More sabre rattling

In recent weeks I have posed a number of economic questions of Brexit. My issues are never addressed head-on. Instead, the usual response is for supporters of the policy to meet my question with another question which is irrelevant to the issue at hand. I probably shouldn’t be surprised: This has been the modus operandi of Leavers throughout the past four years who have never been able to successfully answer any questions on the economic benefits of Brexit. But we cannot run away from the issues forever, and the latest salvo from Chancellor Sajid Javid in an interview with the FT suggesting there will be no post-Brexit regulatory alignment with the EU raises questions that need to be answered.

To quote directly, “there will not be alignment, we will not be a ruletaker, we will not be in the single market and we will not be in the customs union - and we will do this by the end of the year.” He justifies this stance by arguing that companies have had three years to prepare for a new economic relationship. But they haven’t really. Theresa May’s administration was concerned to minimise trade frictions with the EU and it has never been clear what regulatory arrangement the government was aiming for. It is even less clear today. The fact that the government has postponed EU exit three times in the last ten months means the business community is increasingly unsure which deadlines it has to meet, which has added to the confusion. Following the government’s cancellation of regular meetings with industry groups there appears to be a widening gulf between the needs of business and the government. No wonder that business investment has barely risen in the past three years.

Digging deeper only reveals the flaws in Javid’s thinking. His suggestion that “Japan sells cars to the EU but they don’t follow EU rules” is to ignore the fact that Japan has invested heavily in the UK precisely in order to have production facilities which allow it to comply with EU regulations. His hope to boost annual GDP growth to “between 2.7% and 2.8%” a year also sounds like a big stretch when you consider that the slowdown in population growth appears to have reduced the potential growth rate to something closer to 1.5%. His belief that “Once we’ve got this agreement in place with our European friends, we will continue to be one of the most successful economies on Earth,” was pure hubris. How an economy which neither grows particularly quickly nor has exceptionally high incomes per head, let alone one with a debt-to-GDP ratio close to 90%, can be considered “one of the most successful economies on Earth” strains credulity. The economic situation is not terrible but his is not a description of the UK economy I recognise.

As I can attest from my own experience, just because Javid has worked in a trading environment does not mean he necessarily knows anything about economics and I have no idea whether the man entrusted to looking after the nation’s finances believes this nonsense. I rather suspect he does not, as this gem taken from his Brexit referendum literature in 2016 confirms (see graphic above). Consequently, his comments can simply be seen as a bargaining ploy to get the EU to take seriously the UK’s threat to walk away with no deal at the end of 2020. However, I maintain that such an approach is counterproductive. Nobody doubts that a no-deal Brexit will cause some hardship for the EU but it will only have a problem with one trading partner whilst the UK will have a problem with 27. This type of posturing was tiresome three years ago – today it appears deluded.

There is a clear sense that the government is trying to reboot the economic model, in much the same way as the Thatcher government did 40 years ago. The difference is that the economic failures of the 1970s justified trying out new policies. By the early 1980s, the old industries on which the UK had depended for the better part of a century were no longer globally competitive. One of the ways the UK moved forward was to focus on new sectors, particularly in services, and new markets, particularly the nascent EU single market. The case for such a radical economic change is absent today (though you can argue about the need for political change). If the UK is, as Javid believes, “one of the most successful economies on Earth” what is the argument for such a radical structural change?

Over the last four years, many Brexit supporters have consistently failed to acknowledge the importance of regulatory harmonisation for trade. Industries with cross-border supply chains, for example, do not have to worry whether their products meet local requirements if they are sanctioned for use within the single market. Industries such as pharmaceuticals have to meet stringent requirements before their product is certified for use by the general public. Having the same set of rules across different markets makes it easier to sell across borders, and ultimately reduces costs from which the consumer benefits. Regulatory harmonisation is even more important in service industries where it is so much easier to impose little obstacles that can derail trade. Sajid Javid might believe the UK is no longer going to be a rule taker in international trade rules but he is wrong. Trade rules are what underpin the system and if you want access to the Chinese, Indian or American market you have to abide by the rules in those markets.

I have been upfront about my concerns regarding leaving the EU over the years. Even though I was on the wrong side of the Brexit decision, I can live with the referendum result so long as the economic disruption can be minimised. But I remain opposed to the decision to leave the single market, not only because it was not on the ballot paper in June 2016 but primarily because it threatens to impose higher costs which will lead to a reduction in economic welfare. The Brits do have legitimate concerns about the extent to which the UK may be forced to adhere to future changes to EU law on issues such as the environment, and I will deal with this problem in a subsequent post. Indeed, this may be one of the motivating factors behind Javid’s comments. Nonetheless, for too long politicians have been allowed to get away with economically illiterate arguments to support their political case. This is another such example, and there is a serious risk that one day the EU will call the UK’s bluff.