The past week has brought us the usual mix of two types of news about the impact of Brexit: The first type is news about things we knew would happen after Brexit. The second type are the sort of mundane things that we all took for granted, but that now turn out to be made hugely more complex due to Brexit and start affecting people’s livelihoods in ways none had anticipated – let alone thought through – ahead of the Brexit referendum or during the negotiations about the Brexit deal and the post-Brexit relationships with the EU. The latter type of news illustrates just how closely interconnected the UK and European economies have become after 40 years of EU membership and how enormous and manifold the costs of the divorce will be. Let me start with the latter, because they often get little attention beyond a fleeting note in the newspapers.
The ‘Small Brexit News’: School trips and the end of the teething problems hypothesis for grocers
In the category of the ‘small Brexit news,’ the most disturbing one to me this week was a story in the Guardian about the impact of Brexit on European school trip organisers. Several companies are expecting a massive drop in short-term visits to the UK from October when new, more restrictive rules will apply for travellers from Europe including the need for a passport and the end of visa exemptions for certain non-EU travellers when travelling to the UK from the EU in a group. The UK government refuses to exempt children taking part in short organised educational trips from these new passport and visa requirements. This implies amongst other things that all pupils will need passports – as EU national ID cards will not be accepted anymore – and any pupil of non-EU origin will have to apply for an individual visa (as opposed to benefitting from an exemption when travelling as part of an organise school trip). This will increase red tape for schools and travel agents offering school trips and will add an estimated 10-20% to the cost of the trip per child.
What is interesting with this story is the explanation that the minister for future borders and immigration, Kevin Foster, gave to justify his refusal to exempt school children from the new rules: He reportedly said he was “committed to strengthening the security of our border” and to “keep those who may pose a threat away from our border.” So, the same government that asks the EU to show ‘common sense’ over the Northern Ireland Protocol, that bravely walked into the glorious post-Brexit world without any plan, and that decries anyone who voiced any concerns as ‘fear monger’ are scared of school children? It has indeed been one of the great paradoxes of Brexit – and another victory for the Brexiteers’ strategy of shamelessly distorting reality – that it is the Remainers who ended up being considered as driven by fear, when the whole Brexit project is driven by people wishing back a world that’s less scary to them.
Also, in the category of ‘small news’ that often go unnoticed, is an interesting article in The Grocer magazine. The article quotes Sandra Sullivan of the Food & Drink Exporters Association as saying that many companies had hoped at the beginning of the year that the new trading rules established under the Trade and Cooperation Agreement (TCA) would still change. Yet, Sullivan now notes that grocers had come around to understanding that “the fact is this is EU legislation. It’s the rules. That’s now sinking in and companies are starting to change their business models,” i.e. they stop exporting to the EU altogether. The ‘teething problems hypothesis’ seems to turn out to be wrong in one more sector.
The ‘Big Brexit News’: Brexit’s impact on services
In the category of Big Brexit News – i.e. things that have an economy-wide effect and we all did expect to happen – is a striking new study from academics at Aston University. The study found that UK services exports from 2016 to 2019 were cumulatively £113bn lower than they would have been had the UK not voted to quit the EU in June 2016. This is a significant study not only because of the sheer amount of the decline in service exports, but also because of the timing: The study captures exclusively the anticipatory effect of Brexit, which pushed companies to adapt their business model before Brexit actually happened. This is important to put in writing, because a few years down the line, Brexiteers will probably compared post-transition period figures (after 1.1.2021) to figures before the end of the transition period, but after the Brexit vote. This will underestimate the negative impact of Brexit. Indeed, the Aston study reminds us that in some sectors and for some companies, Brexit already had an impact before it actually happened.
The study is also significant, because once again it underscores the recklessness of Brexiteers when it comes to the service industry – Britain’s most important industry. Given the structure of the UK Economy (with 70% of GDP coming from the services sector), services should always have been a focal point in the Brexit negotiations. Instead, the government decided early on to focus on free trade in goods only and then spent most of the negotiations haggling over fishing quotas. In the end, the most important sector of the UK economy was almost completely neglected in the TCA. The FT argued this week that partly this may be due that – in financial services at least – the EU and the UK were perhaps quite happy to start going separate ways in terms of financial regulation. Yet, in areas like the creative industries, business services, legal services etc. etc., the neglect seems astonishing and greatly damaging to the UK economy.
Yet, rather than trying to address these issues of concern for service sector firms, the government firmly focusses its attention on concluding trade deals at any cost (including arguably the cost of loss of lives, if we are to believe recent reports that the late imposition of a travel ban on India after the emergence of the delta Covid19 variant was due to Johnson not wanting to jeopardise the FTA negotiations with Indian PM Modi). The costs that the government is willing to accept for concluding FTAs shows just how symbolically important they have become for the government’s legitimacy. This week has brought several new developments on that front.
Liz Truss’s three victories
Liz Truss – Secretary of State of International Trade – was able to declare victory on three fronts this week: The closing in on a trade deal with Australia, the approval by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries of accession talks with the UK, and the – somewhat unexpected – conclusion of a new FTA with Norway, Iceland, and Lichtenstein.
The trade talks with Australia seem to be nearing their conclusion with officials expecting a tentative agreement for the week commencing June 14 (mor on this below).
On Wednesday the CPTPP gave the green light for accession talks with the UK, which will be helped by the Australia FTA. This may sound like big news, as it may seem like joining the CPTPP would be an important step towards the ‘Indo-pacific tilt’ the government has promised in its Integrative Review (better known as the Global Britain report). Indeed, Liz Truss herself lauded the prospect of accession to the CPTPP as the UK joining another “dynamic free trade area.” But once again, we need to keep the proportions in mind. Joining the CPTPP is another largely symbolic step that experts do not expect to yield large economic benefits: The CPTPP countries are simply too far away, too small export markets for UK products, and it is unlikely that the UK will get a very good deal in particular for services. In particular, one important point to keep in mind is that the UK already has FTAs with 7 out of the 11 CPTPP member states (Canada, Chile, Japan, Mexico, Peru, Singapore and Vietnam). It is about to sign an 8th one with Australia, which will leave New Zealand, Brunei and Malaysia as the only CPTPP countries with which the UK has no FTAs at the moment and for which CPTPP membership may imply an increase in market access. Moreover, experts from the UK Trade Policy Observatory also point out that in many respects, bilateral FTAs with CPTPP countries may be more beneficial than membership. This is because joining an existing club with establish rules does not leave leeway for the UK government to negotiation any specific rules. Rather, the UK will be given the choice to accept the multi-lateral CPTPP rules and join, or not accept them and not join. The current CPTPP rules may not be particularly favourable to the UK, because as a major service exporter it would have an interest in liberalisation of that particular area. Yet, it is regarding services that the CPTPP agreement – like many bi- and multi-lateral FTAs – does not go very far, giving member states the possibility to exempt domestic services from liberalisation. It is therefore not clear what additional economic benefits the UK government is expecting from CPTPP membership.
The third ‘good news story’ in terms of trade, was the conclusion of an agreement with Norway, Iceland, and Lichtenstein. This deal seemed elusive still a week ago. Various newspaper reported that the deal was close to collapsing due to the opposition of the Christian Democrats – a minority partner in the government close to agricultural interests. Norwegian sources report that the opposition was overcome when PM Solberg approached the oppositional Labour party to support the deal. It would also seem that compromises were reached on which varieties of cheese the UK can export at lower tariffs (only four varieties) and that tariffs would be lowered and not completely eliminated. This may have brought the Christian Democrats and their Minster for Food and Agriculture Olaug Bollestad on board, although the deal will now be debated in the Norwegian Parliament. Given that the Labour Party reportedly only agreed to the deal being brought before parliament, but did not guarantee that it would be supporting it, its fate may still be in the balance.
Regardless, the deal may indeed be beneficial to the UK economy, also because one of the concession the UK made in return for access to Norwegian meat and diary markets, was to lower tariffs on Norwegian fish and seafood, which may benefit the fish processing industries in Northern England. But of course, only once the details of the deal are known will it be possible to assess whether and to what extent it goes beyond the previous relationship under EU membership and what exactly the concessions (access to UK fishing waters) are.
Form not substance: The reification of FTAs
Economically speaking the reason why FTAs may matter for post-Brexit Britain is because Brexit means that we have cut ourselves off the EU Single Market, which is by far the most important export market for British products. It is hoped that FTAs may increase trade with other countries so as to compensate for the expected loss in exports to the EU, but also potentially off-set increasing prices for imports. Yet, this economic logic behind the Government’s Brexit strategy has long gotten lost with the shift away from substantive, problem-solving-orientated politics to symbolic politics, or what Chris Grey calls “performative gesture politics of ‘Global Britain’ grandstanding.” This has led to a reification of FTAs: They are now seen as a goal in themselves rather than a means to an end. Indeed, the right-wing pro-Brexit press reports about FTAs as if the estimated value of trade between to countries directly translates into money in British people’s pocket.
More shockingly, even expert commentators seem to explicitly value trade deals as a goal in themselves rather than a means to an end. Thus, well-known trade expert Dimitry Grozoubinski tweeted after the announcement of the Norway, Iceland, Lichtenstein deal: “While free trade agreements and rollovers [of pre-existing EU deals] can’t compare or replace the Single Market, they are still nice to have and hard work to do, so should be celebrated.”
As a former trade negotiator Grozoubinski is certainly best placed to judge how hard it is to work on a trade deal, but the other parts of the statement – that any trade deal is ‘nice to have’ and ‘should be celebrated’ is gravely mistaken. Only a staunch libertarian free trader will believe that any type of trade liberalisation is better than none. That assumption is provenly false, even though the Cobdenite, anti-corn law nostalgia in this country pretends otherwise.
In actual fact, a bad trade deal is way worse than tariffs and quotas. There are library-filling amounts of studies on the negative impact of precocious and unselective trade openness on developing countries (see for instance here). There is also an increasing amount of recent empirical evidence that trade liberalisation may not only be bad for non-university educated workers in developed countries, but indeed directly responsible for Brexit. Thus, one study conclusively showed that areas harder hit by cheap imports from China since the 1990s and thus experiencing industrial decline, were the areas that most strongly supported Brexit. The same has been shown for the US, where areas affected by the ‘China shock’ following liberalisation of trade, were significantly more likely to vote for Trump in the 2016 presidential election. In other words, liberalisation of trade during the UK’s membership in the EU may be one of the root causes of Brexit.
Therefore, the terrible irony with the Truss-Johnson post-Brexit FTA strategy is that it is pursued in the name of the people whose economic grievances led them to vote for Brexit, but will ultimately reinforce the root causes of these grievances.
Whether or not this is a conscious cruel and cynical trick they are playing on their electoral base, I do not know. But the point is that for them the strategy is working. The British public has come to accept trade deals as an end in themselves– regardless of their actual economic effect – because they are a symbol of ‘sovereign Britain.’ Truss is being rewarded for her truly impressive effectiveness in rolling over existing and concluding new deals. The FT acknowledged that “[t]he signing of a UK-Australia trade deal would be seen as a political boon for Liz Truss […] cementing her reputation as one of the Conservative party’s rising stars.” It quoted the editor of the Conservative Home magazine as saying: “Members like ministers who can deliver and delivery in politics is difficult. But Liz has been delivering a mass of trade deals. The fact that nearly all of them have been rolled over is neither here nor there.” This is the perfect illustration of the symbolic value of trade deals for pro-Brexit politicians. Liz Truss and Johnson do not care about the economic realities, but only about the symbolic power of ‘getting things done,’ proving naysayers wrong about Brexit, and showing that the UK can get trade deals done outside the EU. For their electoral support and career advancement in the short term, any trade deal is good news.
Quantifying the impact of the FTAs: The right-wing Press versus the experts
The reification of trade deals in the UK press leads to new FTAs being announced as great victories without much concern for the detail of the agreements. Thus, a couple of weeks ago the Sun ran an article about the UK-Australia deal with the headline: “BRITAIN is poised to clinch a £18billion trade deal that will bring a triple boost for millions of hard-working families.” The ‘triple boost’ refers to Liz Truss’s prediction of more jobs, higher wages, and lower prices due to the deal – which led her to call the deal a ‘win, win, win’ scenario. The paper was very specific about quantifying the benefits from the deal: “It will mean 20p off the price of a bottle of Aussie wine and more highly paid jobs as British exporters expand workforces.” An infographic further shows that vegemite will be 8% cheaper, shoes ‘up to 16%’ and clothes ‘up to 12%’ cheaper.
Besides the question of whether 20p of a bottle of wine will make people’s lives significantly better, it is questionable if these figures hold up to scrutiny. Experts – like Sam Lowe – are, of course, much more cautious about quantifying the impact of the deal, because that impact will depend on many things: Will tariff cuts be passed on to consumers? Will the increase in Australian imports displace British products or products otherwise important from elsewhere? Plus, one incontestable and unshakable fact remains, namely that Australia is far away, which means we should not expect a massive increase in imports from or exports to Australia. Lowe therefore think the impact of the Australia FTA will be ‘so small as to be unobservable.’
You could of course follow Grozoubinski and argue: “Ah well, no harm done! It’s nice to have this deal even if its impact is limited.” Well, that is once again not quite true. One important potential implication of offering Australia a zero-tariff deal on agricultural produce and food products may mean that other countries – like the US and Brazil – will ask for the same thing. The implications on British farmers of zero-tariff deals with these countries may be more significant due to the relative geographic closeness (compared to Australia).
Moreover, as Welsh first minister Mark Drakeford recently warned, one unintended consequence of a trade deal with Australia on Australian terms (i.e. the UK accepting Australian standards rather than insisting on current UK standards), would open the UK market to sub-standard agricultural produce and food products (Australian agricultural produce are sub-standard, not just in terms of animal welfare, but also in terms of the use of hormones, neonicotinoids, and other chemicals that are not currenlty allowed in the UK or the EU). This in turn would mean that access for British food and produce to the EU Single Market would certainly be further complicated.
Sadly, given our government’s ruthless and reckless strategy to conclude any trade deal with any country for personal and symbolic reasons, means that chances are such pragmatic economic considerations are not high on the government’s agenda.
Preparing the ground for the blame game
At one level, however, the right-wing press and Brexiteers seem to start preparing the ground for the possibility of an underwhelming impact of the new FTAs on the UK economy. The pro-Brexit press starts preparing the ground for blaming Remainers and the EU for the UK’s failure to reach supposedly salvation of FTAs and CPPT membership. When the Norway FTA was reportedly on the verge of failing a week ago, the Express lashed out at the Norwegian Christian Democratic party’s attempt to block the deal to protect the domestic farming sector and saw it as a punishment for the UK leaving the EU.
Similarly, in an interesting intervention, Jayne Adye, director of pro-Brexit campaign group Get Britain Out, was quoted as saying “lack of experience in the negotiations by public figures - and media interference - is threatening to derail ‘Global Britain’ with a new form of “Project Fear”.’ Whatever negative impact FTAs will have on the British economy or its farmers can then be blamed on inexperience official negotiating the ‘wrong kind of deal’ or the negotiators being bullied by Remainers into too timid an approach.
At the same time, the debates around the Australia trade deal shows interesting new division emerging in British politics. Right wing pro-Brexit newspapers see themselves confronted with a choice of siding with the patriotic, salt-of-the-earth farmers and fishermen or with the libertarian but internationalist free traders amongst the Brexiteers. Some right-wing papers seem to side with farmers rather than the free traders, thus questioning to some extent the idea of concluding FTAs at all cost. Thus, the Daily Mail accused Liz Truss of trying to push through the Australia deal before putting the Commons Trade and Agriculture Commission on statutory footing and giving it the power to scrutinise trade deals. Even the Express, usually a cheerleader for Truss, called on her to ‘sort it out!’ (the mounting concerns voiced by farmers about a zero-tariff deal with Australia).
Following, the mounting discontent of the fishing industry, farmers may open up a new divide in the pro-Brexit camp, making it more difficult for the Government to ‘have its cake and eat it,’ but instead having to decide who to throw under the Brexit bus. This could then lead to further electoral realignment in the British political landscape by creating new groups of voters disillusioned with the promises of Brexit.