An Article Written by CWS Board Advisor Patrick Minford:
Why the Chequers proposals are damaging and the better alternative EU trade deal
Since the ill-fated Chequers Cabinet meeting much has been written about the faults of Theresa May’s proposals that were agreed that day. In brief these are that they subject UK farming and manufacturing to EU Single Market regulations and in so doing mean that a large part of our economy continues to be ruled by the EU. In addition they mean that we cannot alter the EU standards in these industries, many of which discriminate against non-EU suppliers such as the US, when we enter into Free Trade Agreements with the rest of the world; we can reduce or eliminate tariffs but we cannot eliminate the protection created by EU standards. The New Customs Partnership Mark 2 now supposedly makes setting lower or zero tariffs on non-EU FTA partners feasible; however, doubts remain about the practicality of this proposal too. Finally, some formula about enhanced EU migration in the proposals implies that there will also be free migration in some degree from the EU.
Needless to say, these elements all damage the UK’s economic interests. Our FTA strategy will be less beneficial as we can eliminate less protection and also get less return access from other non-EU countries. We will be unable to optimise regulations in major parts of our economy that will be subject to continued EU rule. Finally we will not gain control of our borders.
The situation is aggravated by the fact that these are just initial proposals to the EU and they may well lead to further concessions against the UK’s national interests.
In this short piece I deal with two questions: first, for what reasons did Mrs. May take this route? Second, what better route could be taken and how would it deal with those reasons?
Why did Mrs. May choose this route?
There is a short answer to this question: UK farming and manufacturing, ‘industry’, wanted it. Whether it was the CBI and such titans as Airbus or JLR, or the Institute of Directors and Chambers of Commerce representing smaller businesses, or a host of individual trade associations, a more or less unanimous howl went up from them that they wanted existing regulations to continue uninterrupted by any new bureaucratic uncertainty. For them it was immaterial who set these regulations or how; they allowed industry to do what it now does and industry did not want them disturbed.
This view was supported across Whitehall, most strongly by the Industry Department (DEIS) and the Treasury, who leaked the notorious Cross-Whitehall Report claiming that there would be huge costs to trade and GDP in border barriers between the UK and the EU if we had a Canada+ trade agreement; and still larger barriers of course in the event of No Deal. Only if industry stayed within the Single Market in goods could the threat of new barriers be removed.
Whitehall and industry combined to make a formidable lobbying force, and dominated No 10’s thinking. It also strongly influenced Tory rebels such as Dominic Grieve and Nicky Morgan. It was put about that the ‘interests of the economy’ dictated a ‘soft Brexit’ in which industry stayed in the Single Market.
What is interesting and a matter for relief is that this argument was not deployed in respect of services, at least in recent months. It has become understood that services are different, that the Single Market in services is of little importance, and the City requires UK regulation by the Bank of England, which has helped to emphasise this point. As services are 80% of the UK economy, the fact that they are not being involved in these proposals means that service regulation at least can be optimised by the UK government. However, even this will be hamstrung by commitments under the Chequers Proposals to keep social and environmental regulation unchanged.
What better route could be taken and could it deal with industry’s concerns?
There is of course a far better route: Canada+. This would mean we would have zero tariffs between the UK and the EU, and also zero non-tariff barriers, together with freedom to see whatever standards were best for the UK home market. Standards on EU exports wold of course remain in place as those mandated by the EU; standards on UK imports would be free for us to determine as part of our domestic decisions on standards. If we liberalised these to permit goods from non-EU countries to be sold here, we would not discriminate against EU imports- they would be free to impose their own current EU standards, which would also meet our new liberalised standards which would be more embracing of variety from around the world.
What then of the threatened surge in barriers between us and the EU? The simple point is that there is no such threat. Any such surge would be completely illegal under WTO rules. Border procedures must be seamless and effectively costless; if existing standards on both sides are met by industry, as they already are, then there can be no sudden withdrawal of trade permissions.
What has happened in our internal political debate is that extreme ignorance of how the WTO works has allowed a Project Fear to take hold among industrialists and the Civil Service interacting with them. They have assumed that the WTO world is a lawless world in which ‘hostile governments’ can ‘make trouble’. Yet WTO law is plain- it mandates seamless border procedures and outlaws discrimination on standards. Furthermore no-one in their right mind would claim that either the UK or the EU would defy international law: both make a particular point of adhering to it, given the centrality of international law to the Treaties on which both take their stands.
How to get back on course?
The present Chequers proposals threaten the UK’s economic interests. They will damage our regulation, undermine our FTAs with the rest of the world, and perpetuate uncontrolled and subsidised unskilled immigration from the EU. Furthermore they may lead to more compromises which worsen these aspects even more. We have not heard the response from the EU but it would be surprising if they did not demand such further compromises.
At some point these proposals as they shape-shift with increasing compromises will become impossible to get through the UK Parliament and will also raise huge concerns in the electorate. For the Conservative Party this could become a suicide mission. The outcome could well be a collapse into No Deal as Parliament refuses to ratify them. No Deal, as we have shown, would be a good outcome for the UK. But it could seriously damage the authority of this government and create political chaos, with unpredictable results.
However, industry, the Civil Service and Tory rebels need to understand that their fears about a plain Canada+ agreement with the EU are quite misplaced. Canada+ would give all the security over border treatment that would occur under the Chequers proposals. But it would also permit the UK to set its own regulations throughout the economy, sign FTAs with the rest of world in the knowledge that less discrimination on standards and so freer trade can be in the policy mix, and recover control of its borders.
Once the government had switched to the proposal of Canada+, the EU’s reaction is known: indeed it offered this outcome some months ago. Why would it not do so? The UK will be a third country from end-March 2019; from a legal perspective, being outside all the EU’s institutions, the only possible agreement for the UK is a trade agreement with the EU as a third country like Canada or Japan.
The problem all along with Mrs May’s proclaimed desire for a ‘deep and close relationship’ with the EU has been that this contradicts third party status. It is ‘half-in, half-out’. Yet the irony is that one does not need to have ‘deep, close’ relations in order to trade with the EU in a frictionless manner, most especially when you start from a situation where all your goods industries satisfy existing standards for exports, in both directions. If either we or the EU were to stop goods at the border on the Friday after Brexit on the grounds that they do not satisfy required standards, when on the Monday before Brexit the very same goods satisfied them, it would be a blatant breach of WTO rules, leading to an immediate WTO court case to outlaw it.
What if the EU refuses to enter into a Canada+ trade deal?
Should the EU refuse to enter into a Canada+ deal, then a plain WTO trade arrangement where we have no EU trade deal at all will work just as well for us. The reasons are the same: ‘access’ to the EU market for us and for the EU to ours is protected under WTO rules. The border must be seamless and as we each satisfy each other’s export product standards there can be no denial of recognition of each other’s standards without breaching the rules on non-discrimination.
The only impediment to our trade will be tariffs on goods each way. These are on average rather low, at around 4%. However they will have a negative effect: on the EU, not on us. To understand why think about how when we leave the EU we will sign FTAs with many countries around the world from which we will therefore buy at world prices with no tariffs imposed from our side. Apart from benefiting our consumers this creates strong competition between all producers, whether domestic or foreign. EU producers are no exception; they will have to meet these prices to sell anything much here at all. So any tariffs we impose they will have to absorb. As for our producers selling in the EU they too will sell at world prices since their competitors here would quickly undercut them if they charged more. Therefore any EU tariffs on them will be paid by EU importers, who can easily do so as EU prices are higher because of the tariffs on world producers.
What this all means is that if we leave the EU without a trade agreement, under WTO rules, and therefore with no transition (which is dependent on a trade deal), the EU carries the burden of paying about £13 billion a year tariff revenue to HM Treasury, it loses our £39 billion budget contribution for the transition period, and the world competition from our FTAs kicks in two years early. This can be costed in present value at around £500 billion. On the other hand we gain present value of £650 billion.
This therefore is a desirable option from our viewpoint, less so from the EU’s- as on top of the monetary loss above it would be technically bankrupt on its budget to 2020 without our budget contribution, given that it is not allowed to borrow. This should persuade the EU to agree to Canada+. But if not, it is their loss.
So bad is the mess into which the poorly thought-out Chequers proposals have plunged the UK and so much worse is it likely to get as negotiations with the EU proceed, that course alteration looks inevitable and certainly highly desirable, as soon as possible. Over the coming months it is essential that politicians start to get a grasp of the WTO world and its workings. Once they do so, the Plan B of Canada+ will come into focus as the superior way to go. However, if the EU refuses to cooperate even on that, we should simply go WTO-rules based trade arrangements all round. This will bring us the full gains from Brexit and by bringing them faster with no burdensome transition period and tariff revenues from the EU, provide an additional fillip on top.
More details of all these arguments can be found in: