Brexit, British Government, David Davis, Michel Barnier

My #Brexit Blog: of gold and gorillas

DD9E17AD-FCA5-4574-98B2-7CA25C82D730It was a week when reality bit, and bit very hard. Brexiteer illusions about a world of easy free trade deals beyond EU membership took a heavy hit when the US slapped a 219% tariff on Bombardier, the Canadian plane maker, over alleged illegal state aid, putting 4,000 jobs in Northern Ireland at risk.

Then, on Friday, the economics editor of SKY TV reported that close on 10% of UK exports was made up of gold which was simply recycled through London. As most of this went to non-EU countries, such as Switzerland, India and China, it had the effect of understating the value of UK manufacturing exports to the EU. The figure is closer to 50%, rather than the 44% quoted by the Brexiteers. The UK does not export as much to the rest of the world as it thinks it does.

Reality also bit when a further round of negotiations between the EU and the UK ended with little or no progress, despite an improvement in the atmosphere between the two sides. Talks on citizens’ rights inched forward, with the UK offering to allow EU citizens with permanent residency in the UK the right to return if they left for a prolonged period of time. In return the UK wants the EU to allow UK citizens who move to the EU to be able to move and settled in different countries, instead of being restrict to the country in which they lawfully reside when Britain leaves the EU.

The UK also offered to enshrine the Withdrawal Agreement into UK law, with lead UK negotiator, David Davis, saying that this would give it “direct effect”. “Direct effect” is a term in EU law which means that an EU citizen has rights under an EU law, enforceable through national and European courts, even if the country in which they are living has failed to transpose the EU law into national law or has transposed it incorrectly.

It is not clear if this is what Davis meant. Probably not. Meanwhile Barnier, the EU’s main negotiator, said that there were still serious issues over the role of the Court of Justice of the European Union (CJEU) in upholding the rights of EU citizens in the UK. The UK is opposed to any such direct role, but has indicated that some sort of indirect role may be a possibility.

Not much progress on the financial issue either. UK Prime Minister, Theresa May, said in her Florence speech that the UK would meet its financial obligations to the EU and that no country would be worse off as a result of the UK’s decision to leave during the current budgetary cycle. But when Davis arrived in Brussels at the start of the week’s negotiations he was again playing the “double bubble” game, trying to use the same money twice. The UK would pay what it owed but only in the context of talks on a trade deal. “We’ll fix our bar bill provided we can continue to play the course”. There will not be many takers in the EU for such a “generous” offer.

And not a word on the Irish border issue, the third of the three Article 50 issues identified by the EU as needing significant progress before the discussions can proceed to deal with the future relationship between the UK and the EU and transition arrangements to get to that relationship.

Let me be very blunt about this. If the UK insists on leaving the EU’s custom union then there is no solution to the Irish border issue. None. The Irish border will be the EU’s only land border with the UK, a third country. The EU is not going to leave that border unprotected for to do so would allow good of whatever origin and whatever quality to be shipped to Northern Ireland, then taken across the border into the Republic of Ireland for onward, custom-free shipping into the EU. That is not going to happen.

The return of a border in Ireland will be the direct result of the UK’s decision to leave the EU’s custom union. Nothing else. There are no magic technological bullets to avoid the need for a hard border. Such “magic bullets” only exist in the imagination of those Brexiteers who want to deny the consequences of their own decisions.

Make no mistake. The “Irish Question” could be a Brexit dealbreaker, because a border is a border is a border, no matter what its shape and form and Irish people in both the Republic and Northern Ireland do not want a border, visible or invisible.
All of which resulted in EU Commission President, Jean-Claude Juncker, saying onFriday morning that a miracle was needed between now and the next summit of EU leaders in October if they were to give the green light to move on in the exit discussions to talks about future relations.

Which brings us to “Gold and Gorillas”.

Ed Conway, the economics editor for SKY news writes in the Times (September 29th):
What is Britain’s biggest physical export? Given that the UK has some of Europe’s most advanced car factories, you might have assumed the answer was motor vehicles. Or perhaps pharmaceuticals, or engines, or crude oil from the North Sea?
No. In July, the latest month for which we have the figures, Britain’s biggest physical export was gold.

How does that happen?

The short answer is that London is the hub for the world’s physical gold market. Sitting underneath the ground in warehouses inside the M25 are vaults containing well over half a million bars of bullion, worth a grand total of about $300 billion: roughly the equivalent of £9,000 for every household in the country.

As noted earlier, most of this gold goes to non-EU countries thereby over emphasising non-UK exports and underestimating exports to the EU. While the latter have been falling they still account for roughly 50% of all the UK’s physical exports. In other words, the export hole to be filled if exports to the EU drop as a result of the UK leaving, is significantly bigger than previously thought.

A Brexit claim goldfingered you might say.

From gold to gorillas. Canada has a free trade agreement with the US: NAFTA. That did not stop the US hitting Bombardier with a potential 219% tariff over planes it sold to Delta, resulting from a complaint by Boeing. The tariffs were slapped on Bombardier, a Canadian company. The 4,000 jobs in Belfast are just collateral damage.

Those favouring the UK’s departure from the EU have claimed, long and loudly, that once outside the EU the UK would be first in the queue to sign a sweetheart trade deal with the US. They appear to believe that global trade negotiations are conducted in accordance with the elegant theories found in economic textbooks. No such thing. They are knockdown, drag-out, bare-knuckle fights. Dominated by the economic self-interest of powerful players. Fairness and justice has got nothing to do with it. Bringing “fairness and justice” to a trade negotiation is akin, as one commentator has noted, to bringing a “chocolate spoon to a knife fight”.

In such a world the big gorillas dominate. The EU, US, China, Japan and India. And when a 160 kilo gorilla goes head to head with a 40 kilo chimp (the UK outside the EU) there can only be one winner. Clue: it is not the chimp.

But the US thinks twice about cutting up rough with the EU because, in trade terms, the EU is as big, if not a bigger gorilla than the US. Further, the EU has teams of highly skilled trade negotiators, unlike the UK, which has next to none.

On March 5, 2002 President George W. Bush hit imported steel into the EU with 8-30% tariffs because of an alleged detrimental surge in steel imports. There was a widespread belief on all sides of the debate, confirmed by top Bush administration officials, that politics played a role in the decision to impose tariffs. Namely, the large and important Rust Belt swing states of Pennsylvania and West Virginia would benefit from the tariffs.

After Bush ignored a World Trade Organisation (WTO) decision against the US on the tariffs the EU threatened to counter with tariffs of its own on products ranging from Florida oranges to cars produced in Michigan, with each tariff calculated to likewise hurt the President in a key marginal state. Bush lifted the tariffs. Wikipedia here)
Inside the EU the UK, as part of a big gorilla, gets treated with respect by the US and the others. Outside, it will be eaten for breakfast.

With 4,000 jobs in Belfast at risk whether the Democratic Unionist Party (DUP) will reconsider its support for the UK government’s decision to quit the customs union and the single market remains to be seen. The DUP’s politics are rooted in tribal identity rather than rational economics.

A final decision on the Bombardier tariffs will be taken early in 2018. If the tariffs are upheld then Brexit dreams of easy free trade deals will be well and truly dead.
Finally, after their conference this week it is now clear what the Labour Party policy on Brexit is. Its policy is not the government’s policy. But as we don’t really know what the government’s policy is, we, therefore, can’t know what the Labour Party’s policy is. Now, is that clear?