Brexit: How Hard is Hard? Searching for a Soft, Hard-Boiled Egg

Words are flying, generally pointed at UK prime minister Theresa May for forcing the UK into a “hard” Brexit.

by Mish

Is that Theresa May’s doing or is it German chancellor Angela Merkel’s doing? How about the “gang of 27”? Does the question even matter?

Regardless, the search is on for a solution. Financial Times writer John Gapper, argues for a soft hard-boiled egg. Is there such a thing?

Chief executives do not usually call press conferences to confess their uncertainty, so Carlos Ghosn’s appearance at the Paris Motor Show last week made a refreshing change. “I don’t know what it means. What does it mean?” inquired the Renault and Nissan boss when asked about Brexit.
It means a shock for the car industry if Liam Fox, UK international trade secretary, has his way. Britain has entered “a ‘post-geography trading world’ where we are much less restricted in having to find partners who are physically close to us”, Dr Fox insisted in a fatuous speech on the same day. Forget the EU, which accounts for half of the UK’s exports; gaze into the distance.
Dr Fox has made little secret of his enthusiasm for the hardest of hard Brexits. He would like the UK to leave not only the EU and its single market but also the tariff-free customs union that it formed in 1968. If it abandons all three in 2019, when Brexit occurs, he will have a job negotiating trade deals with the rest of the world. Until then, he must defer to the EU’s agreements.

Liam Fox on Free Trade

Gapper is referring to a speech by UK’s international trade secretary, Liam Fox, regarding Free trade.

Let’s skip for a moment to the Telegraph article Liam Fox Signals Britain will Leave the Single Market in ‘Hard Brexit’ to pick up on statements by Fox.

Ten Liam Fox Statements Regarding Trade

  1. “As a newly independent WTO member outside the EU, we will continue to fight for trade liberalisation as well as potentially helping developing markets trade their way out of poverty by giving them preferential access to our markets.”
  2. “The UK is a full and founding member of the WTO, though we have chosen to be represented by the EU in recent years. As we establish our independent position post-Brexit, we will carry the standard of free and open trade as a badge of honour”.
  3. “Protectionism never helps anyone at all. Who does it harm more if we end up in a new tariff environment?”
  4. “It is in everyone’s interests that we have at least as free trading environment as we have today, anything else may not harm institutions but it will harm the people of Europe and it is the people of Europe who should be at the forefront of our thoughts.”
  5. “It is an exhilarating, empowering and liberating time yet this bright future is being darkened by the shadows of protectionism and retrenchment. History teaches us that such trends do not bode well for the future.”
  6. “That is the glorious joy of free trade – it is not a zero-sum game, it really can be win-win. The EU/Korea free trade agreement (FTA), which came into effect in July 2011, is just one example. In the year before the FTA was agreed, the UK sold just over 2,000 cars to South Korea. In 2014 that number reached over 13,000.”
  7. “In 1945, both North and South Korea began from a very similar base, but while South Korea embraced open trade and free markets, Pyongyang turned inwards with the tragic consequences for its citizens that we see to this day.”
  8. “Seoul is now at the heart of a thriving economy and dynamic democracy where freedom and prosperity are shared among all its people. It should come as no surprise that while over 80 per cent of South Koreans have access to the Internet, less than 0.1 per cent of North Koreans enjoy the same.”
  9. “More tragically, there is a greater than 10-year discrepancy in the life expectancy of those north and south of the demilitarised zone. For the prize of free trade can be measured not simply in terms of economics but in human terms too.”
  10. “There is a reason why those who wish to diminish political freedoms try to have closed economies because they know that, especially in the era of the technical revolution that is the Internet and social media, open markets will sweep in empowering and liberalising ideas.”

Protectionism Never Helps Anyone

Those statement by Fox make me want to stand up and salute.

Fox’s speech contained the best collective set of statements regarding free trade by any politician in history, quite an amazing performance. Fox is precisely the correct person to handle international trade for the UK.

Let’s now return to the Financial Times for a point-by-point rebuttal to Gapper’s search for a soft hard-boiled egg.

Gapper: Much rests on how seriously Theresa May, prime minister, takes Dr Fox’s quack remedies. Not very, I hope. The gospel of global free trade utopianism that his wing of the Conservative party preaches, with no evidence that it works in practice, correctly scares many companies. While politicians opine about the wonders of the post-Brexit world, they deal with the business reality.

Mish: Pray tell Gapper, when was the free trade last tried? Ironically, we have massive amounts of evidence that protectionism does not work.

Gapper: There is a near-zero chance of the EU and UK reaching a comprehensive trade agreement by 2019 so she has two options. One is a very hard Brexit: reverting to World Trade Organisation status in 2019, including the tariffs that it requires. The other is an interim deal to remain in the single market or customs union until they reach consensus.

Mish: An interim deal is theoretically possible, but the EU cannot dictate the terms. Moreover, demands are increasing. This is precisely what happens when a collection of bureaucrats from 27 nations all get a say in every treaty negotiation. Open your eyes Gapper: The Gang of 27 Hits UK with Impossible Demands: EU Seeks “Inferior” Deal for UK. Got that? The EU demands an “inferior but fair” deal for the UK. That’s impossible by definition.

Gapper: Dropping out of the EU into the WTO fallback in 2019 would not only involve companies such as Nissan paying a 10 per cent tariff to sell cars to Europe (and the other 53 markets with which the EU has trade deals) but would put supply chains at risk. Imported parts comprise £12bn of the £15bn materials in cars built annually in the UK, according to Vendigital, the consultancy.

Mish: If the EU looked the other way and so did the UK, the WTO, which settles disputes would not even be involved! That’s the bottom line. The EU could easily make a decision not to place a tariff on UK cars, and of course the UK could do the same.

Gapper: Tariffs would be only one of the barriers. Every model of vehicle would have to be approved under rules of origin before it entered the EU. As parts from component makers such as Bosch and ZF in Germany crossed into the UK, any delays at customs would imperil the just-in-time vehicle assembly lines for which they were bound.

Mish: That really highlights the stupidity of such allegedly “free trade” agreements! Doesn’t it Mr. Gapper? Moreover, the UK would actually stand a chance of changing WTO policy whereas it has no chance of doing the same within the EU as an outsider. Heck, the UK could not influence the EU from within the organization. Again, this is what happens when you put yourself at the mercy of 27 nations all demanding a say in something.

Gapper: The blithest of Brexiters insist there is no problem. The UK is the largest export market for German carmakers such as BMW and Volkswagen, and the EU will not want to put this at risk, they say. The UK should declare that it will not impose import tariffs and place the onus on the EU to follow. They ignore the fact that there is no choice: the WTO requires duties on imports from countries with no trade agreement.

Mish: Gapper repeated an argument. I repeat my reply: If the EU looked the other way and so did the UK, the WTO, which settles disputes would not even be involved! That’s the bottom line. The EU could easily make a decision not to place a tariff on UK cars, and of course the UK could do the same.

Gapper: Will Mrs May be guided by Dr Fox or by Mr Ghosn on the value of Europe’s tariff-free zone? One is a former doctor with exotic theories about trading more with Australia. The other is an international business leader who employs British workers — the people whose lives she wants to improve — in a strategic industry exporting cars to Europe. How hard should that choice be?

Mish: It should be an easy choice. No one benefits from protectionism, and no one should pay bribes. Ghosn seeks repayment of taxes by the UK, if the EU imposes them.

Are Mercedes and Volkswagen going to seek repayment of tariffs for cars headed to the UK?

You see Mr. Gapper, you cannot play this from both sides of your mouth at the same time. If WTO rules demand Goshn (Nissan) pay taxes, those same rules require 10% tariffs on …

  • Mercedes-Benz (Germany)
  • Volkswagen(Germany)
  • BMW (Germany)
  • Audi (Germany)
  • Alfa Romeo (Italy)
  • Ferrari (Italy)
  • Fiat (Italy)
  • Peugeot (France)
  • Renault (France)

UK Cars: Aston Martin, Bentley, Caterham, Daimler, Jaguar, Lagonda, Land Rover, Lotus, McLaren, MG, Mini, Morgan, and Rolls-Royce.

Who gets by far the worse deal here? Luxury car buyers might not even care about tariffs.

Mike “Mish” Shedlock

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