Tag: EU

Brexit: What Now?

Two huge developments on Brexit this week.

First, Theresa May’s disastrous EU Withdrawal Agreement (negotiated and endorsed by the EU) suffered a crushing defeat in Parliament, going down by 432 votes to 202. This was a fundamental rejection of a deal with a host of problems. Under any normal circumstances, such a mammoth loss on a key policy would have ended a Prime Minister and a government.

Second, the leader of the opposition, Labour’s Jeremy Corbyn, called a subsequent vote of “no confidence” in the government. But with Brexiteers, including the Northern Irish DUP, swinging back behind the Prime Minister to avoid the possibility of a general election, the government survived (by 325 to 306).

What happens now? The default, set out by law, is that the U.K. leaves the EU on March 29th with or without a deal. It is well documented that there is a clear majority in Parliament who want to avoid leaving without a deal. But there is no clear majority for any of the options necessary to prevent a no deal exit.

I spent some time looking at the parliamentary arithmetic last night, from the perspective of Theresa May. She says that she a) wants to avoid no deal but b) wants to ensure she delivers Brexit. And there is no obvious means of achieving both of these goals.

Option 1: Operation Engage Conservatives

Her first option is to try to get more Conservatives on board to support a Withdrawal Agreement. But the difficulty of her being able to do so is set out by the graphic below. The Brexiteer Conservative rebels either want to completely throw out the Withdrawal Agreement for something new, remove a key provision (the backstop) or else simply leave without a deal. Given the EU has said publicly it will not renegotiate or remove the backstop, this seems a dead end unless May is willing to countenance no deal seriously.

The polling suggests that the Brexiteers were right about the politics up front – if the Prime Minister had pursued an “extensive Free Trade Agreement” Brexit and had not got bogged down in the complex arrangements she’d agreed, then a majority could just about have been eeked through on Conservative and DUP votes, with a smattering of Labour rebels (the no deal and no backstop crowds would have accepted it).

But we are where we are. Unless the EU is willing to reopen negotiations and offer a Canada+ deal for the whole of the UK (ending provisions to treat Northern Ireland differently) then tacking towards Brexiteers is endorsing the prospect of no deal, which May says she does not want.

It remains to be seen, of course, how many of these Brexiteers would actively support delivering Brexit through no deal if the EU rebuffed the opportunity to renegotiate outright. But through revealed preference (rejecting the Withdrawal Agreement), they have surely shown they are willing to countenance that risk.

One clear conclusion of this polling of Conservative rebels though is that there are only a tiny number of additional Conservative votes to be gained from a softer Brexit (single market *and* customs union membership – so-called Norway Plus). Given the commentariat all seem to think this week’s events must result in a softer Brexit, that means…

Option 2: Operation Engage The Opposition Parties

The second option is to give up on Conservative votes and try to reach out to opposition parties. Theresa May has offered Parliamentary talks to their leaders, and other groups of senior Parliamentarians. So far though, the leaders of the Labour party, the Lib Dems and the SNP have all said that their key demand is “taking no deal off the table.” Given no deal is the default Brexit, that essentially means “take guaranteeing Brexit off the table,” something the Prime Minister cannot do without her government likely falling.

The problem with dealing with the opposition parties is that they themselves are divided into two broad camps over what to do next.

Yesterday, 71 of 256 Labour MPs joined the campaign for a second referendum. Add in the Lib Dems, the SNP, the Green, a smattering of Independents who want this too and, say, 20 Conservatives, and there’s still only a combined circa 150 in the Chamber who are strongly for a fresh public vote. Even if the government went in this direction, and took the payroll vote with it, that would not command a majority in the chamber either. An overwhelming number of Conservative and Labour MPs in working class seats still by-and-large oppose a 2016 rerun. This could only happen if the Labour front-bench shift their position.

But the only other option that opposition parties might be interested in is a much softer Brexit: either a full, permanent customs union (Labour’s official position) or a Norway style option. Given 150 MPs would prefer a second referendum, it is unclear how many would opt for this if it was available. The only means of getting it through seems to be with Labour front-bench support, giving blessing to large numbers of Labour MPs to vote with the government. That would tear the Conservative party apart and probably guarantee a defeat in the next election, which would naturally appeal to Labour. But on the flipside, large numbers of Labour MPs in Leave constituencies would consider it highly risky as much of the media would describe as Brexit In Name Only, and the completely unreconciled Remainers would reject it for not fully ending Brexit.

Conclusion

Over the coming weeks, Parliament will likely host lots of indicative votes on all these options. The government has to bring forward a revised motion and try again. But so far the Prime Minister appears unwilling to change much of substance, and it’s not clear where she turns.

Crucial now will be the sequencing of votes by MPs for alternatives. If it gets to a stage where it’s the prospect of no deal against the last perceived line of defense against that happening, then Remainers and soft Brexiteers could unite. For now though, they are hopelessly divided too. Absent further constitutional vandalism endorsed by the Speaker of the House of Commons (a strong possibility), I still believe a no deal Brexit is highly possible, despite media claims to the contrary.

Brexit Update: Talks Reach Crunch And “No Deal” A Strong Possibility

Where Brexit negotiations are concerned, we have reached (as they say in Britain) “squeaky bum time.” The triggering of Article 50 on March 29th 2017 started a 2-year countdown for the UK and EU to negotiate a withdrawal agreement for a binding international treaty. Yet just 5 months from deadline, the EU’s position on Northern Ireland and a lack of domestic support for Prime Minister Theresa May’s desired long-term trading relationship mean a no deal Brexit in March remains a real possibility (the tweet linked here quotes Britain’s trade minister Liam Fox).

True, much of the withdrawal agreement has been long agreed. A transition period through to 31 December 2020 is planned to essentially keep the UK within the EU’s economic institutions (the single market and customs union), though reports suggest both sides might be willing to extend this for an extra year. Free movement of people would continue for this period, and the UK would pay £39 billion into the EU budget. Importantly, though Article 50 states that a withdrawal agreement must take account of the longer term post-exit relationship, this is not going to be achieved in time: the agreement would merely be accompanied with a joint, loose-languaged political declaration on the future framework.

But it’s here where difficulties have arisen, and most center around the Northern Irish border. Both sides have said from the start that, post-Brexit, they want to keep the border between the Republic of Ireland (an EU state) and Northern Ireland (part of the UK) free of physical infrastructure and associated interventions at politically-sensitive crossings. But making that commitment self-evidently necessitates a trade relationship. Given long-term trade arrangements will not be agreed in the withdrawal agreement, the EU has therefore insisted that the withdrawal deal itself contain backstop provisions to ensure the border remained open should another arrangement or trade deal incorporating not be agreed.

This is what led last December to the UK and EU agreeing in principle to a fudged “backstop” position on Northern Ireland. In vintage legalese, the text stated: “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

Given the UK government has said repeatedly that the UK would be leaving the EU customs union and single market, this text raised Brexiteer eyebrows. Yes, the UK government agreed this to kick forward future trade relationship talks, and in the hope it would not be ultimately necessary. But talk of full alignment left ambiguity, and the potential for the backstop itself to keep the UK locked into Brussels’ regulatory and customs orbit. However much the UK government insisted that this language did not mean regulatory harmonization, but instead merely achieving shared regulatory goals via detailed sanitary rules, customs procedures, and the Single Energy Market, the backstop left an uncomfortable feeling that the UK had fallen into a trap.

This was not helped when the EU then rejected proposed “technological solutions” and “away from the border checks” that the UK insisted could have avoided the backstop. The unease intensified when, from February, the EU and Ireland began proposing a backstop arrangement where Northern Ireland alone would remain within the EU single market and customs union to ensure a soft border. This was something out of kilter not only with the text but with the wishes of the Northern Irish Democratic Unionist party which props up the Conservative minority government.

This is all significant because Brexiteers fear now that the Northern Irish border has become the tail wagging the dog not just on the backstop, but on the potential future long-term trade relationship between the EU and UK. They fear the UK is being hoodwinked into a Brexit-in-name-only by threats of breaking up the UK through saying that only a soft Brexit can keep the Northern Irish border without physical infrastructure.

The Prime Minister Theresa May’s proposals for a longer-term trade relationship (known as the Chequers Plan) is Exhibit A. Rather than aiming for the best trade arrangements and then seeking to minimize disruption at the Irish border, the plan seems explicitly designed to keep the border as frictionless as possible, at the cost of an extraordinary loss of policy freedom. Chequers proposes a common rulebook between the UK and the EU on goods and agri-goods trade but not services, where fears of Brussels regulating the City of London alone without a UK vote were reason enough alone for exclusion. Non-regression-like clauses on environmental and labor laws would be included.  A complex facilitated customs arrangement would see the UK collect the EU’s tariffs on its behalf.

This deal has proven anathema to most Conservative Brexiteers, binding as it does the UK to EU goods regulation without voting power over it and stripping away the bargaining chip of goods regulation in making liberalising trade deals with third parties. They see Chequers as an unnecessary loss of sovereignty, and want Theresa May to “Chuck Chequers” and instead negotiate with the aim of a whole of UK FTA and practical solutions at the border.

Incidentally, the EU doesn’t like Chequers either. They rightly see it as cherry-picking parts of the single market, are suspicious of a foreign government collecting its duties and would prefer even tighter integration of lots of regulations (including commitments for full harmonization on labor and environmental laws), such that the UK cannot secure a competitive advantage. Political commentators in the know say Chequers is dead as far as the EU is concerned.

In the EU’s eyes, the preferred long-term options have always been a Canada-style free trade agreement, or maintained UK membership of the single market and a customs union (in essence, a political Brexit but not an economic Brexit). Most Brexiteers very much prefer the former, which comes with more regulatory and trade policy freedoms.

This brings us to the crux of the current political crisis. May’s government have thus far lined up with the EU (and against Brexiteer insistence otherwise) in stating that it’s impossible to solve the border problem satisfactorily through an ordinary UK-EU free trade deal and other practical solutions. They imply that with a Canada-style FTA, Northern Ireland alone would have to remain tied to EU economic institutions to avoid a hard border, effectively creating an economic border down the Irish Sea. Conveniently, May claims that only something like her Chequers plan can avoid this.

But with Chequers seemingly without much support at home or in the EU, the future relationship talks have effectively stalled. With so much uncertainty about it, the backstop agreement has taken center-stage, because de facto that could become the default relationship. And here Brexiteer fears have heightened. Since May insists no UK government would countenance Northern Ireland having different customs arrangements from Britain, she has proposed the whole of the UK remaining in a customs union-like arrangement as a backstop.

Earlier this year she suggested this would last for an extra year beyond transition (to December 2021) and Brexiteers are still keen on this kind of time limit. But the EU says that a backstop cannot be time-limited, because otherwise it’s not a backstop. Brexiteers winced this week when the PM’s position seemingly “evolved” in the EU’s direction, with her suggesting remaining in a customs arrangement as a backstop on a “temporary” but indefinite basis. These fears heightened with news that the EU believed there was not enough time to discuss a UK-wide backstop proposal, and insisting that the withdrawal agreement incorporate a “backstop to a backstop,” with a Northern Ireland-only customs arrangement should a full UK-wide agreement fail to be agreed.

For many Brexiteers, the major economic benefit of Brexit is the ability to conduct independent trade policy, cutting deals and setting tariffs. An indefinite customs arrangement threatens this. Given the EU would seemingly prefer the whole of the UK to remain within its economic institutions, a non-time-limited customs backstop provides little incentive for the EU to agree to a future comprehensive free trade deal the Brexiteers desire.

Combined with Chequers then, Brexiteers fear a huge sell out is on the cards. The UK government’s official position has always been that the country will leave the EU single market and customs union. But now both Chequers and the backstop risk are seen to keep the UK within these arrangements to varying degrees.

The result is a political crisis. The PM this week updated the house on the negotiations but could not provide assurances any customs arrangement backstop would be time-limited. She has since floated and then rowed back on extending the transition period, something that would see UK taxpayers pay for at least another year of EU funding, without settling the backstop issue.

As a result, everyone is unhappy. There is talk of Brexiteers dethroning May as a last gasp attempt to push for the Canada FTA-type deal the EU has offered. The DUP are threatening to derail the government’s domestic legislative agenda should the PM allow Northern Ireland to be treated differently. The hardline Remainers, meanwhile, are pressing for a second referendum on any withdrawal agreement May brings back.

With the clock ticking, and stakes rising, the prospect of no deal is therefore heightening. The EU has engineered a situation where in the long-term it insists either the UK must sign up to a backstop where Northern Ireland must be effectively economically annexed, or the UK must remain locked in the EU’s regulatory and customs embrace itself.

The Brexiteers (to my mind rightly) consider this unacceptable. Ignoring whether a change of Prime Minister or strategy is perceived as bad faith negotiating by the UK, it does not seem an extreme position to say that the EU should not have the right to dictate the economic breakup of a sovereign country, nor determine its domestic economic regulations. But at such a late stage and in such a febrile political environment, who knows where this multi-actor game of chicken ends?

Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

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Why All Went Quiet on the Western Trade Front

Although many hailed last week’s “trade agreement” between President Trump and European Commission President Jean-Claude Juncker as an important achievement, it included no firm commitments to reduce tariffs, non-tariff barriers, or subsidies—or to do anything for that matter. The only agreement of substance was that new tariffs would not be imposed, while Washington and Brussels negotiated longer-term solutions to problems both real and imagined.

Those hungering for some good trade news might call that progress, but the only new tariffs that were under consideration (outside the exclusive domain of the president’s head) were those related to the Commerce Department’s investigation into the national security implications of automobile and auto parts imports. Of course, that investigation is still proceeding and there’s no reason to think Trump won’t leverage the threat of imposing auto tariffs to bend the outcome of those EU negotiations in his favor.

So what does Trump want? Trump seems committed to prosecuting a trade war with China and he expects the EU to have his back in that fight. Trump’s tariffs on $34 billion of Chinese products are scheduled to expand to $50 billion in early August and potentially to $250 billion in September. In a recent CNBC interview, Trump even threatened to subject all Chinese goods—more than $500 billion worth of imports in 2017—to additional tariffs.

For the first $34 billion, China has retaliated in kind, targeting mostly agricultural, aquaculture, and meat products. Beijing has pledged to go tit-for-tat throughout, even though its retaliation would have to take other forms—such as penalizing U.S. multinationals operating in China—because annual U.S. exports to China are in the neighborhood of only $130 billion.

The only real factor constraining Trump’s trade war is the potential that workers in red states will abandon the cause and turn on him. But so far, even as domestic production and employment are threatened as a consequence of the tariffs and the retaliation, Trump’s base still seems to be supporting his unorthodox, zero-sum approach to trade. Last month, a worker at Wisconsin’s Harley-Davidson facility, which will be downsizing as the company shifts production to Europe as a result of the EU’s retaliatory tariffs, said of Trump: “He wouldn’t do it unless it needed to be done, he’s a very smart businessman.” That worker and many others agree that the United States should be throwing its weight around to obtain a larger slice of the pie—even if that process ends up reducing the overall size of the pie.

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Steel Yourself as Trump Cuts Off Trade to Spite His Face

Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States. This seldom used statute gives the president broad discretion both to define what constitutes a national security threat and to prescribe a course to mitigate the threat. On both counts, President Trump has abused that discretion.

In March, the president announced his intention to impose duties of 25 percent on steel imports and 10 percent on aluminum imports from all countries. But temporary exemptions were granted to some countries in an effort to extort commitments from them to do their part to reduce the U.S. trade deficit (by selling us less stuff and buying from us more stuff) or to agree to U.S. demands in ongoing trade negotiations (South Korea, Canada, Mexico). The Koreans succeeded by agreeing to limits on their steel exports and by upping the percentage of US-made automobiles that can be sold in Korea without meeting all of the local environmental standards. Ah, free trade…

Apparently, the Europeans, Canadians, and Mexicans haven’t bent sufficiently to Trump’s will, therefore those countries—those steadfast allies—constitute threats to U.S. national security and will no longer be exempt from the tariffs, which means that U.S. industries that rely on steel and aluminum (imported or domestic) will be hit with substantial taxes to mitigate that threat. Got it?

This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion—that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.

So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.

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U.S. and EU Trade Barriers Are Too High: Bring Back the TTIP!

In response to threats of retaliation by the EU over his announcment of steel/aluminum tariffs, President Trump has been complaining about high EU trade barriers. Here’s a recent tweet of his:

If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!

And here’s something he said yesterday:

“The European Union has been particularly tough on the United States,” Mr Trump said at Tuesday’s joint press conference with the Swedish prime minister.

“They make it almost impossible for us to do business with them,” Mr Trump complained.

President Trump is right: EU trade barriers are too high. In addition, U.S. trade barriers are also too high. Here’s something I wrote a few years ago about tariffs:

In the context of the recently launced US-EU free trade talks (formally, the “Transatlantic Trade and Investment Partnership,” or TTIP), commentators have noted that tariffs between the US and EU are low, and thus the key part of the talks will deal with so-called regulatory barriers to trade. An article in Inside U.S. Trade observes: “Overall, the U.S. average tariff rate is 3.5 percent, although the average tariff rate on goods that the EU actually shipped to the U.S. last year was even lower, at 1.2 percent, … .”

But these average figures mask some significant “tariff peaks.” There are lots of individual tariff rates, so if many are low or zero, that makes the average figure fairly low; nonetheless, there are plenty of high tariffs still out there. The same article points out some US and EU tariff rates that may come up during the negotiations. Here is the US:

— U.S. light trucks tariff of 25 percent; a tariff on wool sweaters of 16 percent; a tariff on sardines of 20 percent; a tariff on tuna of 35 percent; and a tariff on leather at 20 percent

Here is the EU:

— applied tariffs on honey of 17.3 percent; carrots at 13.6 percent; potatoes at 14.4 percent; strawberries at 20.8 percent; lemons at 12.8 percent, beef at 12 percent; and lamb at 12 percent

And all of those tariffs add up:

— the U.S. collected about $4.5 billion in tariffs from EU products in 2012. … [Of this amount,] $900 million comes from imported German cars; about $260 million comes from Italian clothes and shoes; and about $72 million comes from cheese imports.” 

And regulatory trade barriers are even higher.
 
So perhaps there’s a way out of the back and forth threats of tariff retaliation going on right now: The two sides could restart the TTIP talks, and bring down barriers on both sides.
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The Economic Doom-Mongers Have Been Wrong on Brexit So Far

For an economist, it’s rare that events occur enabling us to directly test our economic theories and assess them against outcomes. Britain’s Brexit vote last year was one such moment. As the formal Article 50 process for EU withdrawal begins today, it’s worth re-examining the consensus view on what a “Leave” vote would mean. Those warning of impending doom today are many of the same people who predicted a decision to exit would bring immediate economic slowdown.

The Economists for Brexit group of which I was a founding member was busy refuting anti-Brexit reports pre-referendum. Britain’s Treasury led the way, claiming GDP would be 6.2 per cent smaller after 15 years if Britain exited the EU and single market (replaced with an EU-UK bilateral trade deal, as Prime Minister Theresa May now desires). Importantly, they forecast the mere act of voting to leave would trigger an immediate 4-quarter recession with 500,000 people losing jobs, higher inflation and lower house prices. There would be a “profound economic shock.” The IMF warned that a path towards leaving the single market would mean a recession in 2017. The OECD predicted a “major negative shock.” An Economists for Remain letter signed by 12 Nobel Laureates likewise said “a recession causing job losses will become significantly more likely.”

Yet the UK economy has proven robust. Immediate financial market turbulence following the unexpected vote quickly subsided. Far from contracting at the Treasury’s forecast 0.4 per cent annualized rate, the economy is currently growing at 2.8 per cent per year. The employment rate for 16 to 64 year olds is at its highest ever level, 74.6 percent, with unemployment at just 4.7 percent. House prices are currently increasing at 6.2 per cent per year. Annual broad money growth was 6.6 percent in January – suggesting robust nominal GDP growth through 2017. Even after Theresa May pledged to leave the single market and customs union, forecasters were revising growth estimates upwards for 2017.

The economic consensus did forecast correctly the pound’s fall on a trade-weighted index (around 13 percent decline), as did the Economists for Brexit analysis. This will raise the UK inflation rate. But even the recent uptick in inflation to 2.3 percent is in part driven by increasing commodity prices affecting U.S. and German inflation rates too. The flipside has been strong export order books, highlighted by the Confederation of British Industry’s buoyant survey last week. What happens to the pound in the longer term of course depends on the economic fundamentals, but what is clear is that so far the doom-mongers have been wrong on the macroeconomic impact overall.

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