Monday, 21 August 2017

Brexit: why the WTO option is a terrible idea

One person I never managed to meet during the EU referendum, despite extensive networking and travelling, was Patrick Minford. In fact, the only instances in which colleagues and I would mention his name were after his often disastrous appearances both on television and radio. At the time, I was paying zero attention to the merits of what he was saying, or indeed to the World Trade Organisation (WTO) option more widely, but most discussion about him at Vote Leave went along the lines of: 'he admits that unilateral free trade will kill UK manufacturing, he's unhelpful'. I agree with this more now than I ever have. 

What confuses me is why he, a stand-alone economist and advocate of the WTO option, receives unique and fairly widespread press coverage. The Leave campaign was routinely mocked for lacking support amongst economists, most notably by Faisal Islam in his interview with Michael Gove. But we had Patrick Minford in our corner, whatever that amounted to. His influence during the referendum was limited, but his ideas did, and still do, occasionally filter through into the domain of the mainstream media. This is probably more so a reflection of the fact that most economists (probably sensibly) reject Brexit, and less an illustration of the usefulness of Minford's ideas. 

In his new report on trade, misleadingly entitled 'From Project Fear to Project Prosperity', he asserts that a hard Brexit, one which takes the form of the WTO option (which I will explore more extensively), can offer the country an economic boost in the region of £135bn. Astoundingly, this claim is slapped front and centre of the BBC news website, making it difficult to miss. The paper will be published in full at some point during the autumn, but the introduction is already available for reading. From what I gather so far, this new report will be of very little use to the accuracy of the public debate around Brexit. Take, for instance, Minford's summary of what a 'soft' Brexit is:

"What they mean by ‘soft’ is a Brexit that changes the status quo minimally: in it, we retain the customs union and the single market and consequently also the EU’s freedom of migration. This status quo agreement would promote the interests of existing producers who obtain protection from the EU through its high trade barriers on food and manufacturing, who benefit from EU regulation that supports the aims of large lobbying businesses against smaller competitors and who gain from taxpayer-subsidised cheap unskilled EU labour."

He refers to the notion of a soft Brexit as a 'fallacy', which is more than a little ironic given that he favours a trading relationship with the European Union which has been adopted by no country in the world. Other states rely on a variety of trade agreements, from FTAs to customs cooperation agreements to Association Agreements. Minford also incorrectly states that soft Brexiteers call for a stay in the Customs Union, for which there is no economic or political need. EFTA EEA states (Norway, Liechtenstein and Iceland) have not remained inside the Customs Union. Instead, through Protocols 10 and 11 of the EEA Agreement, they have committed to mutual border inspections programmes. 

But I digress. The nature of his comments about softer forms of Brexit are perhaps for a future blog post. Instead, we should be focusing on Mr Minford's ideal: what is called either the 'no deal' option or the WTO option; the hardest form of Brexit thus far proposed and one based upon unilateral free, tariff-less trade. I now worry that with the exposure granted to next month's paper on the economic benefits of a (very) hard Brexit, support for this plan will fester amongst the chattering classes. We may even end up witnessing the conversion of a think tank or two. Certainly, with politicians like Theresa May and Nigel Farage regurgitating the myth that no deal is better than a bad deal, I wouldn't rule these things out. The issue is that if it wasn't so dangerous I wouldn't have much of a problem with that. But it is. 

The WTO option essentially says that Brexit negotiations with the European Union aren't necessary. Instead of finalising Britain's exit with a series of cooperative agreements, single market membership through EFTA or a definitive Free Trade Agreement, we will after Brexit day rely solely on GATT (General Agreement on Tariffs and Trade) and WTO trading rules. In other words, there ought to be no specified bilateral trading arrangements with the European Union in place of membership at all. It sounds simple, but even as we delve into the issue of tariffs (stupidly saddled as the be-all-and-end-all of Brexit trade discussion), the picture muddies somewhat. 

Tariffs

I have recently figured out that a good way to spot a liar or a fraud in the Brexit debate is to look for those who talk about trade purely in terms of tariffs, ignoring the importance of NTBs as they go. If you follow this principle, you will soon be able to differentiate between those who are reasonable and have a clue and those who simply don't pay any attention to the issues. What is especially demoralising is the fact that so many agencies, websites, think tanks, parties and politicians are guilty of this. Even a certain former UKIP leader still maintains that 'no deal is better than the rotten deal we have today', and cites ceaselessly the size of our EU budgetary contributions in relation to tariffs as a way of justifying this claim. And still many believe he has a use in returning to frontline politics. 

I am not so worried about the significance of tariffs as I am more pressing matters, like customs cooperation in the event of single market departure or the obstacles presented to us by non-tariff barriers. Since referendum campaigning began, most discussion about post-Brexit trade has revolved purely around tariffs. This is a problem. I don't disregard their role in modern trade, but I do think we place too much emphasis upon them. Free Trade Agreements, for instance, tend to focus far more intensively on achieving regulatory convergence (something the IEA appears to scorn at) and dispute settlement than they do tariff negotiation. This is partially because tariffs have plummeted internationally, so figurative reduction has become a less pressing issue. 

But, to focus on tariffs momentarily, which we ought to remember do not apply to services, it is important that we address the argument that since we import much more from the EU in the way of goods than we export, Brussels will not seek to impose upon us any vindictive, predatory tariffs. To assert this is to overlook the mechanics of reverting to solitary, national membership of the WTO (as opposed to the current regime of sitting under the umbrella of the European Union). This leap of faith fundamentally ignores established trading systems and the very WTO rules Mr Minford is so keen on abiding by. 



Upon leaving the EU and relying upon WTO rules to trade, Britain acquires the status of 'Most Favoured Nation' (MFN) when trading with the EU. This is automatic and occurs in conjunction with the international trading system. Under WTO rules, as pictured above, the EU (as a WTO member in its own right) would be legally obliged to impose upon the UK the same tariff schedule as it does other members, so as to avoid discrimination and promote equal treatment. As an EU member, the UK benefits from tariff concessions organised by the bloc thanks to years of negotiated, individual trade agreements with other countries. This may seem like a contradiction. How can the EU arrange preferential tariff arrangements with countries it has entered into agreements with, given established WTO rules about discrimination?

The answer is given in Article XXIV of the General Agreement on Tariffs and Trade 1994, as interpreted to mean: 



As the European Union is a customs union, it is able to modify concessions in ways that other members cannot. This has for a long time been one of the trading benefits of European Union membership (note, not single market membership). But here is the kicker. As we have outlined, ordinary WTO members, as Britain would be, must apply tariffs and treatment equally to all other members. This means that Britain could not in any legal sense retaliate by imposing spiteful tariffs against imports from the EU without doing the same to all other WTO members. A point must be made here that the WTO option is dangerous in that it essentially threatens a protectionist race to the bottom. 

Non-tariff barriers

As the Leave Alliance has spent many years now explaining, the country ought to be turning its attention towards non-tariff barriers in order to compliment its attitude towards post-Brexit trade. Tariff imbalances are only the first major problem with the WTO option. The problem with NTBs is that they cannot be overcome or reduced as easily as duties can. Regulations are structured by countries often for complex domestic reasons, such as for the sake of protecting the environment or dealing with organised crime. As a member of the European Union, and thus the single market, Britain currently enjoys regulatory convergence with the continent and a removal of internal frontiers once goods are past the external EU border. 

After leaving the EU and relying instead upon WTO systems, the UK would be guided by the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Sanitary and Phytosanitary Measures (SPS) for its dealings with non-tariff barriers. The issue here is that this multilateral system of NTB reduction is not optimal, especially for a country which has just left the comfort of the EEA. This is primarily because without the intimacy provided by bilateral trade agreements, dispute settlement is tricky and long-winded. A long-running dispute between Airbus and Boeing, lodged in 2004 and mediated through the WTO system, has still not been settled.

Another important facet of global trade are what are called Mutual Recognition Agreements (MRAs). Mutual recognition of standards is a vital aspect of customs cooperation, and such agreements tend to be built either into Free Trade Agreements or as separate MRAs. MRAs deal with assessing conformity to regulations; they test whether or not the exporter or importer has obeyed the necessary standards when (for instance) constructing, treating, labelling or transporting a good across borders. With an MRA established, a country can rely on agreed domestic mechanisms to produce the required paperwork allowing for cross-border transportation. 

Working solely with WTO rules, the UK would not benefit from existing MRA practices. Major economies recognise the importance of such agreements; China, Japan and the United States all have conformity agreements with the European Union to improve trade flow. Achieving uninterrupted trade flow as an independent WTO member would be incredibly difficult as verification of standards conformity would be more time-consuming and in some cases non-existent. It is in reference to trading obstacles like this that so many commentators have expressed concerns about lorry hold-ups on motorways or massive delays at ports. Drivers or shippers at entry points to the EU may be refused entry or have to undergo lengthy documentation procedures in order to continue the journey of the goods they are transporting. Such worries are entirely reasonable, and will form much of the trading picture if Patrick Minford is to get his way. 

Further thoughts

Brexit is not just a question of trade. It is a massive diplomatic and legal undertaking which transcends large segments of public policy. The WTO option is unclear about Britain's place in a variety of schemes led by Brussels, such as Erasmus, the student exchange programme. There isn't any useful WTO clarity, by definition, around issues which aren't relevant to trade. It is therefore impossible to argue that Britain and the EU can untangle from one another and co-exist without the provisions of any political or economic agreements whatsoever. 

To argue that this is acceptable, as does Professor Minford, is absolute lunacy. He still isn't helping the Brexit debate, and my concern now is for the number of people who pay special attention to his views and use them as a template for leaving. He is an academic, but more importantly he was an economist in favour of Brexit, so he is likely to generate substantive support amongst quite a few Leave voters. I don't mean to rain on their parade, but his policies are dangerous and completely counter-productive both for Leave in general and for the productivity of the country. More startling is the fact that whenever he reemerges on our television screens and news websites, he appears to express exactly the same opinions again and again and again, apparently without any real modification or reflection at all. Minford, now a principle barrier to an orderly Brexit, must be ignored at all costs.

2 comments:

  1. Minford's current intervention, along with the IEA's recent publication (publication being a polite word for what is basically a steaming pile of male bovine excrement), is simply fodder for the "hard" Brexit press to use in their attempt to bolster support for the kind of departure they want, which is to say the worst, most ruinous departure possible but meets their owners requirements.

    "This is probably more so a reflection of the fact that most economists (probably sensibly) reject Brexit"

    Are you saying that all those economists, you know, the vast majority, are correct to reject Brexit? No wonder Gove was so keen to discredit them eh?

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  2. yes the fiction, the historical revisionism is that this was not pointed out during the referendum campaign

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