Archive for the ‘Economics of Brexit’ Category

The Agriculture Bill is radical, but it may not be enough to sustain smaller British farms

A new focus on environmental stewardship and animal welfare in the Agriculture Bill has pleased some conservationists. But British farmers will probably now have to compete on price with agribusinesses in the US. Richard Byrne (Harper Adams University) asks whether the new subsidies will be enough to keep smaller UK farms afloat.

The long-awaited Agriculture Bill was published on 16 January 2020. It will replace the Common Agricultural Policy (CAP) as the UK leaves the EU, a policy which has long been maligned for encouraging over-production and damage to the environment. While it has changed substantially since the 1990s, it remains a large and bureaucratic system, bemoaned by farmers and criticised by environmentalists.

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Leicestershire field. Photo: Iain Merchant via a CC BY 2.0 license

The bill is a radical step. It seeks to redress the core environmental issues of the CAP and further link farming and the environment, with the aim of promoting long term sustainability, or at least environmental stability. Farmers will no longer be paid for owning and managing land to a certain level. Instead they will be rewarded for delivering a range of ‘public goods’, including climate crisis mitigation, flood protection, improving wildlife habitats, and protecting soil.

It is the latter that it perhaps the most radical element of the new bill. UK farming has for many years had a ‘Code of Good Practice’ for protecting water, soil and air, which has had little impact on soil erosion and degradation in the UK. Soil is key not only to agricultural production, but water and ecosystem management, and the bill will promote and ‘reward’ the protection and improvement of soil quality.

The new ‘Environmental Land Management Scheme’ (ELMS) under which the new aims will be delivered is similar to the existing ‘Stewardship’ programme, but indicates it will work at a larger and more integrated land management scale and well as incorporating key areas such as animal welfare and public access. In short, the new bill brings together a raft of objectives from CAP and domestic legislation and is an ambitious attempt to make food production environmentally, animal and consumer friendly.

While some immediate issues about its implementation and the transition period have been raised, the bill’s aims have been generally well received by both farming and environmental organisations. It is clear that integrated land management is the way forward and the bill recognises the positive role food production plays in conservation. It also builds upon the lessons of ‘Stewardship’, and hopefully there will be a natural progression for farmers as they are phased into the ‘land management’ objectives.

However, it does all depend on having a viable and functioning agricultural system. The UK’s agricultural landscape is one based upon a range of farming types from small family owned units, tenant farmers to larger family-owned farming businesses and very large agribusinesses, many of which are international in nature. Each of these businesses has played a part in the development of the rural landscape, the rural economy and the sustaining of the present environment, and as such are integral to the delivery of the bill’s aims.

Given the government’s stance on aligning trade and regulation with the EU and its ambition to make a ‘quick’ trade deal with the US, the economic viability of many farming units – particularly the smaller ones, which often have high environmental or landscape interest – may be under threat. The new bill sets out high standards for UK production and even with support these will most likely increase the cost of production. Because the EU has common regulations, the cost differential is generally down to factors such as land prices, labour and inputs. Now, UK production will potentially be competing with food produced in countries (such as the US) with different standards of animal welfare, environmental management or able to use production methods banned in the UK, all of which will make those products cheaper. At the same time UK farmers will lose access to the single market, which is important for both whole products and the value-added food trade. UK farmers will therefore have to compete with cheaper food imports while losing export markets. This will also affect consumer choice in the UK. While many consumers say they want to buy products produced with environmental oversight, the reality is that most are driven by price. The result could be many UK farm businesses going bust or being swallowed up by larger units where the appeal of the Agriculture Bill payments will be less compelling.

So while the UK will continue to produce food, the environment and landscape may shift to a more efficient and industrial-type model. To counter this, the National Farmers Union has called for legislation that would prevent the import of food produced to lesser standards than that in the UK. This is unlikely to be successful as it would be a barrier to free trade, and the US (among others) would surely object.

The UK now has an agricultural policy which – in its outline form – has to an extent succeeded in bringing together both agriculturalist and environmentalists. However, there is still much detail to add to the bill. Most worryingly for rural communities, and for consumers, is that the future of UK agriculture is now locked in a wrangle between domestic policy and future trade relationships, with the UK’s biggest potential trading partner, the US, unable or unwilling to address production standards or the climate crisis in its negotiations.

This post represents the views of the author and not those of the Brexit blog, nor LSE.

Not necessarily more protectionist – Brexit may make EU trade policy more progressive

The conventional wisdom amongst many commentators has been that Brexit will render EU trade policy more protectionist, as the Union would lose one of its more liberal Member States. Ferdi De Ville and Gabriel Siles-Brügge argue that this is not necessarily the case. Instead, they highlight how the EU could render its trade policies more progressive by insisting on more stringent ‘level playing field’ provisions with other trade partners as they are doing now with the UK.

The Conservative majority following the December 2019 UK General Election means that negotiations between the UK and EU will from February move from the ‘divorce’ talks to discussing the future economic partnership. The content of this new economic partnership will be of vital importance not just for EU-UK relations, but also for the UK’s and the EU’s own future policies.

In a special issue of the journal Politics and Governance, a group of scholars has assessed how Brexit – including different possible outcomes for the future economic partnership – might affect EU policies across a range of policies. In this blog post, we build on our own contribution concerning EU trade policy in the light of the new UK government and European Commission, which also assumed office in December of last year.

The common-sense position amongst many observers has been that that Brexit is likely to make EU trade policy more protectionist, as one of the most commercially liberal Member States will leave the EU. We contend that this prediction needs to be qualified for at least three reasons.

While Brexit will lead to the removal of UK representatives from the EU institutions, it does not necessarily mean that the interests currently represented by the UK will disappear. Economic operators might decide to relocate their activities to the EU. The extent to which this will happen depends not just on the future economic partnership, but also on the degree of ongoing uncertainty.

A failure to agree on a future economic partnership without an extension to the transition period is likely to be a highly unstable outcome politically given its significant (negative) impacts. Where a cliff edge is avoided despite the UK government sticking to its insistence that it will not seek an extension to the transition period, the Commission’s position is that negotiators ‘will have to prioritise’. Issues, where the EU cannot take unilateral mitigating action, would likely be resolved later. And if the transition period is extended that would also prolong the uncertainty.

The important point is that one cannot simply ‘subtract’ current UK interests from the EU’s future preference constellation as much depends on how businesses react. Both a looser economic partnership and more uncertainty might mean that more UK-based interests dependent on frictionless trade and cross-border service delivery might relocate to the Union. Counterintuitively, a hard Brexit, following a drawn-out negotiation, might actually lead to fewer changes in the EU’s interest constellation than closer economic alignment following a smoother set of talks.

Secondly, other public or private actors in the EU that align with the UK on trade policy might adjust their strategies to secure their interests post-Brexit. This has already happened with the creation of the Hanseatic League, a coalition of small, northern European Member States supportive of free trade and budgetary restraint.

Finally, the future course of EU trade policy also depends on how Brexit is framed. If the referendum result is interpreted as a call for protection by the losers of globalisation, a less liberal response is likely. But if Brexit is framed as a retrograde, protectionist move, then it could serve to legitimate (more) open, and potentially deregulatory, trade policies.

In the three and a half years since the referendum, the EU has generally reinforced its liberal trade policy orientation. Brexit and the election of Donald Trump as US President were seized on by the European Commission to present the Union as the ‘leader in trade’ that the world needs. In this period, under the leadership of Commission President Jean-Claude Juncker and Trade Commissioner Cecilia Malmström, a plethora of ongoing trade negotiations have been concluded with the likes of Canada, Japan and Mercosur (the regional economic bloc involving Brazil, Argentina, Uruguay and Paraguay). New talks were also launched with Australia and New Zealand, amongst others. However, as the Brexit process moves to its next stage, and with a new European Commission in office under the leadership of Ursula von der Leyen, there exists an opportunity to reframe the EU’s trade policies.

The day after the UK General Election, von der Leyen stated that the EU’s goal in the upcoming negotiations was to achieve ‘zero tariffs, zero quotas, zero dumping’. This new slogan underlines the importance accorded by the EU to preserve a ‘level playing field’ between the EU and the UK. The aim is to avoid UK-based firms undercutting EU firms as a result of less stringent competition and state aid rules, lower taxes and laxer social and environmental protection.

Such provisions – providing for, amongst other things, non-regression on labour standards and environmental rules, dynamic alignment on state aid rules and the transposition of EU tax directives – were already included in the initial draft of the Withdrawal Agreement which featured a ‘backstop’ customs union between the EU and the UK. They may have since been dropped in the renegotiated Withdrawal Agreement – which no longer features such an agreement on a customs union – but remain relevant for the next phase. Top EU politicians and officials have since repeatedly warned the UK that it should not follow up on the threat, or ambition, to turn itself into a ‘Singapore-on-Thames’ if it wants to maintain easy access to the Single Market.

Beyond Brexit and the UK, this strengthened emphasis on a level playing field in exchange for extensive market access could become a more extensive feature of the EU’s future trade policy with third parties. While the UK is both more proximate and significant than other trade partners, there is an argument to be made that the EU could be more consistent: it is harder for the EU to justify withholding market access to the UK if it pursues a ‘Singapore-on-Thames’ strategy when it just concluded a trade agreement with Singapore that did not feature as stringent provisions.

We would argue that the context is potentially also fortuitous in terms of upgrading the EU’s relatively weaker commitments on ensuring a ‘level playing field’ on social and environmental standards. Recent provisions in free trade agreements have only gone as far on non-regression (e.g. in CETA) and are not enforceable through sanctions.

Reciprocity has been a long-standing motif within EU trade policymaking, informing previous moves to establish an International Procurement Instrument and the EU’s 2010 ‘Trade, Growth and World Affairs’ strategy. But current policies are pulling reciprocity in a stronger and markedly more environmental direction. The new Commission’s ambitions in respect of climate and environmental policy, as outlined in the ‘European Green Deal’, have led it to propose a ‘carbon border mechanism’ that seeks to prevent ‘carbon leakage’ – or the offshoring of emissions.

While many EU policymakers may hope that ‘Brexit’ will become a less prominent feature of 2020, its effects on the EU still loom large. As the process moves to the next stage of negotiations on the future economic partnership, the impact of Brexit on EU-UK relations and on the UK’s and EU’s future policies remains uncertain. In EU trade policy, we have so far not seen a protectionist turn as has been expected by several observers. However, if the negotiations with the UK raise the profile of ‘level playing field’ provisions on the environment and labour standards this could change EU trade policy in the longer term. For the better, we would say.

This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image by NOAA’s America’s Coastlines Collection, NOAA Photo Library.

Brexit is finally going ahead. Is it the wrong answer to the right question?

Brexit, it seems, is finally going ahead – although it would be fair to say that we don‘t know quite what it is yet, in the sense that it is still not clear exactly what our trading relationship will be with the EU. It is even less clear whether Brexit is the right medicine for what ails UK politics, writes Kevin Albertson (Manchester Metropolitan University).

This is not a blog so much about the economics of Brexit, as about the gut feelings of Brexit. Brexit, we suggest, is a visceral reaction to the lack of control that many in the UK feel they have over their lives, their prospects, the prospects of their children and the future of their communities. The catch phrase “take back control” appeals precisely because many of the people of Britain feel they no longer have agency over their own lives. The spirit of Brexit has arisen from legitimate concerns, but will not address these concerns. Despite assurances by statisticians and politicians, for many in the UK economic progress would appear to be a thing of the past. This is not a problem caused by the EU. Economic progress will not return – and neither will “control” – when we leave the EU.

GDP – The illusion of growth

Often increases in real GDP or (less often) in real GDP per capita are taken to be indications that life is getting better. However, much of what passes for wealth creation under the current system of national accounts may in reality be wealth destroying. This is because GDP fails to take into account the impact of current economic activity on the future carrying capacity of the world. GDP does not measure welfare so much as economic throughput. If, however we net out the impact of household and government debt, ecological deficits, and other wealth destroying expenditure, we find the global economy has effectively been stagnant for four decades, since 1978.

This is not to say that there have not been winners and losers, of course. There have been millions in (what some call) the developing world, who have been raised out of poverty by global trade, and the global elites have also prospered. The working class of the OECD, less so – even in terms of income (which is, in any event, a flawed measure). In the UK, this stagnation has led over recent decades to each generation on average being less wealthy (and less likely to own their own home) than the preceding generation. As Benjamin Freidman has noted, when the benefits of economic growth are not widely shared, liberal aspirations are held by a lesser proportion of the population. The UK is hardly a recipe for a society at peace with its prospects; it follows support for liberal institutions such as the EU may suffer.

Global unemployment

Adding to the existential angst of those whom the world economy is beginning to leave behind is the nagging suspicion that many people and communities, even cities and nations, are quite simply not required by the global economy at all: there is just not enough well-paid work needing to be done. In a globalised neo-liberal world, not to have well-paid work is not to be valued. Currently, according to the Gallup organisation, global unemployment is 33% . Not all jobs are capable of sustaining prosperity, however: In this regard, Gallup further estimates there are only enough good jobs (full-time, decently-paid) for one-third of the world’s adult population. It need hardly be said, this is a significant shortfall. If we are to reduce economic throughput to meet ecological constraints, yet fewer good full-time jobs will remain. This lack of decent employment is particularly concentrated amongst the young and may be one of the primary causes of unrest in some parts of the world. In the UK lack of decent prospects is unlikely to promote an appetite for international liberalism amongst those who – whether as a result of government policy or globalised market forces – have been left behind, or rather, excluded. Such excluded citizens are likely to demand the national government “protects” their prospects.

Neo-colonisation

Some states have responded to the lack of decent employment by facilitating rotten jobs, by pushing down terms and conditions of employment and/or pushing up precarity. Others respond by effectively exporting their unemployment to other countries through maintaining a balance of payments surplus. The People’s Republic of China and Germany are notably successful in this latter regard, especially when compared to the UK with its long-run balance of payments deficit. As well as further reducing the demand for labour as UK industries shed employment having lost global market share, maintaining a trade deficit leads to further governance problems.

The UK’s trade deficit is financed in part by the sale to foreign interests of its public services, utilities, productive industries and housing. As the UK becomes increasingly foreign owned, it seems reasonable to be concerned that the nation may be run for the benefit of a globalised elite than for the benefit of its citizens. Whether this is a valid concern or not is a moot point, it is perceptions which count in politics.

It is clear many of the decisions of recent UK governments have apparently not reflected the concerns of the demos. For example, the UK electorate disapprove and have disapproved of four decades of tax and welfare and privatisation policies – yet are apparently powerless to influence the government’s stance on these matters. No wonder the electorate feel the need to take back control! However, leaving the EU is hardly likely to provide a solution to the lack of democratic accountability of the national government.

Progress in a stable economy

It is tempting to conclude that the solution to the problem of stagnant or declining prospects is to continue to emphasise growth. However, as we have argued above, what passes for “growth” in the world economy, is largely based on increasing debt and deficit.  We must rather recognise that, like it or not, we have a world economy which is stable, or if you prefer, stagnant. This does not mean the end of progress – it may mean a different kind of progress. As John Stuart Mill, notes, in a stable economy where population is also stable and inequality is constrained we might expect:

a well-paid and affluent body of labourers; no enormous fortunes, … [and] a much larger body of persons than at present, not only exempt from the coarser toils, but with sufficient leisure, both physical and mental, from mechanical details, to cultivate freely the graces of life.

This sounds appealing – except, for some perhaps, Mill’s requirement of “no enormous fortunes”. It is clear restraint on the part of elites’ fortunes is unlikely to come from repeated rounds of the globalised free-market game of Monopoly. On the contrary, history indicates markets lead to economic concentration of wealth and power over time. However, there is no need for the UK to leave the EU in order to address increasing wealth and privilege held by decreasingly few: Many EU nations are less unequal than the UK.

It’s not the common market, it’s the free-market

In short, it is not our relationship with Common Market which is the problem, it is our relationship with the globalised winner-take-all free market – and the relationship of the left-behind regions of the UK with the central government – which want addressing.

This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image by William Warby, Creative Commons licence.

It’s still the money, stupid: Britain continues to pay into the EU budget

Although Britain leaves the EU at the end of January 2020, it will continue paying into the EU budget until the end of the implementation period. Iain Begg (LSE) says that although the issue has faded from view, Boris Johnson will still have to decide whether to continue paying in order to secure access to spending programmes such as Erasmus.

“Money is a great servant but a bad master” – Francis Bacon

With the UK on the cusp of formal exit from the EU, the difficult and acrimonious disputes over the ‘backstop’ already seem distant. The revised withdrawal agreement negotiated after Boris Johnson became prime minster is now seen as a success and there is new optimism about the chances of securing a trade deal in line with the political declaration. Oddly, though, the budgetary dimension of UK-EU relations has faded from view. It was once a different story, and thereby hang a few tales.

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Photo: Images Money via a CC BY 2.0 licence

After the 2016 referendum was called, one of the most contentious issues was the scope for the UK to gain from no longer being a net contributor to the EU budget. Everyone remembers the red bus and the controversy around the claim of a £350 million per week windfall for the NHS.

Despite being debunked by the Statistics Authority, the watchdog charged with overseeing the use of official statistics, the £350 million figure continued to resonate with the public and has undoubtedly fomented expectations of a boost to health spending.

In July 2017, Johnson (then Foreign Secretary) agreed with a backbencher’s suggestion that the EU could ‘go whistle’ for the money, although he later back-tracked to say that the government would agree a financial settlement, but ‘not a penny more, not a penny less’ than needed to meet its legal obligations. Even so, he regularly restated the claim. The chair of the Authority, Sir David Norgrove, subsequently wrote to Johnson in September 2017 reproving him for persisting in using the misleading figure.

In the fraught parliamentary battles of autumn 2019, Johnson repeatedly claimed every extra week the UK stayed in the EU was now costing UK taxpayers £400 million – typically adding that it was money that might otherwise have gone to a struggling NHS. He was taken to task by the BBC’s Reality Check for precisely the same reasons as when commentator after commentator deplored his previous insistence on the notorious £350 million per week.

However, this is only part of the story, because the ‘divorce bill’ negotiated as part of the withdrawal agreement meant that the UK had accepted responsibility for continuing to pay into the EU for the whole of 2020. Article 135.1 of the WA is explicit:

“For the years 2019 and 2020, in accordance with Part Four, the United Kingdom shall contribute to and participate in the implementation of the Union budgets.”

The other main part of the settlement covers obligations entered into while the UK was a member state, but for which final payment falls due after the end of 2020. The UK accepts it must pay, but the deal specifies that payments will only be made when required, the last of which (notably for the pensions of former EU staff) may be decades hence.

Given Johnson’s stance on the budget contributions, not to mention that of Dominic Cummings, Number 10 might have been expected to push for a revision of the financial settlement included in the withdrawal agreement. Yet the Johnson version of the withdrawal agreement did not materially alter the terms of the ‘divorce bill’ the UK has agreed to pay. Estimates (and they can only be approximate because some of the obligations may lapse) for the May WA pointed to a headline total of around £39 billion payable after the end of March 2019.

This figure has now fallen because the two extensions to the Article 50 process effectively meant the UK continued to pay into the EU budget as a full member up to the end of January 2020, ten months longer than expected. Quite simply, instead of paying through a divorce bill, the UK has instead paid the same amount as a member state.

Could all this be one of the reasons for the government’s determination not to extend the implementation period? Despite concerns about the compressed timetable for negotiating a new partnership with the EU, the government is adamant that it will not countenance going beyond the end of 2020, even though there is the option to do so. A key clause in the withdrawal agreement is Article 132.2(d) which states: ‘for the period from 1 January 2021 to the end of the transition period, the United Kingdom shall make a contribution to the Union budget, as determined in accordance with paragraph 3’.

The ‘paragraph 3’ wording is quite vague, referring to a decision by the ‘Joint Committee’ on the ‘appropriate amount’, but from a domestic political perspective, the implication is clear: the UK would, in the much-used phrase, still be ‘sending money to Brussels’. Ending the transition promptly would appear to forestall the invocation of this clause.

Nevertheless, despite withdrawing, the UK is likely to want to remain part of certain EU spending programmes, beyond those for international development aid (the European Development Fund) already included in the withdrawal agreement. The two most obvious ones are future EU research programmes and the Erasmus scheme which supports mobility of younger people. Indeed, a recent editorial in The Times reminded readers how Boris Johnson, when Mayor of London, had welcomed foreign students. As the Thunderer opined, ‘there is no reason why Brexit should lead to Britain quitting Erasmus.’

To sum up, the renegotiation of the withdrawal bill has not reduced the transfer of money to the EU, even though the eventual headline total will have diminished. There are also unresolved matters about future UK payments to Brussels. These may be politically touchy, but demonstrably in the national interest. Is this a case where the large Tory majority should allow the government to avoid grandstanding in favour of rational decisions? Perhaps Boris, given his fondness for the classics, should reflect on what Sophocles said: “There’s nothing in the world so demoralising as money”.

This post represents the views of the author and not those of the Brexit blog, nor LSE. It first appeared at UK in a Changing Europe.

Getting Brexit done? We are still a long way off the certainty that business craves

There has been a lot of discussion recently about “getting Brexit done”, which the government at least seeks to use to give the impression that this also includes the trade deal with the EU, and the ability to move on to trade deals with the rest of the world. There are however several reasons why the reality is somewhat removed from this, writes Nigel Driffield (Warwick Business School).

Firstly, the political declaration has very little detail on trade, except for some understanding that there will have to be some frictions in trade between Northern Ireland and the rest of the UK (something that the prime minister seems happy to deny, even in the face of documentary evidence). The CBI this week urged caution that “sustainable economic growth will be risked if there is a needless rush for a bare bones Brexit deal that would slow down our domestic progress for a generation.”  – recognising the reality that this deal is some way off providing any certainty to business, especially in terms of stimulating investment. The prime minister claimed before the election that there was “£150 billion” of inward investment waiting to flood into the UK once he “gets Brexit done”. Leaving aside the size of this number (roughly 50% more than last years total, which is admittedly 40% down on the year before), many of these issues, plus certainty over exchange rates, inflation will have to be addressed before the UK becomes as attractive for investors 

In my opinion, the current situation affords an utter lack of clarity in at least three areas:

1.           “WTO terms”. People assume that this provides some sort of multilateral agreement that in some sense replaces our existing trade deal. Instead, it simply offers a baseline of anticompetitive behaviour countries can not stoop below while retaining membership. As with all matters to do with trade, large countries and large trading blocks use the WTO as they see fit. America, for example, loses roughly half of the cases that it brings to the WTO, and then, when it has lost, largely carries on as before.

2.           Rules of Origin. To my mind, it is shocking how little attention this has received. In order to have “free trade agreements” one has to abide by what are called “Rules of Origin”. That is to say that if a product (or service) is stamped as “made in the UK”, a certain percent of the total value must have been generated in the UK – or imported and been subject to tariffs paid (under WTO rules) at the point of importing them. At present, UK goods need to meet the requirements as “made in the EU”, but once we are independent much higher proportions of goods will have to have been produced here. Brexiters argue that this will lead to activities being brought back to the UK, but given then existence of trade costs, one would ask, if we could produce these inputs as efficiently as foreign producers, then why are we not doing it already. Those advocating “free trade” see the solution as cutting all our import tariffs to zero, but that is likely to risk many more jobs.

3.           Quality assurance for exporting. This is likely to hit sectors such as food and drink. At the moment, participation in the single market requires the UK to carry out a certain level of quality assurance of goods exported to the EU. At the moment we just about meet this threshold (and get some leeway due to our market size and contribution). As a third country, we would need to do roughly three times as much checking, and at present, we do not have sufficient trained people. This can be addressed over time, but will cause significant difficulties in the medium term, especially if other countries – such as Canada or Australia demand the same. Again, one wonders if this is why certain brexiters have advocated us adopting the same standards as certain developing countries.

So, taking this together, one can see that we are still a long way off the certainty that business craves. There appears to be a clear division now between the political need to announce both a trade deal with the EU, and one with the US, and any desire to understand the benefits (and costs) associated with that deal. There is some suggestion this week that access to UK fishing waters is a concession the EU will demand in exchange for bank passporting. The government will then have to trade off the political fallout of this with the economic fallout should the city find EU access restricted. Such tradeoffs have hitherto been ones the government have sought to deny that they even exist, and it will be interesting to see if economic expediency trumps political posturing.

This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image: Pixabay License.

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