Two huge developments on Brexit this week.
Two huge developments on Brexit this week.
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.
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.
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.
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.
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!
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.
Members of NATO are meeting in Warsaw. They are dragging the U.S. back into its traditional role of guaranteeing the security of Europe, even though the continent is well able to defend itself.
The North Atlantic Treaty Organization was a necessary part of Containment, preventing the Soviet Union from dominating or conquering Western Europe. But after recovering from World War II the Europeans remained dependent on America.
NATO lost its raison d’etre once the Warsaw Pact disbanded and Soviet Union collapsed. Alliance officials eventually added “out of area” activities, that is, wars of choice irrelevant to Europe’s defense (Balkans, Libya, Mideast, Afghanistan). Such conflicts have wasted lives and resources with no benefit to Europe and America.
The European Union’s leaders said they wanted the United Kingdom to remain in the EU. But Brussels offered only minimal concessions to British Prime Minister David Cameron, undercutting his effort to sell the benefits of continued EU membership.
Now the Eurocrats who dominate EU policy are attempting to push the UK out the door. London should slow down the process and maximize its leverage.
The vote to Leave shocked Eurocrats across Europe. Even many Brexit advocates believed that Remain would carry the day. The British government is not prepared to announce a Brexit program.
However, EU leaders almost immediately began pressing London to act. They want the UK to trigger Article 50, which begins a two-year process to renegotiate a departing member’s relationship with the EU.
Once taken the decision cannot be reversed. And if no agreement is reached within two years the country is unceremoniously defenestrated without any special access to the European market.
But the UK need not hurry. The British government should hold off until it is ready.