The shackles of the single market and customs union

Being the UK’s Single Market Minister during an intense period of EU legislating when they said they were “completing”the single market turned me from a mild sceptic to a strong critic of the undemocratic approach of the EU. It was quite clear watching and listening to the EU officials during that period that their aim was to take more and more powers of self determination away from member states in the name of the single market. All you needed for a sigle market was the rule that a product of merchandisable quality in one country could be offered for sale in another with suitable labels.

They had a doctrine of the occupied field. Everytime they put forward a regulation or Directive in a new area it meant they established competence or power over that area. Quite often the first piece of legislation did little and was unexceptional. The reason was they merely wanted to capture the jurisdiction without at first using the power in ways that alarmed or upset. That came later, once competence was established.

My job was offen a negative one. The UK government wanted the single market, but also often wanted to resist bad or needless legislation in its name. It was also the case that often the draft regulation was based on a Franco German way of conducting business, and not on a UK way where that was different. I then had to argue for a change of draft to stop UK businesses being made to change their model or being declared illegal.

All this should worry the present government about the Withdrawal agreement. If the UK signed that as currently drafted there would be no UK vote, voice or veto on any law the EU wanted to pass in all the areas of its competence. That means that every business sector and company in the UK would face a prolonged period when the EU might deliberately or inadvertently legislate in ways that damaged their business models with us being unable to stop them.

Why don’t the UK business bodies raise this issue? Why don’t they raise the problems for our car industry created by the attack on diesels, car loans and the costs of purchase? UK industry has suffered from past EU regulations and taxes, and could be made to suffer more.

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Freer trade worldwide

The UK stands on the threshold of being able to lead the movement for freer trade worldwide. If we leave the EU in March we can pioneer new trade deals around the globe. Japan and others would like us to join the TPP, a vast free trade area in fast growing Asia. Australia and New Zealand, Singapore and South Korea, Canada and Japan would all like closer trade relationships than we have enjoyed as members of the EU.

The big issue is how the west relates to China. The world is witnessing a bruising encounter between the USA and China over many trade issues. The USA wants China to remove some of its many tariff barriers. It wants China to allow more inward investment without requiring joint venture partners and technology sharing. It wants a better enforcement of intellectual property rights in China. It wants more action by the Chinese to reduce over capacity and participate more as importers as well as exporters in the world trading system.

The UK should have a place in these debates, and will be able to once we are out of the EU. The UK too would benefit from more open markets in China, and from the removal of more tariff and non tariff barriers to trade by Beijing. The UK is helpful to China as she builds a large banking and financial service industry, with London playing a leading role in the international development of Chinese finance.

Many of us who voted Leave have a global perspective. Recognising the strong logic of numbers, this is the Asian century. Our trade with the EU will naturally diminish as a proportion of the total whether we are in or out of the EU. Our trade with Asia will grow. The issue is how quickly our Asian trade will increase, and how enthusiastic will we be about this development. Now is a good time to be a free trade advocate, and to get involved in TPP and Chinese trade relations. We can be a force for the good, for greater prosperity and more open markets.

It is long past the time when the UK government should publish its tariff schedule for April 2019. This too offers an opportunity to lower the EU tariff schedule we currently use, whilst keeping some bargaining power for future trade deals to eliminate more tariffs. If they see our tariff schedule it might also cement EU enthusiasm for tariff free trade with us.

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The Remain Parliament tries again to stop Brexit

This week the same MPs who look down on Leave supporters and want to dilute or defeat the decision of UK voters to exit the EU were repeating the same tired lies of Project Fear. This was the case put to voters which lost the referendum. They seem to think that all we “stupid” Leave MPs will get it in the end and change our mind about Brexit. Apparently if you shout the same false forecasts and ignorance about how trade works for long enough the country will decide to stay in the customs union and single market, and maybe in the whole EU.

These MPs perpetuate the myth that WTO trade without a customs union cannot work. They seem to think tariffs will have to be paid at the ports with lorry drivers carrying wallets of fivers as if computers and electronic manifests had not been invented. They do not recognise that complex Just in time supply chains already accommodate non EU components and supplies coming in under WTO rules with EU tariffs.They do not seem to acknowledge the substantial friction of EU UK trade, with VAT, customs,currency change, anti terrorism and anti smuggling checks at or away from borders, and with the need to complete a complex Intrastat declaration.

The government proposed a contradiction on Thursday. The Minister said leaving without a deal remains a possibility, as the law says. Yet the government motion said they were taking no deal off the table! That is why many MPs abstained, as we saw no point in voting for such a contradictory and inaccurate motion. Many abstaining MPs agreed with the part of the motion that supported trying to get a better deal from the EU and made clear their support for that.

The Prime Minister needs to press the EU for a better deal and return with that to the Commons in due course if she wishes to reverse the big defeat the Withdrawal Agreement suffered. I agree with her long held line in the election and afterwards that No deal is better than a bad deal. The Withdrawal Agreement is a bad deal. It would need a lot of improvement to persuade me to like it, as I have set out before. It’s not just a case of tweaking the backstop.

Leaving without signing it takes back control of our laws, our money, our borders and our fish. It is what we voted for. We have had 2 years eight months to prepare for leaving, and the government has said we will be ready. The government has said they are not going to block our ports or create new delays at the border, so our imports will flow as before.

I want to see them table a Free Trade Agreement so we do not have to impose tariffs and any other new barriers to trade, and to expedite a managed WTO exit in March. The sooner they do this the better. They should also publish a schedule of tariffs for March 30 so the EU can see what not agreeing to talks on a Free Trade deal looks like. I would have thought they would prefer tariff free to continue.

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Pound rises against Euro

For all those who like to explain movements of the pound on the basis of Brexit news, they should be saying today the pound rose because Parliament voted to keep no deal on the table. The pound is stronger now than before the vote.

As regular readers will know, I think the pound’s movements are usually the result of other economic and market forces.

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Paying for a degree

The topic of student loans and student debt is back on the agenda. There is wide dissatisfaction with the current system. Students worry that they are asked to pay too much and borrow too much. Universities worry that some course fees do not cover the costs of providing a good education. The public debate worries about access to higher education for students from lower income backgrounds, and about the value of some courses to a person’s life chances.

I am a fellow of an Oxford College drawing no salary. The College is a research institution financed from Endowment income. It has no students and no fee income so I am not conflicted or pursuing self interest in this matter.

The case for the student loan system initiated by Labour and extended by the Conservative/Lib Dem Coalition government was straightforward. Going to loans allowed universities to expand and more students to attend. A grant based system implied rationing as there were limits to the amount of state cash allocated to this service. Universities themselves would decide how many places to offer and set entry requirements. The system as a whole would supply money and a place for anyone wanting to go who met a university’s standards. The taxpayer was let off paying grants. In some cases lower income taxpayers without the benefit of a degree had to pay more tax to give a grant to someone would go on to earn many times their income, which was generally thought unfair.

The problems of the loan scheme were also well understood. Many students would not repay them, leaving taxpayers with the debt after all. Graduates with a large debt might feel constrained about buying a home or building their own business as they had already borrowed a lot. Some people would be put off going to university, not liking the idea of starting adult life with a big debt.

There were attempted fixes for some of these problems. People from lower income backgrounds can apply for access funds or scholarships, so they can borrow less and still pay the bills. In an attempt to cut taxpayer costs from non repayers the interest charge was set high. The successful and honest ex students are asked to pay more to cover some of the costs of those who never earn enough to repay or of those who leave the country to try to walk away from their debt.

Reform is the air, with both Labour and Conservative wanting to move to lower fees or no fees. Replacing the whole system with grants would be very expensive and raises the issue of state rationing again. Cutting the maximum fee will curtail universities and militate against more dearer courses in science which require expensive facilities and more intensive teaching.

Offering more scholarships to lower income students might be a better way forward, with scope for government and universities to negotiate over how many and who pays. Universities do provide access funds, and many are building endowments with independent financial capacity to help students.

The provision of university places is not a proper market. There is a fee cap, which means they all tend to charge the same maximum permitted, whilst there does have to be a system of rejecting some who want the service but are not qualified to benefit. Just as under the state financed system that went before, there is a market for talent where the brighest and best qualified tend to go to the universities that come out highest in league tables, thereby reinforcing their positions.

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Inflation, money policy and wages

Yesterday came the expected good news that headline inflation is below the 2% target. Core inflation has been below target since June 2018. Meanwhile wage growth is around 3%, so real wages are now rising. People can look forward to having more to spend as their pay goes up.

The Bank of England has been changing its mind about all this. In a past good lecture the Governor argued that there is no longer a simple trade off between lower unemployment and higher inflation. The so called Phillips curve suggested that if unemployment fell wages started to go up faster, leading to price inflation and the need for the authorities to rein things in. Revision to this pointed out that in a modern open trading economy like the UK prices are held down by global competition, and wages by inflows of migrants and by importing labour intensive goods and services from lower wage countries. In his most recent speech the Governor has rowed back a bit on this sensible observation. He claims that there is once again a modest trade off between lower unemployment and higher wages, and that therefore the Bank will need to tighten further to control prices in the months ahead.

I do not agree. It is true wages have been going up faster in the last year, but there is no evidence this is flowing through to prices which remain under the cosh of global competition. In part wages have gone up through the introduction of the Living Wage, in part through cost push pressures in areas of the economy like care homes where recruitment has been difficult. The danger is lifting interest rates too far too fast will plunge us into a downturn. There is too little money and credit about as it is, given the Bank’s tightening policy. The Governor does at least acknowledged that he has deliberately tightened policy over the last year.
It is time he said job done. The Fed has been more magnanimous in saying they have tightened enough. The Bank of England should also say this more clearly, and work to ensure a decent supply of credit to households and businesses. As The Governor argued convincingly there is no debt problem in either the public or banking sectors in the UK. With China slowing and the Eurozone stalling we need a positive policy in the UK. With inflation under target now is a good time to promote growth and allow people to buy more cars and invest more in property and business.

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The Bank of England forecasts a modestly faster rate of growth for 2021-22

The latest Inflation Report from the Bank expects Uk growth to improve in the second half of its three year forecast period from now, reaching a bit above 2% after a period at lower levels. The Bank thinks supply and demand is currently in balance in the Uk economy, that it will slow a bit this year leading to a small amount of surplus capacity, followed by a tightening.

As the Governor himself has explained in a past lecture, this concept of domestic capacity has its limitations as a way of estimating what will happen next to prices. Given the open nature of the UK economy, capable of importing goods and services from around the world that are in short supply at home, a lack of capacity does not automatically translate into higher prices. Given the enthusiasm of UK companies to welcome employees from overseas there is also a countervailing pressure on wages as the local jobs market tightens up through substantial job creation. Despite this the Bank thinks it will need to toughen monetary policy as they approach the second half of the forecast period, which will in itself slow things a bit.

The Bank’s figures show that the UK this decade has grown faster than the Eurozone, and the Bank sees the sharp slowdown in Eurozone growth in the second half of last year as a factor slowing our economy. They recognise that the bigger slowdown in residential property prices in London resulted from being “disproportionately affected by regulatory and tax changes” often commented on here. The by to let and Stamp Duty tax changes hit turnover and prices of the expensive London properties. They see a modest slowdown in the world economy as a whole, and do not see any major inflationary threat in global markets.

They mention Brexit frequently, saying they might respond either way depending on when and how it occurs. There is no sign of a recession in either their world or their UK forecast, though they acknowledge the recessions now stalking some of the continental countries. It would be good to have more analysis of why this is happening in the Euro area and what knock on effects it will have on our exporters. They remind us that the European single currency area accounts for 38% of our current exports. Presumably the slowdown or recessions in continental countries could mean some favourable downward pressure on our import prices, where we import many more goods and food than we export to them.

The UK economy has held up well at a time of negative growth in Italy and Germany and slowdown in France. This has happened against a background of UK policies that have led to a large reduction in new car sales, and a slowdown in housing transactions. Buy to let investment by individuals has been reduced substantially by tax rises, and new car sales hit by policies against diesels along with higher VED particularly for dearer cars.

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The world economic slowdown

The Central Banks of the USA, Euro area, UK and China have all been slowing the economies they regulate. The US economy has done the best, as the Fed has allowed substantial credit growth in the private sector to offset some of the impact of rate rises and the reduction of Quantitative easing money and repayment of bonds. As a result the US economy which started to grow at more than 3% may manage more than 2% this year. The impact of the tax cuts and fiscal stimulus administered by the government is helping.

The Bank of England has been the toughest, cutting money growth considerably, reining in car loans and consumer credit, putting through two rate rises and ceasing all Quantitative Easing. The European Central Bank has been the softest, continuing with large amounts of money creation and bond buying up to the end of last year, and flagging no rate rises for the foreseeable future. Their current interest rate of 0% is lenient.

Despite this the Euro area economy is slowing the most. Italy is in recession, reporting reductions in output in both the third and fourth quarters last year. Germany had a down quarter in the autumn and may have had another down quarter to December 31. Greek and Cypriot output remains miles below the 2007 levels, with Italian GDP also still lower than pre crisis in real terms. French growth is slowing markedly and the whole Eurozone is back in stagnation. The UK is managing slower growth, which shows underlying strength given the squeeze being administered by both the Bank and the Treasury.

China has seen a small slowdown in growth on the official figures, with reports of a sharper slowdown for manufacturing and imports. Chinese money policy has also been more restrictive than in the past, with the authorities now signalling they wish to relax a bit to avoid more damage to growth.

It is difficult to see what the Eurozone can and will do to lift things. It is a poor background for the traditional parties fighting the European elections in May, but it is the result of the disciplines of the Eurozone. All the time the Germans and the other richer surplus countries decline to send more grants and cash to the poorer parts, it reinforces the need to squeeze budgets to keep finances in control. This in turn leads to slower or no growth, which in turn means less tax revenue and a bigger budget squeeze.

The Euro, just like the Exchange Rate Mechanism it replaced, is a recession machine for the weaker economies. That is why the Italian government tried to get a different budget, and one of the reasons why populist parties around the continent are making progress electorally.

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Brexit end game?

As we listen to the ticking clock we are assured by the PM the UK will leave the EU on 29 March this year. The question remains how.

It sounds from the government line and the line of Mrs May’s helpers that they want to get Parliament to reconsider the Withdrawal Agreement which Remainers and Leavers united to defeat. They seem to think they can pose Remain MPs with the choice of no deal versus the Agreement where they might prefer the Agreement, whilst saying to Leave MPs it is Withdrawal Agreement versus No Brexit. The problem with this approach, as tried last time, is it is contradictory. The threat of No Deal issued to Remain supporters is exactly what many Leave voters now want.

It is not credible to say to Leave MPs Brexit will be cancelled if the Withdrawal Agreement is rejected again. The government would have to propose rescinding the Article 50 letter and embark on the repeal of the EU Withdrawal Act. Many MPs would realise this would destroy the trust of electors. It would lead to the loss of many seats as Labour and Conservative MPs who had won in 2017 on a clear promise to implement Brexit faced retribution from angry voters at the following election. It is difficult to see how Mrs May’s leadership would survive any such attempted U turn on such an important issue, and questionable whether DUP support for the government could last either.There is every reason for MPs to stay loyal to the Conservative or Labour Manifesto and refuse to repeal the legislation.

I suppose there is just a chance that Mr Corbyn might help Mrs May put through delay if he thought it would damage her more than him, but it would be volunteering to open up worse divisions within Labour as well. Both leaders would have to reaffirm commitment to Brexit and would need to persuade the EU that there was some point to a delay. The EU so far has said the negotiations are over on the Withdrawal Agreement, and not offered talks on the future partnership until the Withdrawal Treaty is in force. What would the basis of delay be, as the EU would presumably want all sorts of things in return for a longer time period in the EU?

To a Leave MP the Withdrawal Agreement was easy to vote against because it is not leaving. It is a further 21 to 45 months in the EU, accepting their new laws without any say on them, under their court, and paying large unspecified sums to their budget.With the backstop it might keep the UK in a customs union permanently. The Conservative Manifesto very clearly promised the UK would leave the EU, single market and Customs Union. The Labour Manifesto promised to leave the EU and set out a detailed trade policy that would be incompatible with Customs Union membership.

Mrs May might late in the day get some legal text offering reassurances about the backstop. It is unlikely to be a full rewrite of the Agreement taking the backstop out in the way Parliament requested through the Brady amendment. This should not be enough to lead to the successful passing of a motion in favour of the Agreement after all, and certainly not enough to give the government a majority for the complex legislation it will take to put the 585 page agreement into UK law. It is difficult to see a way of avoiding a full debate on the complete agreement, whatever the draft Withdrawal Agreement Bill might say, allowing plenty of opportunity for doubts to be expressed about many features of this comprehensive lock up of UK sovereignty under a new and damaging EU Treaty.

Given this Remain may well seek delay instead. The issues this poses are two fold. Why would the EU consent to 3 to 9 nonths delay, given their view that the negotiations are over and the Agreement cannot be re opened? How would this fit in with their timetable for European elections and a new Commission? Why would they want to prolong the exit of a country that is clearly going to leave and is refusing their expensive terms for an extension of membership?

At home lies the seconds issue. Many voters will ask why would the UK want delay? It prolongs business uncertainty. It makes the UK look feeble and indecisive. It delays new trade deals and stops us spending the money saved on exit. It fails to take back control of our laws, our money and our borders.

What are the things we can get the EU to agree in April and May that we cannot get them to agree in February and March against the pressure of the deadline of departure? The public want government and Parliament to just get on with it. That is also the best negotiating strategy.I still want a managed WTO exit with a UK offer of a free trade agreement which could avoid tariffs and other new barriers to our EU trade.

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Who is running Brexit policy and what is it?

If you listen to Sir Martin Donelly, former Permanent Secretary at the Department of International Trade and friend and supporter of Ollie Robbins, senior civil servant negotiator for the UK,  the UK has to accept that the Withdrawal Agreement is as good as it gets and sign it.

So we can guess there is a senior strand of advice and opinion within the current civil service which says the UK must seek to change Parliament’s mind and get on with signing up to the Withdrawal Agreement they have negotiated. Doubtless they will help the PM get some clarification or side document to the Agreement over the backstop to try to secure its passage on a second attempt.That would sign us up  to the 21 months or more of very expensive talks, submit us to  the Irish backstop which looks like a device to get us to stay in the customs union, and place us at a huge disadvantage in trying to negotiate a so called future partnership.

Much of the civil service  work as I understand it from press reports and Ministerial statements has been to map all the contours of our current relationship with the EU and try to replicate them whilst claiming we have in some technical sense left the EU. This of course has all been under the guidance of Ministers, and Ministers have to take responsibility for what the civil service does as soon as they sign the work off. There does not seem to have been any effort to design and table a Free Trade Agreement, and our best trade negotiator Crawford Falconer has been kept well away from all the EU talks.

This strand of opinion gains considerable support from the Chancellor and the Secretary of State for Business. They have expressed their continued regrets at our departing the EU and have made clear their opposition to leaving without a Withdrawal Agreement. They have exuded hostility to WTO Brexit and do not look as if they are trying to smooth our passage in that eventuality. They keep in touch with a limited  number of leaders of large international businesses and seem enthusiastic every time one of those speaks out about alleged dangers of leaving. Indeed we can read reports that they encourage businesses to accentuate the negative. Many of the scare stories say we will have trouble importing, yet the government has not set out just why and how it will mess up our ports.

Within government we also have figures like David Liddington, Deputy Prime Minister and Gavin Barwell, Chief of Staff at Number 10 with strong Remain pedigrees who wish to reach out to Labour to find a compromise across Parliament to delay or water down Brexit.

The Prime Minister herself seeks to balance these Remain forces with the much larger number of pro Brexit MPs on the government and DUP benches. She herself always rules out staying in the Customs Union and single market, as stated in the Conservative Manifesto and by both sides in the referendum. She says she does not want No Deal but it has to be there in case there is no agreement which is better. She never wavers in saying we will leave on 29 March.

She has also rubbed out the clear red line in the Manifesto that nothing is agreed until everything is agreed, and forgotten the promise to negotiate the future partnership in tandem with the withdrawal agreement to maximise leverage and read across.

The problem is the warring factions around the Cabinet table and in Whitehall, where it appears there are more who wish to delay or thwart the will of the people than there are believers in just leaving in March. Parliament has rightly decided the Withdrawal Agreement is a bad deal – or indeed no deal at all, as it does not relate to the  future partnership. Most of the time the  PM works with the big majority in her party to get us out of the EU on time. When she does she wins the votes. When she tries to reach out to the small Remain group of Conservative MPs and listens too much to those forces in government that still cannot be reconciled to a proper Brexit on 29 March, she stumbles and loses votes. She should now set out a vision of how we will spend the money, use the new powers and settle a new trade policy if we just leave on 29 March.

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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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