Wednesday, 24 August 2016

Trade will always be an imperfect system. It's time we admitted it.

I broke my cardinal rule on the blog last night. I made a passing comparison of the EU to the USSR (now edited). From the point of view of the reader, it sounds ridiculous - but in the context of what I was thinking, the comparison is valid. It is harder now for a third country with no preferential access to the single market to get goods into the EU than it was to get goods into the USSR.

That says quite a lot about how customs systems and standards compliance have evolved - and we are now inspecting at a whole new level of detail. There very much is an iron curtain - a firewall of red tape and compliance - and this is why the developing world finds EU trade frustrating. The relationship is wholly asymmetrical where the EU is wholly at liberty to export - but there is no reciprocality. On those grounds the EU, when it comes to movement of goods, is probably worse than the USSR was.

The USA is the same. Trucks entering from Mexico without the proper compliance documentation are subject to intense screening. There's actually a good example demonstrated in episode 8, season 2 of Better Call Saul at the beginning. It causes delays - it costs money.

This kind of border inspection has the potential to spoil goods, especially fresh produce. This is why the UNECE TIR convention is being adopted by a number of new countries and it forms the basis of a new African free trade area so that lorries may pass through countries without inspections. That way the only pinch points are the ports.

In order to remove the necessity for port inspections the EU has a customs union but the same effect can be achieved with a mutual recognition agreement on conformity assessment. Both parties agree that the standards and means of inspections (along with the qualifications of the inspectors) are equivalent. Such is subject to random audits.

And while this is not a free trade agreement it very much is a trade agreement and if we broke away from the EU unilaterally as the Tories propose then very soon we would be in a real mess.

As it happens the EU has a number of these agreements not just with third countries but other blocs where the EU is satisfied there is sufficient conformity. At this point it should be pointed out that a mutual recognition agreement is not necessarily a standard agreement. They are all specific to the partner country or bloc. There are some provisional agreements with African nations but they do not cover all sectors. Specific authorities have their own agreements. For instance the EU's medicines agency is working toward an MRA with the US FDA (Food and Drug Administration).

The process of trade now is to seek out new areas of regulatory harmonisation and customs cooperation. This is why my eyes roll when toryboys talk about tariffs. It's just one tiny element of trade. They seem determined to ignore the significance of regulation. To them it's just a matter of "cutting red tape". Nobody wants to be sullied by this level of detail - especially when in their imaginations we are going to have a bonfire of regulation and let the markets decide.

While you could get carried away with such radicalism, it overlooks the need for phytosanitary measures and disease control among both humans and livestock. It's also matter of quality control. You buy goods with confidence specifically because we do spot checks of formaldehyde on plastic produce. It's why we don't import cheap electronics that electrocute people.

There comes a point though, when all of this amounts to a hefty regulatory burden that slows down trade. Technical barriers to trade are increasing. The ideologue would simply take an axe to all of the technocracy - but these would be the first people to complain when Waitrose is no longer stocked full of pristine quality checked goods. So then the process of removing red tape becomes a matter of making better regulations informed by science. It becomes a matter of systems integration and harmonisation. Trade then becomes a delicate process of agreeing common standards and common data structures. And when we have world trade, it helps if there are global standards.

This of course means making multiple compromises and making broad brush agreements at a level where there is nothing even approaching democracy or accountability. The EU is one such example. The toy parliament is neither here nor there. MEPs do not get to tinker with standards and regulations. It is literally above their paygrade and ability.

So then in come the finer philosophical questions as to who decides these things and under what circumstances can they be opposed or ignored. The EU approach has been to demand uniformity throughout and demands universal conformity. And there is a lot of sense in doing it that way. But there are losers as well as winners and it raises the bar to market participation. As much as you must have expertise on how to make your product you must also make it conform to the standards and meet the shipping regulations.

Libertarians argue that this means adding extra costs that freeze out the little guys and stifles innovation and competition. They are absolutely right. But then there are positive and negative liberties. Is the "little guy" perfectly at liberty to make ramshackle electronic goods that may electrocute the user? Of course not. The market (or rather the people) demand a degree of conformity and testing. Moreover, it reduces negative externalities.

You might have notice in recent years the Fire Brigades Union opposing attempts to merge the Fire Brigade with the ambulance services - creating a uniform rescue service. But it will happen simply because incidences of house fires have collapsed by more than fifty percent in the last twenty years. We don't have coal fires, we have safe gas systems which are heavily regulated and we have electronics testing so that electrical fires are now rare. This means we don't need an extensive fire service and household insurance is now cheaper than ever.

So if the complaint is that our iron curtain prevents the rest of the world trading with us then it becomes a question of bringing the rest of the world up to global standards. This is known as trade facilitation. It is the only game in town when it comes to boosting trade. But it costs money and takes time. And even if we can secure mutual recognition agreements these systems have to mature and trade is then only as good as the physical infrastructure - the ports and the roads. This is where the major investment opportunities are and that is where we can boost our exports in services.

Underpinning all of this is a myriad of bewildering agreements of different types. There are more than ten categories of trade agreements each with their own methodologies for achieving harmonisation. Then there are comprehensive agreements like TTIP which span nearly all of them.

The truth is that the world is no simpler for leaving the EU and there are no silver bullets for getting round the technocratic burdens. It is a process of negotiation and constant evolution where the process is dry, opaque and remote. Part of the opposition to TTIP is because it is shrouded in a fog of complexity that leaves electorates suspicious of what their government is doing in their name. At the stroke of a pen industries can be wiped out in the name of the common good. One day your business is compliant. The next day it isn't.

That's actually why Brexit is ultimately necessary. Trade is becoming more complex where the bigger and more ambitious deals can do as much harm as good. The EU does not allow for exemptions and waivers. The EU is too wedded to the idea of a single uniform marketplace where nobody has a commercial advantage. They call this a level playing field - when in fact it's just a brake parachute that ensures nobody gets ahead. That is why European trade is stagnating and the EU is becoming less competitive.

In trade terms we need to be thinking more along the lines of little and often rather than looking for trade bazookas like TTIP. It really is a hare and tortoise game. Politicians like the idea of big solutions to complex questions but in reality it is a patchwork of incremental policies that bring about the biggest gains. This is why the global approach is better. Multilateral forums with no central authority as such.

The WTO approach does not insist on conformity. It allows the world to evolve at its own pace. Instead it has a system of arbitration where complaints can be brought to it if a nation can demonstrate that an action in contravention of an agreement harms their own trade. This approach allows nation states maximum sovereignty in a world where absolute sovereignty no longer exists. It formalises informality but in a less restrictive way.

The EU approach is the search for a non existent ultimate harmony - a utopian order to trade that becomes more elusive the harder you strive for it. World trade will always be chaotic. Billions of people making trillions of transactions daily with new innovations surpassing our ability to regulate and control. So what we want is systems that facilitate trade while reducing harm - which maximise profits and supply chain efficiency while protecting the customer. At the same time we must safeguard that which makes us distinctive and the system must be fair.

That is why trade regulation has no endgame. It is a continuum where the system is never complete - where every nation must speak to every other nation. Having a rogue entity like the EU commission making agreements on behalf of all of Europe means making decisions for half a billion people when it cannot possibly know who the winners and losers will be. We need to recognise that there is no perfect system and no endgame and build transparent institutions that allow nations to get the best for themselves according to their own talents and resources. We must stop looking for easy answers.

Ultimately a dogmatic and ideological approach to trade means trampling on the rights of nations - making demands for sacrifices they have had no real say in. That can never be democratic nor can it maximise trade. It can only ever enforce mediocrity. Brexit is an opportunity to change the way we do things and play the game by a different set of rules. We won't be having a bonfire of regulations but we can at least make sure that our voice is heard and that we retain the right to say no. Without that, we make ourselves slaves to a machine where the greatest crime of all is to be different. That is not a world I want to live in.

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