Wednesday, 25 May 2016

The IFS report is another one worth ignoring

The Institute for Fiscal Studies have released a report on the economic effects of Brexit. Vote Leave questioned the neutrality of the IFS, saying it was "a paid-up propaganda arm of the European Commission". Such a lazy response that does the Leave campaign no favours at all. But that is in keeping with everything else they do.

The report though, I find to be more white noise. There are only two scenarios they need concern themselves with as far as economic modelling is concerned. That which Vote Leave proposes and that which will actually happen. Anything else is a straw man designed to cloud the debate. If there is any purpose at all in think tanks it is to provide clarity.

The scenario set out by Vote Leave is not only politically improbably and needlessly aggressive it is also a complete fantasy. I think the report is actually far kinder to Vote Leave than I would have been. However, it needs to be restated time and again that economic assumptions based on models require a complete understanding of risks and opportunities. That is where I find fault with this report.

I am willing to concede to the beancounters who watch currency markets for the immediate aftermath. I don't deny that there will be a period of disruption and I'm not going to paint it rosy. It's really up to the public to decide if it's worth it. In that I would would say that hyperventilation notwithstanding, even the 2008 crash was not nearly as eventful for ordinary people as we might have expected. The so-called austerity we have experienced thus far has been timid and not that far removed from what a Conservative government would do in any case. But to quote directly from the report:
In terms of UK trade beyond the EU, it could be possible for the UK to strike better, or faster, trade deals than the EU could. The EU has a head start in that it already has deals with over 55 countries. The UK may be able to ‘grandfather’ these deals, i.e. quickly strike very similar deals. But this is not guaranteed. 
This is where economics must give way to politics. What we do know is that the EU prefers comprehensive trade agreements which extend far beyond tariffs, but anyone watching TTIP or CETA knows that these take several years and are prone to stalling. Improved trading agility using he technique of unbundling (reaching agreements on specific products, sectors or TBT issues) is one of the biggest reasons to leave the EU.

As to what deals the EU has in progress, we do not know when these are likely to be completed nor do we have much of a quantifiable assessment on how useful they are to the UK. As much as we may be able to grandfather such deal or negotiate proxy use of them, there is also the presumption of continuity which could be applied on the basis of the Vienna Convention on Succession of States in respect of Treaties. There are conflicting opinions as to how useful it is but if both parties agree to its use then it is as good a framework as any.

The IFS says that "More generally, the UK would have less to offer countries in terms of access to its own market (the UK’s economy is only around a sixth of the EU’s), but granting access to the UK would be less of a threat to countries keen to protect their own industries. As a single country, the UK may also have less difficulty in reaching a deal."

Bingo! That is precisely why we can prosper outside the EU. In the 1970s, Japan did not import a single piece of fish and it did not use salmon for sushi. That all started to change in the 1980s after a Norwegian seafood delegation visited the Asian country and Project Japan was formed. Today, Norwegian salmon is the sushi fish of choice among young Japanese.

As a result, Norway ended up increasing its seafood exports to Japan by 250% during 1980-1994. Sales of Norwegian salmon to Japan went from next to nothing in 1980 – a mere 2 metric tonnes – to 28,000 metric tonnes of salmon and trout in 1995, 5,000-6,000 of which were for raw consumption.

More to the point there is nothing that says we must work alone. The following extract from The Palgrave Handbook of EU-Asia Relations is illuminating:

What this shows is that, especially as a larger and more important economy than Australia, we can be leaders in coalition building on international trade forums. As much as anything this makes us the kingmaker in any dispute between the US, EU and China. That is leverage we would never have inside the EU. We would be the deciding vote. I also strongly suspect we would join Efta, making Efta the fourth largest bloc in the world. It is ironic that supposedly "isolated" Australia has done more to reform the EU Common Agricultural Policy than Britain has from with in over the last forty years.

The IFS says that "It seems likely that, over time, the UK would, if it wanted, strike bilateral Free Trade Agreements with big countries (Canada and Australia have done so with the US). Switzerland has agreed a deal with China ahead of the EU. It is important to be clear that, despite the name, such ‘free trade agreements ’ do not go as far as the full market integration offered by EU membership."

This to me blows the whole remain case apart. Economists are absolutely obsessed with tariffs and bilateral "free trade agreements". At this point in world trade we have gone about as far as we are going to in minimising tariffs. The huge savings in transaction costs are in eliminating technical barriers to trade. In that regard we would use a combined trade and aid policy to bring trading partners into the fold of international standards thus making them part of what is now an emerging global single market.

We'd be replicating what we have achieved in Europe on a much wider basis. Regulatory harmonisation is real market integration. Thanks to the WTO agreement on Technical Barriers to Trade, EU rules and standards are now entirely subordinate and so by working on a multilateral basis we would be expanding the rules based trading area and bypassing the EU.

The point of Brexit is not only to have our own vote and veto at global bodies but also the free right of initiation. Rather than going via the EU we can host multilateral talks to bring new members aboard, signing them up to Codex and UNECE standards and helping partner nations meet those standards, which itself is an opportunity for UK expertise. In so doing we bypass the largely obsolete bilateral approach.

By way of building greater regulatory harmonisation at the global level we can kick start not only UK exports but also those of the EU. We also make friends and allies in the process which can add to our leverage in global trade alliances.

The EU is often viewed as an unwelcome obstacle to global agreements on trade, often setting the bar too high for emerging economies. Britain can break the deadlock - not least because we are world leaders in soft power. I don't feel I am exaggerating when I say that Britain could kick start a new era in global trade. We would also find allies in pressurising the EU not least as the EU frequently attempts to dominate the agenda in global affairs, squeezing out competitors.

The euro-centric view is that this protectionism helps our economy - using our collective "clout" to get the best for Europe. Except that freezing out African states keeps them poor and it is that which is driving the mass migration to Europe which has its own costs. If we are serious about tackling then global migration crisis then we need to get serious about tackling the push factors instead of building border fences and mounting naval patrols.

Britain is uniquely placed to act as a global facilitator in ways the EU cannot. While economists remain largely ignorant of the vast expansion in global regulatory harmonisation and the shift in focus to multilateralism in removing technical barriers to trade, they are wholly blind to the opportunities that Brexit presents - which is why they are so uniformly glum about their projections.

We are told that if we stay in the EU we are missing out on the opportunity of new agreements with China, but this ignores several factors. Firstly China is doing deals with absolutely anyone who wants one. From Mexico to South Africa. It is thinking decades ahead with a view to global dominance in several markets. MOUs with China are very easily replicated.

But even under the existing agreements we have, anyone who has any dealings with China knows that it is a seriously expensive and seriously bureaucratic process where you need to have serious upfront capital in order to gain access to Chinese markets. Many British companies turn their noses up at trade with China specifically for that reason. It's expensive and it's risky selling goods to an alien market where we don't have particularly good access to consumer data which is heavily protected by the Chinese state and it is not about to share it even with the EU. 

We could be waiting decades for anything even approaching a comprehensive deal with China and be missing about on all the opportunities we could be creating elsewhere. Similarly TTIP is likely to be underwhelming if it does pass, having had much substance already stripped from it. We can do more with agreements less comprehensive in scope and be enjoying the benefits while the EU is still in the queue, forever looking to catch the big fish. 

Not being one who watches currency markets or fluctuations in market indexes, I can't offer any illumination on what will happen in the immediate aftermath of Brexit, but I can say with near certainty that economists are not giving us the full picture because there is a gaping hole in their their modelling - the shift from bilateralism to multilateralism and the globalisation of regulation. On this subject they're not even past first base much less able to offer any projections on the basis of what might happen. 

With this in mind I take the view that whatever market shocks there be they are only temporary, and will rapidly settle down when the government stops spreading panic. Speculative assets may take a pasting for a short while but that's largely not our concern. If you play in the casino you get burned occasionally. We cannot arrange our politics for their convenience. Brexit is about remodelling our approach to global trade while reforming our relationship with Europe in ways that are presently impossible. In that regard any transitional costs should be regarded as Britain's investment in the future.  

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