Blog Featured

May doubles down on deception by Harry Western

Written by Harry Western

A senior economist outlines two deceptions at the heart of the Government’s Chequers strategy. The most important public policy choice in a generation – how to implement Brexit – is being driven by a mixture of shoddy calculations, exaggerated claims and deliberately misleading use of data.

The prime minister’s speech at the Conservative Party conference, and the subsequent events, should leave no-one in any doubt that the government’s aim is to push through a form of Brexit that will be Brexit ‘in name only’. This will mean permanent effective membership of the EU customs union and single market, but with the UK having no say in the running of either – the ‘vassal state’ of which Boris Johnson and others have warned.

At the heart of the government’s deception strategy are two elements of the ‘Chequers’ proposals: the ‘common rule book’ for goods trade and the ‘facilitated customs arrangement’. Both have been misrepresented by government in their key details.

The ‘common rule book’ is a (deliberate) misnomer – what it actually would be is the EU rule book. The government claims this rule book covers only a ‘narrow area’ of EU law and is ‘relatively stable’. Both of these assertions are untrue.

As well as product standards, this ‘rule book’ would cover a whole swathe of other EU legislation on competition policy, environmental policy and social and labour standards, plus some tax elements such as the VAT system. The number of EU directives, regulations and decisions promulgated in these areas each year is very high, in the hundreds.

The government has also claimed that adopting these rules would not be automatic, with the UK parliament having the right to block them. In theory this may be true, but in practice it will not be as the sanctions for doing so will be very significant – perhaps even the collapsing of the entire future UK-EU agreement.

So, in reality the UK parliament would continue to copy and paste vast amounts of EU legislation every year under these proposals. Moreover, these proposals would sharply limit the scope of the UK to run an independent trade policy, as the ability to vary UK regulations in key areas including agri-food would be lost.

A further misleading claim by the government in this area is the suggestion that the proposed alignment of UK and EU rules in areas like the environment or labour markets resemble the undertakings seen in modern free trade agreements such as the Canada-EU (CETA) or Japan-EU FTAs.

This is a very serious distortion of the factsModern trade agreements do contain chapters on labour and environmental issues but the undertakings they contain are quite modest. The so-called ‘non-regression’ clause on environmental standards, in CETA for instance, merely state that the parties ‘recognise’ it is inappropriate to weaken environmental or labour standards to attract trade and investment. Regulatory co-operation undertaken under the aegis of CETA is described by the EU as ‘always voluntary and in no way limits the ability of the Parties to carry out its own regulatory, legislative and policy activities’.

The facilitated customs arrangement (FCA) is a façade, sold dishonestly and designed to fail and leave the UK in an effective customs union. The idea is that the UK would run a dual tariff system whereby goods destined for UK end-consumers would be charged different rates from those intended for on-shipment to the EU. This would supposedly allow the UK to have an independent trade policy while also minimising trade frictions with the EU.

The earliest version of this proposal was roundly condemned by trade and logistics experts as unworkable, bureaucratic and costly. A key problem was the system of rebates proposed, whereby UK importers would have to pay the EU tariff on non-EU goods but could then claim it back if they could show the imported goods were bound for a UK end-consumer. It was not clear that such tracking was possible and even if it were, the costs of claiming rebates in this way could be prohibitive.

These objections appeared to have sunk the FCA earlier this year but it then re-emerged in a new and supposedly improved form. The key ‘improvement’ was that the rebate system would now only apply to a small proportion of UK trade – allegedly 4%. This figure has been described by trade policy experts at Sussex University as ‘a serious underestimate’ and ‘not credible’.

In reality the rebate mechanism would have to apply to a large chunk of non-EU imports to the UK, imposing large costs on business and again making running an independent trade policy very difficult.

The government claims the rebate mechanism would not apply to finished goods imports from the rest of the world but given how easily many of these goods could be on-shipped to the EU (where some would normally face high tariffs) there is no way the EU would accept this. For imported inputs used in UK finished goods, there are also complications. For example, for those final goods exported to the EU, a different tariff might be payable on the imported inputs than for inputs into finished goods staying the UK. For this to happen, the whole original consignment of imported inputs would need to be tracked from the outset.

There are key further problems with the FCA. It may be inconsistent with WTO rules (by granting an effective preference to EU imports), it is not clear how it would work in the presence of divergent anti-dumping actions between the UK and EU and – most important of all – it has been publicly opposed by the EU.

It seems likely that the FCA was never intended to be implemented and is just a fig leaf which allows the government to pretend it is working towards the UK having an independent trade policy while intending the opposite. It was probably always set to be dropped at some point, in favour of participation in a customs union, either openly or in disguised form (for instance the UK continuing to follow the EU external tariff). Recent suggestions that the UK might continue to participate in a ‘temporary’ customs union after the end of the proposed two-year transition point very strongly to this being the government’s real long-term intention.

The misleading statistics used to try to sell the FCA are unfortunately just the latest in a long series of exaggerations and manipulations used by government and officials, first to try to stop Brexit and then to try to neuter it

  • The Treasury’s 2016 long-term study of Brexit used flawed methodology and extreme assumptions to generate big negative effects on UK GDP from Brexit (the estimated impact on UK exports being several times too high, the huge estimated effects on productivity having a very thin evidential basis) and then compounded this with a misleading presentation of the key results.
  • The ‘Cross-Whitehall Briefing’ earlier this year similarly generated big negative effects on GDP from Brexit based on hugely exaggerated estimates of future trade barriers – its claims on the scale of non-tariff barriers that might be faced by UK exporters to the EU were up to ten times higher than reputable academic estimates.
  • Estimates presented by HMRC on the costs of running a ‘MaxFac’ customs system (essentially a normal system similar to that now applying to non-EU imports) were anywhere from five to twenty times too high thanks to a mixture of double-counting (now admitted) and dubious claims about the future cost and number of customs declarations.

The government is also using misleading claims about the Irish border issue to further its efforts to neuter Brexit. Recent suggestions by the Chancellor that the UK would be obliged by ‘WTO rules’ to erect a hard border in a ‘no deal’ Brexit scenario are untrue. And crucially, suggestions that such a border would be needed to prevent the EU single market somehow being disrupted by cross-border trade flows have been rubbished by the Irish revenue commissioners themselves who now see no need even for customs checking posts away from the border (as earlier floated) given how low and predictable most cross-border flows are. The ‘Irish backstop’ is unnecessary and increasingly looks like an excuse cooked up to push the UK into permanent customs union membership.

In short, the most important public policy choice in a generation – how to implement Brexit – is being driven by a mixture of shoddy calculations, exaggerated claims and deliberately misleading use of data. Rather than seeking to use evidence to shape its understanding of Brexit-related issues and design sensible solutions to the various practical challenges Brexit poses, the government has at every turn over the last year engaged in a process of manufacturing evidence, justifications and smokescreens for pursuing a pre-determined policy course: a course completely at variance both with its Lancaster House aims of 2017 and the subsequent general election manifesto.

 

Harry Western is the pen name of a senior economist working in the private sector who needs to remain anonymous

About the author

Harry Western