Sunday, 2 December 2018

Deal or no deal?

"If I were you, I wouldn't start from here" is the punchline to a joke about a tourist asking a local for directions. If you were looking for a satisfactory resolution to Brexit, you certainly wouldn't start from here. Theresa May has made a catastrophic misjudgement in assuming that Leave voters are as obsessed with immigration as she is. The European Commission exploited her weakness and myopia to negotiate a deal that is widely, and accurately, regarded as a national humiliation.

The Conservative Party has inexplicably stuck with a leader who lacks every leadership quality apart from perseverance and who lost a 20 per cent poll lead against an antediluvian Marxist. Meanwhile Momentum (t/a the Labour Party) only cares about rerunning the general election and Stronger In (t/a People's Vote) only cares about re-running the referendum.

Every road now leads to something approximating ruin. A so-called People's Vote might resolve the issue in the short term but it would not resolve the question of whether Britain wants to leave the EU. A second referendum would have to offer a binary choice (the idea of having two Leave options and one Remain option would shamelessly rig the result in favour of the europhiles). The options would be May's version of Brexit versus staying in the EU. Given this Hobson's choice, many people will stay at home. Remain could still lose the referendum, but if it won it would be on a lower turnout and with a blatantly restrictive question. It would not show that the UK had changed its mind about leaving, only that people considered May's deal worse than remaining.

It would also poison politics for a generation and whichever party was seen to be responsible (and this would not necessarily be the Conservatives) would be held in contempt. The same would apply if parliament somehow kept Britain in the EU without a second referendum, perhaps more so.

A general election would solve nothing. Neither Labour nor the Conservatives are likely to get a majority, let alone a sufficient majority to push through a Brexit plan, and Labour doesn't have a Brexit plan anyway.

Given how unsatisfactory these options are, many people are tempted to damn the establishment's eyes and go for no deal, AKA a 'clean Brexit', AKA WTO terms. This is the legal default unless something changes, but it is also a road to ruin. In fact, it is the road to greatest ruin.

Far too many people on the Leave side are complacent about a so-called clean Brexit. They do not take the predictions of the Treasury and the Bank of England seriously because they were laughably wrong about what would happen in 2016. It is true that the pre-referendum predictions were woeful as anything other than propaganda. It is also true that last week's predictions from Mark Carney were based on such implausibly pessimistic assumptions that Paul Krugman scoffed at them from across the water.

Remainers have engaged in so much ridiculous scare-mongering in the past three years that it is tempting to ignore their every warning. This is a mistake. Just because the boy falsely cries wolf does not mean there isn't a wolf. It was never likely that planes would be grounded and EU nationals deported, but these wild claims should not us distract us from the real problems that no deal would entail.

Queues at the border are an obvious example. Interestingly, Krugman is relatively relaxed about this, writing:

Britain is an advanced country with high administrative capacity — the kind of country that history shows can cope well with huge natural disasters, and even wars. Would it really have that much trouble hiring customs inspectors and installing computers to recover from an 8 or 10 percent drop in GDP?

And even in the short run, I wonder why Britain couldn’t follow the old prescription, “When all else fails, lower your standards.” If laxer enforcement, special treatment for trusted shippers, whatever, could clear the bottlenecks at the ports, wouldn’t that be worth it, despite the potential for fraud, as a temporary measure?

I'm not so sure. As the Economist notes...

Small delays add up to large tailbacks. Researchers at Imperial College London have calculated that two minutes more transit time per lorry at Dover and the Channel Tunnel translates into a 47km traffic jam.

This is important because...

Britain’s big supermarket chains hold as little as one-and-a-half days’ worth of fresh food in their supply chain at any given time, and say they have no capacity to hold more.


Consider the plant in Oxford where BMW churns out 1,000 Minis a day. Each is made up of 4,000-5,000 parts. Bringing 4m parts to the factory on 200 lorries every day is a “significant logistical challenge”, says Graham Biggs, the firm’s communications director. Three-fifths of them come through Dover or the Channel Tunnel; their contents are unloaded directly onto the apposite part of the production line. Reconfiguring its supply chains to circumvent hold-ups and tariffs would take years if it were possible at all.

It is true that most of our trade is already with non-EU countries, though it is a slim majority and many of them have trade deals with the EU. It is not beyond the wit of man to invest in customs inspectors and IT projects. We should have started doing it in June 2016, not least because we would have got a better deal if Brussels thought there was a realistic prospect of us walking away (it would have cost money but what's the worst that could have happened - shorter queues?). We didn't. Even now, with less than four months to go, there appears to be very little planning for no deal. In the long run, we could adjust but in the short run we would have supply problems that would make the fuel protests of 2000 look like the lettuce shortage of 2017.

This is not the fault of people who voted to leave the EU. The government has let us down. Still, you wouldn't start from here.

There are plenty of other potential problems with a clean Brexit. Passporting for financial services, the Irish border, the European Exchange Warrant and countless logistical issues which are obscure but important. Some of them may be easier to solve than they first appear. Others may prove almost intractable. We won't find out until March 30th when the government will have to tackle them all at once. Has the government and the civil service done anything in recent years to make you confident that they are up to the job?

The biggest issue is tariffs and we can predict with reasonable certainty what will happen here. As a third country, the EU will put its tariffs on our exports. No ifs, no buts. For example, there will be a 12.8% tariff on lamb, a 13.6% tariff on cauliflowers, a 16% tariff on tractors, a 10% tariff on cars and an 8% tariff on many clothes. For some items, tariffs exceed 20%. Some even exceed 100%.

It is not Project Fear to point out that these tariffs will make our goods unappealing to consumers in the EU; that is kind of the point of them. A large number of British businesses - whole industries - will be affected and many of them will go bust or, if possible, relocate in the event of a no deal Brexit. Industries which cannot relocate, such as Welsh lamb farmers - who depend overwhelmingly on exports - will go to the wall and they will not go quietly (nor should they).

On the other hand, consumers will be free of EU tariffs on imports and will be able to buy New Zealand lamb, for instance, at a lower price. This is an undoubted benefit of leaving the EU properly but under no deal it is debatable whether these benefits outweigh the costs of widespread unemployment, recession and falling incomes that will come from what Michael Gove describes - with some understatement - as the period of 'considerable dislocation and disruption'.

I happen to be in favour of unilateral free trade, but even I would not introduce it overnight. There is no evidence that the government is in favour of it at all. The most likely outcome is that the government will choose to introduce its own tariffs (which Remainers dishonestly portray as 'WTO tariffs') on anything that competes with British industry. It may even impose them on some products that are not made in Britain. These tariffs - which will have to apply to non-EU imports as well - will naturally lead to a higher prices and exacerbate the inflation caused by the inevitable drop in the pound, but they are not as senseless as they may seem. The government will have concluded, with some justification, that the EU will be in no rush to sign a trade deal with a country that has already dropped its tariffs.

None of this is a natural consequence of Brexit as some Remainers will claim. The EU has always been keen to have tariff-free trade with Britain and tariff-free trade is one of the few things that Mrs May has successfully negotiated. It would have been part of a Canada+ deal, a Norway+ deal or any other deal. It is only absent from no deal and it would not be a temporary problem. It would probably take years to negotiate a free trade deal if we walked away from the deal that is currently on the table, especially if we walked away with the £39 billion that the EU considers - rightly or wrongly - to be theirs as a matter of legal fact.

(It has been suggested that we could use the £39 billion to alleviate the problems suffered by the industries that are harmed by tariffs. I have no idea whether this sum would be sufficient - I suspect not, and the EU would certainly pursue some portion of it through the courts - but a system in which our exporters have tariffs imposed on them while consumers pay higher prices and the government spends billions trying to prop up industries that have been screwed by protectionism is not the free trade Brexit I voted for.)

Time is now running very short. It is conceivable that a better deal could yet be negotiated. It is conceivable that EFTA/EEA could be the solution. Conceivable - but it becomes less likely every day. Unless Article 50 is extended, it is a choice between May's deal and remaining in the EU and, as Gove points out, remaining in the EU could be worse than it was before:

Like a guilty partner who had threatened to leave for another and come crawling back, we would be forced to accept far tougher terms than we have now.

Keeping the rebate? Forget about it. Stopping a tide of new EU laws? No way. Halting progress towards a European army? Nope. Guaranteeing we wouldn’t have to pay billions to bail out euro members in the future? I’m afraid not.

You don't need to be a Brexit purist to consider May's deal a betrayal. In a normal political environment, May would resign and the Conservatives would be punished by the electorate for their incompetence. But British politics is in a period of extreme abnormality and the only realistic alternative to the Conservatives is the far-left sect that has taken over the Labour Party who would relish no deal because it would make the winter of discontent look like the summer of love and do to the Tories' long-term electoral prospects what that winter did to Labour's. It would also remove many of the legal and constitutional barriers to the planned economy that John McDonnell has in mind.

There are some who think that Britain needs a short, sharp shock to push the government towards the kind of liberalisation and deregulation that would put a rocket under the economy. A no deal Brexit certainly offers the opportunity to reform the economy but, as Sam Bowman points out, there is no reason to think that the current government - and Mrs May in particular - have any interest in seizing it...

Theresa May is the most illiberal, anti-market Prime Minister the UK has had since at least the 1970s. She seems obsessed with cutting immigration. Her government is pushing through unprecedented new powers to allow the politicians to block or intervene in takeovers of British firms that might come with unpopular job cuts or factory closures. She has brought in price caps in energy instead of doing anything to make the market more competitive or consumer-friendly. Her government cannot stop banning things as trivial as plastic straws, on ludicrously thin evidence that doing so provides any benefit to anyone anywhere.

May would surely be forced to quit under no deal and it is likely that her successor would be more liberal, but it is doubtful whether he/she could bring about sufficient reform in time to outweigh the damage done by tariffs. In any case, no deal would not be a short, sharp shock because it would not be short.

If Brexit is cancelled it will be nauseating to see people like Andrew Adonis gloating but it will be worse to hear them say 'I told you so' when the economy collapses under no deal. The only way for Brexit to end up approximating the Project Fear predictions would be for us to leave without a deal.

There was nothing inevitable about our current predicament and you wouldn't start from here, but now that we're here it would be irresponsible to jump from the frying pan to the fire. The European Commission and the British establishment have won. The Brexiteers have been outmaneuvered. We have lost and it is not worth wrecking the economy and opening the door to socialism to make a point. The only realistic choice now is between remaining in the EU and accepting May's deal. No deal is a no go.

Having said that, I would be delighted to be wrong, so if you disagree with my analysis please leave a comment.

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