Tuesday, 6 June 2017

The Tories are throwing our future away

Take a look at this World Bank report. It reckons that if we departed via the EEA we would only suffer a 12 percent decrease in gross exports of goods from the UK. That's manageable and can be recouped over time.

The Tory strategy is to go for a PTA deal - (preferential trading arrangement). By looking at the agreements that the EU signed in the past, we would expect the new agreement to include around 14 typical provisions. Agreements with this depth guarantee market access for goods and, to some extent services but do not usually go beyond areas that are not covered by the WTO (i.e. WTO‐X areas) other than competition policy and investment.

Estimates suggest that the sharp drop in the agreement’s depth between the UK and the rest of the EU would lead to a 38 percent drop in gross exports of *goods*, 26 percentage points more than in the “Norway” scenario.

In the “no‐agreement” scenario, the UK and the EU do not sign any preferential agreement. This means that areas such as investment, competition policy and movements of capital (just to name key ones) would no longer be regulated by the agreement and the UK would have to pay Most Favoured Nation (MFN) tariffs to access the EU market.

In this scenario, gross trade in goods from the UK to EU countries would be halved, while export of value added would be reduced by 28 percent. According to the estimates, services exports would fall by 62 percent, which implies a 14 and 46 percentage points drops with respect to the intermediate and “Norway” scenarios. Intermediates value added exports would decrease by about a quarter and foreign value added in the UK’s exports would decrease by one‐third.

The worst case scenario they use doesn't seem to account for a lot of the trade facilitated by inter-agency cooperation which is part of a wider global network of agreements. It is unclear whether we can resume those on the same terms later. There is also what we're calling the perturbation factor where the trade system is in such disarray that normal trade cannot function well and we lose a lot more trade that way. If their models are correct (and to me they smell about right, scepticism notwithstanding) and add the peripheral factors I think a no deal scenario would probably result in a 37% overall loss of trade.

Even if we're being needlessly pessimistic an optimistic assessment would probably bring the figure closer to their 28% but that's still pretty much a third of our total trade. Some can be substituted but only after intensive negotiation for emergency continuity measures but in a word, we'd be screwed.

Now I know we've had some long conversations about the validity of economic modelling and forecasting but this model is based on the lawful practicalities of treaties rather than the guesswork of the markets. Prior to the referendum they were all predicting doom on the basis of a currency slide and an instant decampment of business. That didn't happen but if we don't have a deal with the EU they unequivocally will. They said so. I believe them. I would. If we go down that road we are finished as a serious trading nation for more than a decade. Even if we do take the Tory PTA deal we are still looking at a very substantial cut to GDP and major cuts. At least, though, you won't have Romanian neighbours. Happy now?

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