of selling into the EU. That means even if the UK relaxes its regulatory regime, many firms may continue doing things in an EU compatible way.
"Alternative Arrangements for the Irish Border"
Statement:
“The Border Irish is a non-issue, overstated or easily addressed with the ‘Alternative Arrangements’”
Suggested follow ups:
“It’s 2020 and a truck full of goods is approaching the Northern Ireland border without the right paperwork. How is it handled?”
"Does any land border on earth have “alternative arrangements” allowing frictionless trade without physical infrastructure?"
- Note: Nowhere does. Switzerland does not. Neither does Norway.
“If a technological solution were implemented, wouldn’t this impose significant costs on Northern Ireland firms?”
- “Is this in the spirit of the Good Friday Agreement?”
Explanation:
When two different trading regimes share a land border, there has to be a way to verify that goods travelling between them comply with all appropriate taxes, standards and procedures.
There are only four options for how to verify a vehicle full of goods is compliant:
Stop it at the border via a physical check point not in the spirit of the GFA;
Spot and flag it for authorities by way of a license plate identification camera. Such a camera may be problematic from a GFA standpoint and would be a magnet for radical vandals;
Do nothing at the border and rely on interdiction by expensive and unreliable patrols deeper inside Northern Ireland; or
Simply allow it enter, meaning the UK’s border with the EU is operating on the honor system.
For the record, the often cited Swiss system uses a combination of (1) at specifically designated lorry border crossings and (2) and (3) at and behind border crossings lorries aren’t supposed to be using.
The EU avoids doing most of this internally by being one single giant trade regime.
The need to comply with, and demonstrate documentary compliance with, tariffs, taxes, standards and procedures will also apply costs on Northern Ireland firms which do business with Ireland.
"We can get an EU FTA in Months"
Statement:
“Even if there’s No-Deal, the UK and EU can get a comprehensive Free Trade Agreement done in just a few months because the UK already fully aligns with EU standards.”
Suggested follow ups:
"The EU have said they will not negotiate with the UK without first agreeing the backstop. Are you saying you are prepared to accept that, or that they are lying?"
“You’re suggesting the world’s 2nd and 5th largest and most complex economies would break the FTA speed record by at least 9 months?”
“What is the relevance of existing regulatory alignment when the bulk of an FTA’s regulatory text governs HOW regulations are made and enforced, not what they are today?”
Explanation
The EU have established an Irish Backstop and the payment of the UK’s outstanding budgetary contributions as preconditions for any negotiation after No-Deal. Unless these conditions are accepted, or it turns out the EU is bluffing, an FTA with the EU will not be possible.
Free Trade Agreements generally take many years because points of contention inevitably emerge. The fastest agreements take place either between countries with very limited economic ties (like Australia and Peru) or in negotiations where there’s a very high imbalance of power between the parties (some US FTAs). The idea two large, complex and heavily entangled economies could bash out an FTA in a few months defies reason.
While the UK is currently aligned with the EU on many regulations, the regulatory chapters of Free Trade Agreements focus primarily not on current regulations but on the principles, procedures and limitations around regulatory practice (existing and future). Additionally, the EU's internal regulatory rules rely on the European Court of Justice to settle disputes about them, which will no longer apply to the UK after Brexit.
For example, this is the TPP Regulatory Coherence chapter. The EU is going to seek commitments from the UK on how it regulates going forward, which will get very, very messy. Existing regulatory alignment will help, but not nearly enough to make an EU-UK FTA a quick or easy process.
"Brexit Means Lower Prices"
Statement:
"The EU is highly protectionist. If the UK leaves, it will be able to slash tariffs to cut prices on supermarket shelves."
Suggested follow ups:
"The EU has an average tariff of 2.6% and most goods on supermarket shelves entered tariff free, what can consumers really expect to see?"
"If the UK radically cuts its tariffs and isn't willing to open up immigration, what will it offer in FTAs?"
"The UK currently supports the world's poorest countries by offering them tariff free access. Is it prepared to erode that by slashing tariffs for everyone?"
Explanation
The EU, like most developed countries, has generally low tariffs with a few 'peaks' in selected products. These tend to be products where the EU is a heavy producer, including products like lamb where the UK is one. This means cutting the vast majority of the EU's tariffs won't make a noticeable difference to supermarket prices, especially when set against a drop in the value of the GBP.
If the UK unilaterally reduces its tariffs for all WTO Members, it will lose the ability to do so for individual Members as part of a trade negotiation. This will reduce the UK's ability to trade for meaningful commitments from future FTA partners.
The EU currently offers the world's poorest countries (Least Developed Countries) and a range of developing countries tariff free and quota free access to much of its market under the Everything But Arms and Generalized System of Preferences Plus programs. The UK has said it wants to roll over these programs, but if it reduces tariffs for everyone in the WTO, these programs will cease to have value.
"90% of Economic Growth will be Outside Europe"
Statement
"90% of global economic growth is expected to be generated outside Europe, the UK needs to be free to capitalize on that, not trapped in the EU."
Suggested follow ups:
"Isn't growth a misleading figure to cite, given the gap between rich and poor countries? Nigeria would need to grow 300% to have the same GDP as Spain."
"What specifically about being in the EU Single Market and Customs Union is preventing the UK from trading with emerging markets?"
Explanation
Focusing on projected growth percentages is a sleight of hand move in economic analysis because it obscures existing size. A modern, developed economy tends to grow at 1-3% per annum. Developing countries grow much faster, but from a significantly lower base. Many of the countries posting 8-12% annual growth rates are still decades away from rivalling even smaller EU states for income, and may never match them for per capita disposable income.
There is little evidence that being in the European Union is preventing the UK from successfully accessing emerging markets. For example, China is the UK's 5th largest trading partner (counting the EU states individually). The EU has also negotiated Economic Partnership Agreements with cover most of Africa and is in ongoing FTA negotiations with Mercosur, the Latin American trading bloc.
The German Car Industry Argument
Statement:
"The EU enjoys a trade surplus with the UK and its major producers like the German car industry won't allow that to be jeopardized, forcing the EU to capitulate on its red lines."
Suggested follow ups:
"How significant is the EU as an export destination for the UK, compared to vice versa?"
"The inevitability of a German auto industry led EU capitulation has been predicted for over two years, why have we seen no evidence of it?"
"How successful have the interests of comparable major UK business groups been in shaping how the UK approaches Brexit?"
Explanation
The UK imports more from the European Union than the European Union does from the UK. However, exports to the EU account for over 40% of the UK total while only 8% (including intra-EU) or 18% (excluding intra-EU) of EU exports go to the UK. Additionally, the impact of Brexit on trade flows between the EU and UK may not be equal. The UK has indicated it will unilaterally remove many of the tariffs the EU would face, and supply chains by their very nature are more likely to retreat to EU Member States than move in the other direction.
The notion of powerful EU industries forcing the EU to move off its redlines in order to ensure the continuity of trade have been around for so long that German Chancellor Angela Merkel was pushing back on them as early as October 2016 speech. Such assistance does not appear to have yet materialized. The BDI, Germany's Federation of Industry itself warned the UK not to expect its assistance as its priority would be the maintenance of the EU Single Market's integrity. This statement was echoed by VDA, the German car makers association.
Assumptions around an inevitable EU capitulation driven by industry pressures are premised on the ability of major EU industry groups to dictate the bloc's policies. In considering whether this is realistic, it is sensible to contrast this notion with the highly dubious success of major UK industries in steering the Brexit process.
"Only 4-10% of UK Businesses Export to the EU"
Statement:
"The importance of the EU to the UK economy is vastly overstated, in fact, only [4%-10%] of UK VAT registered businesses export to the EU."
Suggested follow ups:
"Are you aware that if you include the UK businesses which form part of the supply chain for exporters to the EU, the figure reaches 23%, a quarter of the VAT registered firms in the country?"
"These statistics treat BMW UK with its 22,000 supported jobs, the same as a local watchmaker. Is that misleading?"
"What percentage of UK firms which don't export to the EU nevertheless have business models relying on cheap and hassle free inputs from the EU?
"Do you realize these statistics only count sales between VAT registered businesses, and not UK firms selling direct to European consumers?"
Explanation:
Most trade statistics are misleading when taken out of context or presented without nuance. Percentage of firms trading is among the most misleading, which is why it's rarely used.
The oft-cited 4-8% figure counts only UK businesses which are VAT registered and which are directly selling to another VAT registered business in the EU. This completely ignores any business which sells things to another UK business for subsequent export, or transformation and export. Government estimates place the number of small and medium sized firms engaged in such supply chains at 15%.
Statistics on the 'number of firms' doing anything are also potentially hugely misleading because they treat all firms identically. There are only about 7,000 businesses in the UK considered 'large.' Each employs over 250 people, and many employ thousands or tens of thousands. However, if all 7,000 of them stopped exporting to the EU tomorrow costing hundreds of thousands of jobs, it still wouldn't make a dent in the 'percentage of firms' statistic because there are over 5 million UK businesses.
Export statistics also completely obscure how many UK businesses rely on EU imports. A car factory in the UK making vehicles for the US market relies on being able to receive parts from all over Europe in a timely and cost effective manner. Without such inputs, it may not be a viable business but because its exports go to the US rather than to the EU, it doesn't count against the 'exporters' total.
"Brexit lets us retake control of our fishing waters"
Statement:
"Leaving the EU will allow UK fishing to flourish again as it regains full sovereignty over its territorial waters."
Suggested follow ups:
"Brexit means the EU loses the right to fish in our waters, but we lose the ability to continue selling the bulk of our catch to the EU tariff free. How can we expect the latter without providing the former?"
"How many people are employed in the UK fishing industry?"
Explanation:
The fishing issue is complex and consists of two elements. Who is allowed to fish off the coast of the United Kingdom, and where UK fisherman can sell their catch.
Each coastal country is surrounded by an Exclusive Economic Zone. Within that zone, the country determines who is permitted to fish, and how much. The EU does things a little bit differently. Under the EU Common Fisheries Policy, the waters around the EU are divided into segments and EU Member Governemnts are allocated a total allowable catch for each segment based on historic fishing patterns. They can then distribute these quotas among their fishermen or trade them to other governments.
What the EU approach means in practice is that the UK does not have sole control over its Exclusive Economic Zone. In fact, on average about half (by tonnage) of the fish caught within the UK Exclusive Economic Zone was landed by vessels of other EU Members, primarily Denmark, the Netherlands and France. If the UK were to leave the EU, it could raise the quantity of fish UK vessels were allowed to source from within the UK Exclusive Economic Zone, restrict or eliminate altogether the right of other EU Member's fishing fleets to operate there, or both.
The potential cost comes in market access. At present, some of the most lucrative fishing undertaken by the UK is done for export to the EU. Under the customs union, these (primarily) salmon, mackerel and shellfish enter the EU tariff free and largely without border friction. If the UK leaves the EU and rescinds the right of EU fishermen to access its Exclusive Economic Zone, there is a concern the EU will reciprocate by refusing tariff free entry to UK fish. EU tariffs on maritime produts are higher than in most areas, averaging 11.4% and being as high as 22% on some types of fish.
According to the latest UK government statistics, the industry employed 12,871 fishermen in 2007, down to 11,692 by 2017. By comparison, Ford Motor Company) and Vodafone each employed over 13,000 UK staff in that year. As a sector, manufacturing employs 2.6 million.
The EU trades with the US and China just fine without an FTA
Statement:
"The UK currently trades with the rest of the world under WTO rules successfully. Those who say you need a new Free Trade Agreement as well to trade with other countries are wrong. The EU has no such thing with China or the USA, two big trading partners."
Suggested Follow Ups:
Isn't there a significant difference between withdrawing from an agreement businesses have operated within for forty years, and not having such an agreement in the first place?
Potential trade deals with the US and China are often listed as key benefits of a harder Brexit. Is their potential overblown?
Is it not misleading to compare regional integration agreements like the EU Single Market or NAFTA, which enable joint production, to free trade agreements with distant lands?
Explanation:
The UK has been a Member of the European Union for over forty years, and that membership has shaped the business models and operations of its firms. The absence of friction at the border for example, means some products to cross back and forth five or ten times to undertake various transformations and value additions before completion. Disrupting this by introducing friction threatens an existing business model. This is substantively different from the absdence of a trade agreement, which might prevent such a business model emerging but doesn't disrupt any existing firm.
The absence of free trade agreements with the US or China hasn't prevented them from becoming major trading partners for either the EU or the UK. If such agreements aren't critical, then the trade arguments for leaving the European Union or for doing so in a manner which doesn't preclude such agreements (such as with a Customs Union or as part of the Single Market) make little sense.
Regional Trade Agreements like NAFTA/USMCA or the EU Customs Union/Single Market have fundementally different objectives to Free Trade Agreements like those between the EU and Japan, or Australia and South Korea. Regional agreements aim to consolidate the economic potential and competitive advantage of a region, decreasing barriers to trade inside it to enable joint and collaborative production of higher value, more competitive goods and services. A free trade agreement by comparison, is a more mercantalist endeavour which aims to make it easier to mutually sell goods and services.
With thanks for contributions or corrections from (evolving list):
Prof Steve Peers (@StevePeers)
Dave Smith (@DaveSmithSkvn)
Al Talbot (@ShandyAl)
Liz May (@LizMay12)
Raphael Hogarth (@RaphaelHogarth)
Jerome Druesne (@JeromeDruesne)
Matt O’Toole (@MatthewOToole)
Vadim Cheianov (@Cheianov)
Peter Whitworth (@PeterFWhitworth)
The Columnist (@Sime0nStylites)
Gareth Morris (@GarethDMorris)
Holger Hestermeyer (@hhesterm)
Jon Stokes (@JonS1950)
El Sid (@El__Sid)