Brexit: Global Europeans

Thursday 19 January 2017








While we are beginning to see a reaction to Mrs May's bizarre claim that we can conclude a free trade agreement with the EU inside two years, there is another area that needs some really serious scrutiny.

This is the glowing, fluffy-bunny claim, expressed in her speech that she wanted "this United Kingdom" to be "a truly Global Britain". We are to be a country that reaches beyond the borders of Europe and "goes out into the world to build relationships with old friends and new allies alike".

The idea behind this, of course, is that we will compensate for the inevitable loss of trade with the EU Member States will increased business from other parts of the globe. Embellished by Liam Fox today, May's preferred outcome is that we become "a great, global trading nation that is respected around the world and strong, confident and united at home".

These two, of course, go hand in hand, but not in the way Mrs May might hope for. The world works in very different ways to the way it is painted by the free trade zombies.

I got an insight into this when, for over a decade, I worked for three trade associations, covering the egg, meat and cheese industries. One of those was the UK Egg Producers' Association, representing about 20,000 small producers, some of whom were general farmers who kept poultry, and some specialists.

Most of the eggs were produced by caged hens and a major cost at the time were the EU battery hen welfare regulations, which required considerable capital expenditure to service a market where the returns were already perilously slim.

As such, one might have expected a considerable backlash against "EU regulation" in general, and the EU in particular. But, in fact, industry-wide, there was no great hostility, but for a complex variety of reasons.

Firstly, in the downstream period after the Salmonella and eggs scare induced by junior health minister Edwina Currie, we had seen a torrent of UK law, much of it draconian, ill-thought-out and extraordinarily damaging. The intervention of the EU into the legislative field actually brought a degree of rationality and stability, shaving off some of the rough edges from the UK law and removing a few of the more obvious absurdities. At another level, no supermarket will buy produce that was not fully compliant with EU law

Secondly, from a purely protectionist stance, the fact that EU laws, and especially those on welfare, were stricter than US laws was welcomed. The economics of the industry were such that the US giants could produce eggs at anything up to 15p a dozen cheaper than European producers, while shipping them over in a Jumbo jet would cost about 5p per dozen. Put simply, if the UK market was opened to the US, the domestic egg industry would cease to exist.

Then there was a third, particularly interesting element. Very few of our producers actually exported directly to Europe or anywhere else, but the industry as a whole needed to export in order to stay profitable – and for that, virtually all producers had to comply with EU law.

The issue here was the spring flush. Although commercial laying birds are far distant from the original jungle fowl and live in completely artificial environments, they still go into high gear in the Spring (their natural laying cycle), whence egg production peaks.

This period, though, also matches Easter, one of the periods of highest egg demand – but not exactly. Before the Easter demand takes off, the hens are already in overdrive (especially if Easter is late). Producers watch nervously as a national egg surplus build up, and prices teeter on collapse. With predatory supermarkets, they can easily end up selling at less than the cost of production.

Fortunately, there is an answer – export. For reasons that were never clearly explained to me, the Dutch demand cycle was slightly different to that of the UK, taking off earlier in the year before the hens got going. Thus, by the early Spring, we could usually anticipate an egg shortage in Holland, driving up the prices there.

What then would happen was a number of entrepreneurs would contact UK farmers and buy up the entire UK surplus for a few weeks, and strip the wholesale market. They would fill up a number of containers for transport to the Dutch market. Because of regulatory harmonisation and the emerging Single Market, that had become a simple operation, allowing the price to be stabilised. For many egg producers, the money they then made represented their profit for the entire year.

The point here is that most of the time, most egg producers did not export. But they all needed to comply with EU rules, so that when market stabilisation measures were needed, their surpluses could be exported - even those bought off the wholesale market. And to add to that, the EU was keeping out the Yanks.

Bluntly, at the time, the last thing the egg industry wanted or needed was to drop out of the Single Market. Whether things are different now, I don't know, as I've lost touch with the industry. But I do know that producers would oppose the UK signing up to a free trade deal with the US – one that gives access to our market for agricultural goods. Not only the egg industry would be wiped out. Beef and milk producers would also go, alongside poultry meat and pig producers, plus many others. Meanwhile, a trade deal with New Zealand could wipe out UK lamb production.

Unsurprisingly, a trade deal with the US is not going to happen. By the time the Guardian and others have finished with their exposés on US livestock welfare standards, with cattle crammed in feedlots of a 100,000 or more head (pictured), there is no way a British public is going to accept US produce. And if we did, we would find it very difficult to export manufactured food products to EU Member States unless we could guarantee exclusion of US imports.

Interestingly, disparities in agricultural standards have (in part) been holding up TTIP and it is those same standards which have historically hindered agreement on trade deals between the US and Europe. Our regulatory regimes are just too different. There is no chance of harmonisation.

It is not only in agriculture, though, that this problem is going to be met. Two years ago, I was writing about international tyre standard, where the Europeans and the US had failed to reach agreement on a global standard via UNECE, handicapped by the differences in regulatory philosophies.

For this very reason, there has been no progress on the harmonisation of type certification for vehicles, and no common code for the approval of pharmaceuticals. We also see significant differences in the regulation of biotechnology and financial services. Even philosophical differences in the regulation of toys create barriers between the two blocs.

This is not just – or at all – a problem of differences in wording between regulations (although such differences do not help), but in the use by the Europeans of the precautionary principle in relation to scientific uncertainty, to block the release of products. This compares with a legal obligation for US regulatory agencies to provide strong and reliable scientific evidence and to undertake economic cost-benefit analysis, when considering product approvals.

More generally, the European emphasis is on rigorous pre-release certification, conformity with which largely indemnifies producers from civil liability in relation to risks covered by certification. This compares with less proscriptive release requirement in the US, but with manufacturers exposed to civil action in the event of failure.

These differences will not be easily reconciled. As Hammond said over the weekend, we have largely adopted the European social and taxation model. But he could also have reminded us that we have also adopted the European regulatory model as well. And such are the differences between that and US practice that it is very difficult to service both markets, unless volumes are high enough to sustain the additional costs.

When one adds to this the behaviour of different markets where – as the egg producer example illustrates – the UK industry is fully integrated with its European counterparts, the reorientation of UK trade is not going to be that easy. To become more "global", it will first need to become less "European", and that's going to take a little time – time we haven't really got.


Richard North

https://markets.jpmorgan.com/research/email/g710g98v/q54fPe_t9deyGVFlz9mRpw/GPS-2229790-0

Brexit: Mayday!

The substance of PM May’s speech was so extensively trailed in the media that little in it comes as a meaningful surprise. May confirmed that her vision of the UK’s future is not consistent with ongoing membership of the single market. May stated that both Houses would get to vote on the deal the UK reaches with the EU – it has always been likely this would be the case. May wants to have the freedom for the UK to make its own deals while still facilitating free flows of trade with the EU – a deal on customs co-operation, while leaving the customs unions has always been likely.

One might expect a successful negotiating strategy to have ambitious objectives and a credible fall back position. May certainly has the former. But we doubt the Prime Minister has the latter.

Concluding a free trade agreement with the necessary breadth and scope to create something close to continuity in the UK’s trading arrangements, and doing so within a two-year period, would be unprecedented. Such a deal will be a mixed agreement requiring ratification in all 27 EU member states. It will need to encompass mechanisms for regulation and standard setting across the existing swathe of trade while creating a body for dispute resolution that is not the ECJ but respected by both sides. While the structures that generated these trading relationships have evolved over 43 years of the UK’s EU membership, they will need to be codified in a new bilateral Treaty in something close to two years, without the process becoming bogged down by sectoral interventions or by concerns that the EU and the UK have different ideas on appropriate structures of regulation.

The notion that the UK can simply “fall back” to WTO rules as providing an alternative (as summarised in “no deal is better than a bad deal” is, in our view, very dangerous. Significant parts of the UK service sector would, under these conditions, lose their ability to provide services to EU-based counterparties overnight. Much of the plumbing that supports trade in goods and services on a day-to- day basis would be left without defined administrative processes and legal foundation. The imposition of tariffs is almost a side show relative to these issues. In addition, the UK is threatening that under constrained market access it would reinvent itself as a pseudo-Singapore of Northern Europe via low corporate tax rates and a ‘new economic model’. We note that the success of such low-tax entrepots has typically been at least partially based on the ability of firms to access markets in their locale, not on the withdrawal of that access. And, as we wrote yesterday, it is far from clear that there is a durable political commitment to the UK becoming a permanently low-corporate tax, low-regulation locale.

Taken as a whole, we do not view the no-deal WTO option as credible. So what happens in these negotiations? We assume that the EU will not seek a punitive arrangement for the UK, only that it will negotiate guided by its legitimate self-interest. Even so, we see a high likelihood of a disruptive and damaging outcome. For some time, we have argued that the bespoke FTA route would ultimately see the UK realise that it could not land the required deal within a pre-2020 election timeframe, while the option of a “WTO only” route would be recognised as untenable. Hence, it would be forced to prioritise a set of sectoral deals while seeking to extend the Article 50 process, and the result would be an exit under a hastily arranged patchwork of deals with some sectors seeing significant disruption upon the EU exit. An alternative (to which we ascribe only slightly less probability) is that the EU offers the UK a heavily modified temporary version of EEA membership to allow further time for discussion on future arrangements as the EU exit occurs. While that may have broader sectoral coverage, accepting it would come at high political cost for May, having eschewed the EEA route at the outset.

The next few months and the beginning of the Article 50 negotiation will be key. The crystallisation of the UK government’s approach is likely to generate a renewed wave of research and reaction from business, which may influence how the administration is viewing the process. Furthermore, we suspect that the EU itself will warn that the UK is trying to accomplish too much in a limited time frame, and may suggest other ways of moving toward those aims

Туткалчев
19 Яну 2017 16:25

само в Англия

EU will kill deal