Corbyn & Brexit

Perhaps this article is damaging.  Possibly it makes sense to keep quiet and hope for a strong Labour showing.  Maybe Brexit with Labour will be better or at least not so bad.

But we have to be honest, at the head of Labour is Corbyn & behind him are the hard left figures who’ve been there since he was first elected.  So what can we say about this man who displays “integrity, honesty & clarity”?

Clearly, the key to Corbyn’s appeal is that he is an honest, decent, different kind of politician.  A man of integrity.  Yes, he may not be polished or media friendly but he means what he says.  He’s someone you can believe in.

corbyn integrity

However, there has also been the persistent rumour that he wasn’t really a Remainer at all but a secret Leaver who fronted a lackluster Labour Remain campaign.  This is particularly important as many of his supporters were young, ardent Remainers who have the most to lose from Brexit.

This rumour has been dismissed by these same supporters as agitation by bitter “Blairite” MPs. Lets consider some of the evidence:

We now have the Labour Manifesto, and this comment from Ian Dunt on it’s contents:

corbyn

Is this fair? Has Corbyn always been in the 3rd anti-single market camp?

jceu

This was a comment from Sept 2016 made by a Corbyn aid.  It’s a confusing message (not least because it fundamentally misunderstands the single market) however it clearly mentions Corbyn’s issues with State aid & nationalisation with regards to the EU & the Single Market.  He was “campaigning against” these “aspects” of the EU in the middle of a campaign to stay in the EU.

How can you be for the EU if you have always wanted to engage in significant nationalisation & state aid programs?  If Corbyn believes that the new Manifesto would be incompatible with these aims, then how could he be a remainer?

 

We need to cast our minds back to September 2015, when Corbyn had his first surprising leadership win.  His historical anti EU stance was well known & the PLP knew the referendum was coming so they all met him to question him on his plans and thoughts. He’d been elected by a significant number of new Labour supporters however these supporters were overwhelmingly pro-remain & he had no support in the PLP.

If it became clear that he was still as anti EU as he had been his entire political career, what impact would this have had on his new support base?

However, following the meeting almost all of the PLP were convinced (or let themselves be convinced) that he really had adjusted his views on the EU (they quickly changed their minds after the result but that’s another story).  One however, Chuka Umunna, wasn’t.  He resigned the bench, saying this:

It is my view that we should support the UK remaining a member of the EU, notwithstanding the outcome of any renegotiation by the prime minister, and I cannot envisage any circumstances where I would be campaigning alongside those who would argue for us to leave; Jeremy has made it clear to me that he does not wholeheartedly share this view

But OK, perhaps he’s seen sense since that point nearly 2 years ago, perhaps he did learn to embrace the EU?

Well, lets look at this tweet:

Corbyn

And lets consider the 3 major campaigns we’ve seen him in, 1 leadership, 1 General Election and 1 for remain.  We know that against considerable hostility, in his leadership campaign & the GE we saw him get his message out and show real enthusiasm and be passionate, even inspiring.  Huge crowds, great oratory, even genuine leadership.

However, on the campaign that wasn’t about his own personal success, Remain, he was barely seen.  Few TV spots, lackluster performances.  In fact if you go back and watch his 2 TV appearances for Remain you’ll see him being glum, qualified, tired.

And now he’s the strongest voice in Labour for a complete break with Europe. He’s whipped his party to an unconditional Article 50 passage and his manifesto is full of economic nationalism.  His speeches about British Steel show his deep commitment to state aid and a managed economy, impossible under the EU.

So no-one can seriously, honestly compare & contrast the last few weeks of the election with the Remain campaign and say he was equally passionate for Remain as he was for his own personal success. At best, he didn’t care, at worst, well.

 

So, did Jeremy Corbyn really change his mind on the EU in 2015 (whilst maintaining all of his other 40 year old beliefs, including those on state aid & nationalisation but on this one issue lining up with his new supporters), lose the referendum with sadness, ask for immediate Article 50 invocation “by mistake” and then think “well, there’s no chance of staying in the SM so we may as well put in place all the nationalisation & state aid programs the EU was stopping us doing”?

a50

Or was Chuka Umunna right?

Because if he was right, then Corbyn was never really a Remainer.

And if he wasn’t, then he misled all those thousands of new supporters at the worst possible time.

And if that’s true, then the whole persona of a “decent man of integrity, not like all the other politicians” comes crashing down.  And ultimately that’s all he has.  He’s not politically skilled, he’s not particularly brilliant and he’s certainly not worldly wise.  The whole pitch is a simple man of honesty & integrity.

Of course I can’t look inside his head and see if it’s got “Leaver” or “Remainer” running through it, I can only consider the evidence.  Barring a few speeches he gave off camera to the faithful there is little proof that he was actually for Remain and, as mentioned, the contrast between the 3 campaigns is frankly startling.

But if he really was always a leaver, and if you’re a Corbyn supporter (as opposed to perhaps a Labour supporter) then surely you have to re-examine this.  Because if Corbyn really is a true Leaver it will be seen as one of the greatest political betrayals in British history, a committed Leaver supported by an army of staunch remainers, who worked to move us away from the EU in order to implement a 40 year old socialist program.

And who was also, by the way, careless or disinterested about the effects it would have on the people he’s supposed to care about.

Brexit Fantasies – They need us more than we need them

Summary

  • Around 60% of our trade goes to or through the EU
  • Around 10% of EU trade comes to UK
  • In the event of a “No Deal” exit from the EU, EU-UK trade will not cease but it will significantly reduce
  • From a UK point of view a reasonable estimate of a 25% reduction in trade creates a £75 Billion trade gap or 15% of our total trade
  • From an EU point of view the reduction could be 2% or less of total trade for many countries, several could see little or even no loss of trade
  • All countries however get a veto on the final deal and so therefore the UK is in the weakest possible position in terms of negotiations
  • We need them far more than they need us

 

 

As Brexit continues there still appears to be a significant thread of thinking which maintains “they need us more than we need them”, in other words, the EU is bound to cave in because they sell far more to us than we do to them and therefore a “no deal” scenario would hurt the EU far more than the UK.

If this is true, we have a strong hand.  If not, we’re bluffing, and we will be caught out.

So let’s examine this, step by step.  Many figures, quotes taken from fullfact.org

EU/UK Trade position

It is true that there is a large trade deficit between the EU & UK:

The value of trade to the UK and the rest of the EU—we exported about £230 billion worth of goods and services to the rest of the EU in 2015, according to UK data, while the rest of the EU exported somewhere around £290 billion to us.

It is this £60 Billion deficit that drives much of Leave thinking on why they need us more than we need them.  However, If you look at that deficit on a country by country basis March 2017 Trade with other European countries RB

it becomes clear that the deficit is hugely skewed towards Germany.  Only 5 in 27 nations have a surplus of more than £5 Billion.  Germany may need a deal but for most countries it’s much less of a concern, if it is a concern at all.

This becomes even clearer when we look at relative market sizes (thanks to  for charts)

asymmetry

44% of our trade goes into the EU, only 7% (admittedly some figures put it higher) of their trade comes to us.  More importantly, only one country (Ireland) has more than 10% of its trade with the UK.   This is important to understand as every individual country gets a veto on the final deal so all 27 must be convinced it’s in their best interest.

However, the EU also has existing FTAs with 53 countries and is close to completion on an additional 41 FTAs.  Existing FTAs cover approximately 13% of our trade and the new 41 FTAs a further 4%.

So.  44% + 13% + 4% = 61% of our trade going through the EU. And given the argument over exact numbers let’s say EU trade to UK is 10% of their total.

In other words, we need them for 60% of our total trade & they need us for 10% of theirs.

Let’s run through a “no trade deal” impact scenario.

Impact of no deal

The following is greatly simplified but, as the government has failed to estimate the impacts of the no deal scenario it’s probably as good a picture as any.  The day after March 2019, if no deal is in place we lose access to the Single Market, the Customs Union, the 50 additional trade deals the EU holds and the 41 close to completion.

  • UK – Trade will not cease with the EU and the other 50 countries, but it will reduce.  Let’s assume a reduction of 25% loss of trade from UK to EU
  • EU – The EU has a surplus and therefore it will lose more trade than we do, however, it will likely still have access to those 50 trade agreements.  But we’ll say 35% total loss of trade from EU to UK.

This is a simplification as we don’t know the exact mix, what sectors will be affected more or less etc. however 25% loss for UK, 35% loss for EU seems reasonable in the event of a no deal scenario and on the face of it shows they need us more than we need them. However:

  • For the UK – 25% of 60% total trade is 15% – a loss of 15% of our total UK wide trade.  This is significant by any stretch, its about £75 Billion.
  • For the EU – 35% of 10% is 3.5%. EU losses are a fraction of ours.

However that isn’t the whole story.

That 25% UK trade loss will create a demand gap in the EU, a £75 Billion market opportunity for the other 27 countries in Europe.  Cars that are no longer sold to Italy by the UK can be sold by France or Germany.  Every EU country will have 26 other single market EU countries (and 4 EEA ones) to sell to and all will be perfectly placed to go after that £75 Billion in available trade. If they capture even half of it their losses shrink to 2% or less.

As an illustration, Spain would lose 35% of its trade for the UK under these figures. However its UK trade represents only 7% of its total trade and therefore a loss in real terms of about 2%.  If Spain is able to capture some of the market opportunity vacated by Britain it can reduce those losses to perhaps 1%.  Not ideal, but not catastrophic.

How about the UK? Well, we will have no markets available to us after March 2019 that we don’t have today.  There is no new opportunity or opening in our markets that we can use to fill this £75 Billion gap.  Any new trade deals will be several years out and no-one, not even the Leave Leadership, now expects us to sign deals of any size on the day we leave.

Different % figures can be used however in any scenario the impact on the UK of no deal is magnified in comparison to the EU as they are 4 or 5 X more important to us than we are to them, as a proportion of our total export economies.  And as mentioned, we are even less important to most of the 27 who barely trade with us but who also get a vote on the final deal.

However even that isn’t the whole story.

The country with the single biggest surplus is Germany who have huge reserves & will support the EU.  We are running at a deficit and can’t even afford our NHS.  We don’t have a Germany in our corner.

To answer this, Brexit supporters will say “yes, but look at the deficit the UK has with Germany – the German’s will insist on a deal”.  They won’t, because the UK isn’t their biggest market:

german-export-shares

The EU is.  Germany exports nearly 7X more to the rest of the EU than it does to the UK. That market is far more important to Germany and it will preserve EU stability above all else.

Conclusion

It is simply wrong to say the EU needs us more than we need them, or that we can handle a 15% loss in total trade whereas they cannot absorb a loss of 2-3.5%.  Brexit supporters are guilty as always of taking a UK centric view which is based on a misconception of our actual bargaining power.

This is not helpful as clearly the UK needs a good deal with the EU, and fooling ourselves that we can simply wait for the EU to come to us does not help the UK at all.

Many will respond “ahh but of course we’ll get a deal” – that isn’t the point.  The point is we need a deal far more than the EU does and we cannot walk away without one, to do so would cause us far more pain than the EU.  Therefore, we will take what we are given or we will walk away with nothing.

The more we tell ourselves otherwise, the greater the chance we will walk away with nothing.

 

Simplistic Leave Arguments

Leave arguments on Twitter are reducing down to a fairly limited set of options. Possibly a level of desperation setting in.  For my personal sanity it’s easier to record them here as it saves typing the same responses in 6 times daily.

  1. “we knew what we were voting for” – this is ridiculous as a) people voted leave for a wide variety of reasons, there is no “we” and b) almost no-one even imagined, much less voted for the deeply damaging hard brexit we seem to be heading for.  Leave supporters in particular appear to have an ability to rewrite history, however the reality is just prior and after the vote leave supporters were all over the place.
    pollsimple
  2. “you lost, get over it” – this is clearly an affront to democracy. By the time things shake out there could be 3 years between the vote and knowing the deal. We’ve had 2 GE’s in less time in the past. Yes, remain lost, just as most people “lose” in every general election however this argument is as pointless as saying to someone complaining of Conservative neglect of the NHS “well they won the election 2 years ago fair and square, there’s no point whinging now”.
  3. “Stop talking Britain down/we all just need to pull together” – this just puts the blame and/or responsibility for a badly thought out and implemented Brexit on the people who opposed it rather than those who pushed it forward.  We’re starting to see a tendency to see Brexit as a “Blitz” like event, in which if everyone just pulls together and shares out the powdered egg rations we’ll get through it. But this a fake narrative, put in place by leave supporters who don’t want to take responsibility for their vote. Brexit is a self inflicted crisis brought about by a tiny majority.  The path of Brexit is not an act of faith, everyone thinking nice thoughts won’t make any difference in the negotiations that are starting.

Post Brexit trade deal fantasies

If we lose 5% of our trade with the EU we’ll have to increase our trade with BRICS by 25%.

One of the key aspects of the argument to leave the EU is that it will allow the UK to go “global” again, to sign new trade deals free of the constraints of the EU. However, a quick analysis of the figures shows that it would be nearly impossible to match our existing trade position, much less exceed it. The details are below but to summarise:

We will lose significant trade when we leave the EU, a 25% reduction is not unrealistic. To compensate for this we would need to sign beneficial trade deals with 10 or more of our largest non EU trade partners AND more than double our trade with those partners, just to match our existing trade position.

Almost all of these trade partners are on the far side of the globe and it is unlikely they will buy exactly the same goods & services that we currently sell to the EU & associated countries.  Therefore this massive shift of trade will also likely require a huge realignment of the UK economy. This means job losses and significant disruption.

This kind of shift and growth in trade with distant partners is unprecedented and likely impossible.  11% of our trade markets will need to compensate for losses in up to 61% of our existing available free trade areas.

losses

As the UK is already in deficit and has high levels of public debt, there is simply no slack in the UK tax base to absorb this kind of realignment.  Public services, the NHS, social security, the Police, in fact anything financed through taxes will suffer significant cuts OR the UK will have to undertake yet more borrowing.

The following provides details on the above. Figures are taken from these 3 posts:

Commonwealth trade in focus as uk prepares for brexit

European Union free trade agreements

Will new free trade deals soften the blow of hard brexit?

 

UK Trade, WTO & Trade agreements

It’s a common misconception that being in the EU prevents the UK trading with other non EU countries.  It does not, and over half of our trade occurs outside the EU.

Trade pie

Note that although we are in a trade deficit with the EU, we already export more to non EU countries than we import and in fact there is nothing stopping us selling to anywhere in the world, as long as our widgets & services are compelling enough.  However, that trade is generally under World Trade Organisation rules and so Free Trade Deals (FTAs) are usually needed to “oil the wheels” in order to increase trade.

That said:

  • We can trade with anyone whilst in the EU, there is nothing stopping us increasing our trade levels with countries inside or outside the EU.
  • The one thing we cannot do is negotiate new trade deals by ourselves in order to improve that trade.
  • However, not only are there 31 countries in the Single Market, the EU has 50 odd existing trade agreements with other countries in place and several more close to completion.
  • We will lose some level of access to the Single Market, Customs Union & these additional FTAs when we leave and consequently significant trade.
  • Therefore, from a purely trade point of view, the value of any new FTAs (and subsequent increased trade) must be greater than the losses we incur from leaving the EU.
  • If we cannot negotiate sufficient new FTAs AND grow our trade significantly then there is no point, and significant risk, in leaving the EU from a purely trade point of view.

That’s the essential trade point, that there is sufficient ability, will & scope to deliver significant new trade deals as it is inevitable that there will be greatly reduced trade with the EU.

The key question however is, is there sufficient trade available?

Existing UK/EU Trade position

  • The UK trades with approximately 192 countries World Wide
  • The EU has existing Free Trade Agreements (or single market membership) with 53 of these countries.  This represents 57% of our existing trade.
  • A further 41 countries are close to finalising FTAs with the EU.  Added to the above this represents 61% of our total trade.

This map illustrates the reach of the EU’s existing trade agreements:

trade

Admittedly the US/EU agreement has been killed however as can be seen, there’s not a lot of space left on the map.

Although we will hopefully get some kind of deal with the EU it won’t be as good as it is now and as for the other 50 odd agreements, they were negotiated with the EU, not the UK.  It’s unlikely that they will all simply be ratified on the day we leave as each partner country will now be trading with just the UK and not a market of 500 M people.

Given the above, we have no idea how much trade we will lose once leaving the EU however 25% of that 61% seems reasonable (note that findings in this research piece indicate that a 25% estimated loss may be conservative).  This represents 15% of our total world trade.

How easily can we replace that 15%?

New Trade Deals

We must then look to our existing trade partners with whom we do not yet have a significant trade deal in place to see if we can sign trade deals of sufficient value to replace this lost trade.

However, our 3 next biggest partners are the US, China & Japan, representing 24% of our trade.

japan

The United States already has a massive trade deficit with the UK at nearly 40%.  Given the new administration’s hostility to trade deals of any size (it has canceled TTIP, the US EU deal, and pulled out of TTP, the Trans Pacific Partnership.  It is also taking a look at NAFTA, its North American Trade Agreement)  it is extremely unlikely that we will grow our exports to the US under a new trade deal anytime soon.

China conversely already does very well out of our existing trade relationship, and has far more clout than the UK.  They have no reason to negotiate a deal that will correct that imbalance in favor of the UK.

Finally, Japan has already highlighted in the strongest terms it’s concern around the UK leaving the Customs Union & Single Market.  It is very much opposed to Brexit as it made clear.

That isn’t to say an FTA with these 3 countries is impossible however its difficult to see how the UK can negotiate a deal that is beneficial to us in the time needed.  This leaves our next 10 largest trade partners, they represent 11% of our existing exports.

top10

Why 10? As mentioned, only new FTAs can increase trade for the UK outside of the EU, so the assumption is being made that no more than 10 significant new trade deals could be negotiated in parallel given the lack of trade negotiation expertise in the UK.

Of course the likelihood is that 10 in parallel, alongside continuing “transition” negotiation with the EU and also alongside reaffirming the 50 odd existing EU FTAs, is impossible and that only 2 or 3 can run alongside each other.  However we’ll use 10 as an upper number.

This 11% would need to replace the potential 15% of losses from leaving the EU.

To put that into perspective, 10 separate comprehensive FTAs must be negotiated and signed in as short a time as possible, and those FTAs must grow exports to those countries from £54 Billion to £129 Billion per year, a growth of 130%.

Furthermore, most of these countries are on the far side of the world and it is extremely unlikely that they will buy the same goods & services in the same mix as we currently sell.  Therefore there will be massive upheaval in the economy as it shifts to meet this new mix.

This is unprecedented and likely next to impossible.  A mature economy cannot disengage itself from one huge market whilst growing 10 separate ones on the other side of the world by 130%.  The reality is that an FTA does not create instant trade, it only oils the wheels.  Companies then have to work within the new FTAs to establish new trade relationships, all of which takes time and whilst they are simultaneously dealing with the fallout from leaving the SM/CU.

Quite simply there is no easily untapped trading “pot of gold”.  Yes there are some big economies out there but they are established & are also focused on their own trading blocs (TPP in the Pacific is still going ahead, just without the USA).  This isn’t about the size of those markets, it’s about our ability to insert ourselves into those markets via beneficial trade deals in order to massively grow our “market share”.

There is a reason why Liam Fox is in the Philippines, there just aren’t that many untapped markets of any size left.

Finally, there will be those who say “it’s not all about the economy”, and that’s fair enough.  However, the UK is currently in deficit & has a very large national debt.  This loss of trade means a loss of jobs & taxes and that in turn will put additional pressure on public services, the NHS and many of the things Brexit supporters care about.

We cannot simply shrug our shoulders and say goodbye to 15% of our trade, nor can we expect 10 countries in distant lands to pick up the slack. Leaving the EU and its existing network of existing and planned network of Free Trade Agreements is an immense act of national self harm.

 

Note. This blog offers some insights into why losses from leaving the single market could be even higher than 25%, and why growing trade volumes outside the EU will be problematic

http://www.niesr.ac.uk/blog/will-new-trade-deals-soften-blow-hard-brexit

This blog talks about the relative losses the UK & EU would suffer under a “No deal” scenario and why the UK needs a deal far more than the EU does.

Brexit Fantasies – they need us more than we need them

“Seven key British perspectives” – Fisk

This is a brief fisk of an article written by Andrew Lilico, a leading Leave economist, entitled “Seven key British perspectives on the Brexit negotiations” which is in circulation.

To understand the essential flaw in this article it’s first necessary to appreciate that it is underpinned by 3 implied assertions.

  1. They (the EU) need us more than we need them because…
  2. We can tolerate a loss in GDP more than they can and also…
  3. We can, if necessary, walk away with no deal

If these assumptions are wrong, then almost all the perspectives are false.

This blog outlines some of the reasons why these assumptions are in fact wrong.  To summarise, it demonstrates how:

  1. the trade deficit with the EU is in not the bargaining chip Leave supporters believe it to be
  2. If the UK fails to secure an EU trade agreement then any loss in trade would be significant & greatly magnified (by a factor of 4 or more) for the UK in relation to the EU

Once this is understood, the perspectives are exposed as empty posturing.  The UK is not in the driving seat, the EU is, and this has been demonstrated in the concessions the UK is already making (as reported over the last few days).

With that said, below are the 7 perspectives:

1. There’s zero possibility of the UK agreeing to pay tens of billions of euros for a divorce bill before talking about a trade deal. So Angela Merkel and Francois Hollande can insist all they like that the divorce bill has to be agreed before we commence trade talks and that parallel talks are impossible and that those are the EU’s rules, but the blunt reality is that the alternatives are: a) parallel talks; b) no talks. It’s the EU’s call.

The second point, sequential rather than parallel talks, has already been conceded by the UK government, at least initially.  We will begin with discussion of the “divorce bill” and other matters and then Trade talks will begin in parallel from some point after October if sufficient progress has been made on the overall separation agreement.

However the EU will set the conditions for acceptable progress & therefore will decide when parallel talks begin.  If they don’t believe we are serious about the settlement then trade talks will be delayed.

As to the bill, the EU have asked for the broad outline to be agreed rather than the final amount.  In the end however, it will be a legal matter based on UK obligations, again, already conceded by UK government.  If the UK doesn’t agree to pay, there will be no trade deal, and the UK needs a trade deal.

2. There’s zero possibility of the UK backing down and agreeing to retain free movement. A bizarre article in the New Yorker yesterday… said that: “Many European officials believe that May will eventually soften her stance, because leaving the EU without a deal would be catastrophic.” No. She’s not going to soften her stance. And if she tried to soften her stance she would cease to be Prime Minister and the person that replaced her would not soften her stance either.

This statement is predicated on either a) the UK has a stronger hand than the EU, b) the UK can afford to have no deal or c) the UK government is prepared to put political pride before the national interest.  Since neither a) or b) are true (see above) then this indicates we will likely get a deal which has been cherry picked to suit the EU. The stance is softened or we get something between a very poor deal & no deal.  In point of fact the stance has already been softened, as May has indicated that free movement may well continue in some form after March 2019.

In reality, there will likely be some face saving fudge of existing EU FoM policy.

policy

presented as a victory by the May government, as most people are not aware that FoM regulations actually require EU nationals to prove they can support themselves after 3 months.

3. The European People’s Party MEP Manfred Weber said on the Today programme on Thursday that he hears the UK wants a trade deal, but in that case why are we leaving? In the UK our perspective is that we don’t see why we should find it any  harder, or requiring of any more conditions, or any more dependent on accepting free movement, for us to do a trade deal with the EU than for Canada or Korea to do such deals.

This may be true, but Canada & Korea do not have a trade deal that is anywhere close to the scope of the single market.  In any case what we think is irrelevant, unless we are the stronger partner, which we are not.  The EU will either offer a significant deal which involves free movement or a greatly reduced deal on their terms.

The underlying flaw in this perspective goes back several years and stems from the fact that Leave leaders have never fully understood the single market.

They believe the SM is a free trade area with an inconvenient “tacking on” of free movement of people. The EU by and large see free movement of people as fundamental to the single market, one of its 4 freedoms & integral to its operation.  It is a benefit, not a burden, as far as the EU is concerned.

And indeed movement of people is part of all trade negotiations, as evidenced by Australia & India looking to include visa discussions in trade agreements.

 4. The UK is not “requesting” a trade deal with EU and we aren’t interested in making any “concessions” to be “given” such a deal. Instead, we are proposing a trade deal because we believe the trade deal itself in the mutual interests of the EU and us. If the EU doesn’t think a trade deal with us is, in and of itself and with no further “sweeteners”, in their interests we will be philosophical about that & say “OK. Your call.”

This repeats in essence the above, we are offering a deal on our terms and the EU can broadly accept those terms or not.  As outlined in the introduction this is simply empty posturing.

5. We do not accept that the UK “inevitably has the weaker hand” in Brexit trade negotiations, as the New Yorker tells its readers we do. Even were it true that the economic damage to the UK would, in GDP terms, be larger than for the EU (which many Britons don’t accept — not only because of the trade deficit we run with the EU but, more crucially, because of the dependence of the EU’s finance and corporate sectors on the City), we think UK voters and politics will be more able to tolerate losing some GDP, in the short-term, than EU voters and politics will be. We believe our system and economy are solid, whilst the EU’s teeters on the brink. We can bear it. They can’t.

Fundamentally Mr Lilico presents no figures for what this loss of GDP would be or how long it would last for.  All we do know is that the loss of trade to the UK would be magnified due to our relative differences (again, see here for why it could be 15% loss for the UK vs 2% for the EU).  Therefore this statement is saying “We believe our system can support a loss of GDP better than the EU can, even though we have no idea what the loss could be, no figures to assess its impact and consequences and even though we know that the EU’s losses will be a fraction of ours in any feasible scenario”.

“We believe we can absorb 5X the pain you can in scenarios we haven’t actually quantified” is a statement of faith, not economics.

6. The UK does not believe itself a small country, or a modest player in the world dependent upon its EU connections for its global influence and prosperity, or a diplomatic naif liable to be exploited this way or that by more hardened negotiators. We believe ourselves one of the three or four most powerful countries in the world, a nuclear power, a permanent member of the Security Council, long-term cunning diplomatic player in global arenas, with many outside options beyond Europe if Europe walks away.

This may be true but what, for example, does being a nuclear power have to do with Trade?  Do any of these things deliver us new trade deals on the day we leave the EU with no deal, because if not then what relevance do they have.   The lack of trained UK trade negotiators is a statement of fact, no more or less.  This is essentially British Exceptionalism and has little to do with economics.

7. We believe it happens quite frequently that others in Europe need our money, our intelligence and security assistance, and our soldiers. And we believe that saying “If you want to get these things next time you need them, you’d better play nice” is not an appalling blackmail. It’s blunt statement of a few realities of life that others would do well to remember.

I’m reasonably certain that some of the above refer to our duties as NATO members.  Nevertheless, to be equally blunt, any idea of the UK using its security capabilities to drive a better trade deal dies when we consider the possible future headline:

“5 killed in Paris Terror raid.  Did UK intelligence withhold vital information?”

The UK would be an international pariah.  This, frankly, is gunboat diplomacy which takes no account of the interconnected media saturated world we live in.  Refusing to share terror intelligence for trade purposes is indefensible on the world stage, no matter how logical it appears in government circles.  The UK government has also backtracked on this point.

Finally

Now, all the above might be “delusional”. But it is the British perspective. And if other countries don’t grasp that, there’ll be a mess.

Well, it is delusional, or at least very misguided.  And I don’t expect the EU will be in a mood to pander to our delusions.

To summarise.  If the UK has the stronger hand OR can walk away from any deal then this article makes sense.  However, we do not, and walking away would sacrifice the national interest for political posturing. As these 7 perspectives largely rest on that mistaken belief in our bargaining power and/or our ability to easily walk away they can essentially be dismissed.

This is important however as Lilico is a “leading Leave economist”.  The posturing in this article indicates that not only did the Leave leadership enter the brexit process with a false perception of our bargaining strength but more importantly, they have learned very little in the intervening months.

3 of the “perspectives” are publicly close to breaking point within a week of the Article 50 process.  We can only hope our actual negotiators have a more pragmatic outlook.

Brexit & “They need us more than we need them”

The following is a fact and informed assumption based article.  It is not about patriotism, optimism, talking the country down or any other emotional aspects but simply a reasoned, logic based argument.

lilico

Andrew Lilico has produced a report on “Seven key British perspectives on the Brexit negotiations“.  (See this additional blog for a point by point discussion on the article) Lilico as I understand it is a key “thinker” on the brexit side, however the 7 perspectives boil down to:

  1. They need us more than we need them because…
  2. We can afford a loss in GDP more than they can and therefore…
  3. We can, if necessary, walk away with no deal

We do not accept that the UK “inevitably has the weaker hand” in Brexit trade negotiations … Even were it true that the economic damage to the UK would, in GDP terms, be larger than for the EU … we think UK voters and politics will be more able to tolerate losing some GDP, in the short-term, than EU voters and politics will be. We believe our system and economy are solid, whilst the EU’s teeters on the brink. We can bear it. They can’t.

This is important so I’ll emphasise this. This entire article assumes, logically, that no deal is worse for the EU than it is for us and further, that we could, if necessary, walk away with nothing.

If this is true, we have a strong hand.  If not, we’re bluffing, and we will be caught out.

So let’s examine this, step by step.  Many figures, quotes taken from fullfact.org

EU/UK Trade position

It is true that there is a large trade deficit between the EU & UK:

The value of trade to the UK and the rest of the EU—we exported about £230 billion worth of goods and services to the rest of the EU in 2015, according to UK data, while the rest of the EU exported somewhere around £290 billion to us.

It is this £60 Billion deficit that drives much of Leave thinking on why they need us more than we need them.  However, If you look at that deficit on a country by country basis March 2017 Trade with other European countries RB

it becomes clear that the deficit is hugely skewed towards Germany.  Only 5 in 27 nations have a surplus of more than £5 Billion.  Germany may need a deal (more on this later) but for most countries it’s much less of a concern, if it is a concern at all.

This becomes even clearer when we look at relative market sizes.

44% of our trade goes into the EU, only 7% (admittedly some figures put it higher) of their trade comes to us.   It’s important to understand, every individual country gets a veto on the final deal so all 27 must be convinced it’s in their best interest.

And this doesn’t take into account the 50 trade deals that the EU has with the rest of the world and which we have access to.  Perhaps 15% of our non EU trade operates via those EU deals.

So.  44% + 15% = 59% of our trade goes through the EU. Let’s say 60% of total UK trade.

And given the argument over exact numbers let’s say EU trade to UK is 10% of total EU trade

If these figures hold, let’s run through a “no trade deal” impact scenario.

Impact of no deal

The following is greatly simplified but, as the government has failed to estimate the impacts of the no deal scenario it’s probably as good a picture as any.  The day after March 2019, if no deal is in place we lose access to the Single Market, the Customs Union & the 50 additional trade deals the EU holds.  See below for more on this.

  • UK – Trade will not cease with the EU and the other 50 countries, but it will reduce.  Let’s assume a reduction of 25%.
  • EU – The EU has a surplus and therefore it will lose more trade than we do, however, it will likely still have access to those 50 trade agreements.  But we’ll say 35%.

This is a simplification as we don’t know the exact mix, what sectors will be affected more or less etc. however 25% loss for UK, 35% loss for EU seems reasonable in the event of a no deal scenario and on the face of it shows they need us more than we need them. However:

  • For the UK – 25% of 60% total trade is 15% – a loss of 15% of our total UK wide trade.  This is significant by any stretch, its about £75 Billion in losses.
  • For the EU – 35% of 10% is 3.5%. EU losses are a fraction of ours.

However that isn’t the whole story.

That 25% of trade losses (as mentioned, around £75 Billion) will create a demand gap in the EU and 27 EU countries will have friction-less Single Market access to it.  Cars that are no longer sold to Italy by the UK can be sold by France or Germany.  Every EU country will be perfectly placed to go after that £75 Billion in lost trade and if they capture half of it their losses shrink very quickly to 2% or less.

How about the UK? Well, we will have no markets available to us after March 2019 that we don’t have today.  There is no new opportunity or opening in our markets that we can use to fill this 15% gap.  Any new trade deals will be several years out and no-one, not even the Leave Leadership, now expects us to sign deals of any size on the day we leave.

Different % figures can be used however in any scenario the impact on the UK of no deal is magnified in comparison to the EU as they are 4 or 5 X more important to us than we are to them, as a proportion of our total export economies.  And as mentioned, we are even less important to most of the 27 who barely trade with us but who also get a vote on the final deal.

However even that isn’t the whole story.

The country with the single biggest surplus is Germany who have huge reserves & will support the EU.  We are running at a deficit and can’t even afford our NHS.  We don’t have a Germany in our corner.

Conclusion

It is simply wrong to say the EU needs us more than we need them, or that we can handle a 15% loss in total trade whereas they cannot absorb a loss of 2-3.5%.  Again, Lilico is guilty of taking a UK centric view which is based on a misconception of our actual bargaining power.

This is not helpful as clearly the UK needs a good deal with the EU, and fooling ourselves that we can simply wait for the EU to come to us does not help the UK at all.

Now, all the above might be “delusional”. But it is the British perspective. And if other countries don’t grasp that, there’ll be a mess.

is the closing comment in the article, which essentially means “pander to our illusions, or else”.

Many will respond “ahh but of course we’ll get a deal” – that isn’t the point.  The point is we need a deal far more than the EU does and we cannot walk away without one, to do so would cause us far more pain than the EU.  Therefore, we will take what we are given or we will walk away with nothing.

The more we tell ourselves otherwise, the greater the chance we will walk away with nothing.

Existing EU trade deals post no deal scenario

The EU has 50 trade deals in place with the rest of the world. The UK cannot sign trade deals with non EU countries whilst in the EU, in fact technically it’s illegal to even negotiate and so it will take some time to resign those trade deals to the UK.  This is not a given – a trade deal signed with a market of 500 Million people is not as attractive as one signed for 65 Million.

Some deals may be signed on day one, however the more likely scenario is that we will have to re-negotiate many of those deals, likely on less favorable terms.

We have to assume a significant level of disruption to this trade following a no deal scenario.  Typically the impact of this is ignored by Brexit supporters.

Brexit & the Free Railway Party

A new political party appears in the UK, the “Free Railway” party.  Its members passionately believe that all of the UK’s problems began when we privatised the railways, in fact they believe all rail travel should be completely free.

However, they realise that this isn’t necessarily something the majority of the UK care about (most people don’t use trains all that much) so, how do they stir up some interest?  They put together an exciting manifesto:

  • All rail travel to be free
  • Free rail travel will create an economic boost, leading to tax cuts for everyone and more money for public services
  • Our roads are far too congested & towns too polluted, free railway travel will save the country

Almost all Experts* however are far from convinced.  They point out that most people cannot use trains on a day to day basis.  They also say that the figures don’t stack up, that any boost in the economy cannot possibly pay for the tax cuts and public services improvements in the manifesto.

Furthermore, they say that the existing Railway companies have long term contracts and own all of the infrastructure.  Buying the railways will be hellishly expensive.  In essence, they say the manifesto is a fantasy, that it cannot be implemented.

However, the Free Railway party mount an effective public campaign.  They accuse the experts of “Project Fear” & tell them to “stop talking down our railways”.  They point out that we were a world leader in steam trains 150 odd years ago and can be a leader in trains again.  When its pointed out that getting the railways back might not be that easy, they say “Nonsense, the railway companies need the government more than the government needs the railways”.  “Think of all the savings we’ll make when we don’t need ticket machines and train guards, we’ll save a fortune” they say.

52% of the public are convinced, many of them don’t actually use the railways, but some are really concerned about pollution & some are constantly getting caught in traffic jams.  Others really care about the NHS and public services and everyone likes the idea of a tax cut.  So they get behind the Free Railway party and its message of “Take back control of the railways”.

The party sweeps to power.  The 52% celebrate, the 48% (and all the experts) are a bit confused and concerned.  Ticket machines are burned in ceremonial bonfires.

However, it then turns out that the Free Railway party got their figures wrong after all. There won’t be any cash for tax cuts or for public services and in fact tax rises will be needed as:

  • The economic boost wasn’t all that big
  • Subsidizing the railways is far more costly than the Free Railway party said it would be
  • The bill to buy back the railways is far higher than originally stated

It also transpires that the previous government agreed to a set of long term rail investment commitments with the railway companies, and these need to be paid for.  The contracts have been signed by both sides and so the government has no option but to meet the costs of these commitments for several years into the future.

As for the roads, they’re just as congested and just as polluted.  Traffic isn’t reducing at all.  In response the Free Railway party says that they never promised to reduce congestion, only to control the types of cars on the road.  But this doesn’t make any sense, because all types of cars are still needed, and if numbers don’t reduce, how does congestion get better?  Many people swear that they heard the Free Railway leaders say that they would reduce cars on the road, in fact that’s why they voted for them.

And so, after 12 months in power:

  • The railways are free, that’s one promise met

However…

  • Taxes have gone up rather than down
  • There’s no more money for public services
  • Traffic congestion is no different and neither is pollution
  • There’s a massive unexpected Railyway bill
  • Paying for all the free trains costs far more than any extra tax received

The experts reappear.  “We told you all of this” they say “we said this manifesto was impossible”.  And the 48% say “Almost no-one has what they wanted, the only people who are happy are the leaders of the Free Railway party, this election was based on lies and fantasies”. And behind closed doors, the civil servants say “we can’t afford this, it’s going to set us back years and money was already tight”.

To which the Free Railway party say “Tough, its the will of the people”.

 

*Note: there is one expert who agrees with the Free Railway party, but he thinks we should stop bothering to make trains & train tracks completely and import them instead, so no one pays much attention to him.