This week’s news were dominated by the UK having for the first time in its history a convicted law breaker as Prime Minister (and Chancellor) and by the diversion tactic of the new plan for immigration (pushed through by the Home Secretary via a ‘ministerial direction’ to overcome opposition within the government). Both events are related to Brexit, but already received a large amount of commentary from people with much greater expertise in these areas than I have (see on the law breaking UKICE’s Jill Rutter and of course Chris Grey’s blog post; on the new refugee policy look out for UN HCR’s commentary). Other Brexit-related events I feel more competent to comment on concern trade and ‘levelling up.’
The Trade and Agriculture Commission (TAC) published its advice on the Australia Free Trade Agreement (FTA) this week, and we finally got to learn about the details of the UK Shared Prosperity Fund (UKSPF), the centrepiece of Michael Gove’s ‘levelling up’ agenda.
The UK-AUS FTA’s impact on nature, animals, and humans
An interesting piece of Brexit related news this week was the TAC’s advice on the Australia FTA, because the deal was lauded by the government as ‘world-leading’, but strongly criticised by the National Farmers Union (NFU) and called a ‘trade capitulation’ by the FT’s Alan Beattie (see my previous blog post). Therefore, the TAC’s advice is interesting not just regarding this first big post-Brexit FTA itself, but also in terms of the UK’s strategy regarding FTA with other countries.
The TAC had the mandate to advise on concerns in the areas of environmental protection, animal welfare, and public health by answering three questions: “whether the FTA requires the UK to change its levels of statutory protection in relation to (a) animal or plant life or health, (b) animal welfare, and (c) environmental protection”, whether it reinforces the UK’s levels of statutory protection, or whether it affects the UK’s ability to reinforce protections in these areas.
On BBC Radio 4 Farming Today, the chair of the TAC, Prof. Lorand Bartels - incidentally an Australian national – summarised the findings as essentially rejecting any concerns about the FTA’s impact on the environment, public health, and animal welfare as either exaggerated or unfounded.
Reading the report, however, it is not entirely clear what the optimistic assessment is based on. Or rather, it is clear that it is based on a very minimal, procedural understanding of environmental protection, health, and animal welfare. The conclusion is essentially based on the fact that the FTA does not reduce the UK’s ability to adopt environmental regulations compared to the current WTO rules; in some cases the FTA even requires both parties to maintain existing standards. So, the positive assessment is essentially based on the – questionable – assumption that current standards are good enough in both countries (indeed, there is a strong relativism inherent in the report: ‘It can never be assumed that what is normal in one country needs to be normal in another. Nor, as a rule, does international law, or trade agreements, entitle one country to determine production practices in another country. The assumption is that states are sovereign, and when they cede sovereignty, they do so voluntarily.’)
Where problematic practices are acknowledged (such as mulesing of sheep without pain relief), the report minimises concerns because the commission argues that import of such produce into the UK will not increase significantly; and if they do the UK’s ability to ban a produce does not change compared to WTO rules.
That sounds reassuring…Except, of course, that these existing rules already set a pretty high bar and burden of proof for the country that seeks to ban any imports due to public health, animal welfare, or environmental concerns. Indeed, imposing measures on imports covered by the agreement requires that the country imposing the measures is able to demonstrate the causal link between the practice and the negative effect on the UK, is able to prove the necessity of the measure to address the issue, and is able to show that the measure is not a ‘disguised restriction on international trade’ or an ‘arbitrary or unjustifiable discrimination between countries where the same conditions prevail.’ Therefore, any attempt to block imports that raise concerns – however legitimate – can be challenged by the exporting party and quite possibly defeated on the grounds that they constitute unjustified discrimination.
Furthermore, in the area of environmental protection, the FTA adopts an odd definition of environmental laws whereby ‘Australia’s “environmental laws” are defined as meaning only Commonwealth laws. This is significant, because under Australia’s federal system most environmental legislation is at state and territory level.’ In other words, Australia’s obligations under the FTA only apply to its federal laws, not to its more important state and territory level legislation.
Moreover, despite the confident argument throughout the report that the FTA will not affect the UK’s ability to maintain its standards, the TAC seems to advocate for the UK to change its regulatory regime and possibly algin it on the Australian regime. This transpires most clearly regarding pesticides. The report mentions different pesticides that are permitted and widely used in Australia but banned in the UK. These include neonicotinoids, the herbicide paraquat, and fungicides such as epoxiconazole and chlorothalonil. Yet, rather than mentioning the devastating effects of these substances not just on pollinators, but also on bird species, or the long-term effect the decline of pollinators will have for humans, the TAC stresses the negative impact of the reduction of pesticide use on yields and farming profitability. Thus, the report notes that “the restriction on neonicotinoid pesticides in the UK has contributed to a significant reduction in production of canola (oilseed rape) in the UK.” Rather than acknowledging any legitimate concerns regarding pesticide use, the TAC seems to suggest that post-Brexit UK may want to ‘learn’ from Australia: “It should be noted that regulatory cooperation under the FTA may facilitate the UK’s exposure and understanding of the Australian pesticides approvals regime as it continues to consider the best future model for its own independent regime.”
The report on the AUS FTA makes it clear what the TAC’s priorities are – on Radio 4’s Farming Today programme, it’s chair stated that ‘competition is the name of the game.’ Everything else is secondary. As such, the TAC adopts a naïve 19th century free trade approach, where any liberalisation is unquestionably good, regardless of the unequal impact on different groups of people - let alone on animals and the environment. The report also betrays a resolutely technocratic world view that James C. Scott has called ‘high modernism.’ The commission still believes that (short-term) yield and profitability are the only relevant standards by which to judge agricultural production methods; and technologies like pesticides and OMGs are the way to improve this metrics. Even in a report on the environmental, human health, and animal welfare impact of the FTA, these areas are only considered as an afterthought. The TAC does not seem aware that it is precisely the unfaltering belief in human ability to control nature that has brought us to the brink of a man-made mass extinction.
This attitude is of course not surprising from a commission that counts amongst its members arch-libertarian Brexit ultra Shanker Singham. Brexit is a reactionary and retrograde project that seeks to turn back the clock a century or two. The TAC’s advice fits that project by applying that retrograde thinking to the analysis of environmental impact of trade.
Overall then, despite the reassuring tone, reading between the lines and looking behind its legal details, the report does not make one confident that Britain’s post-Brexit trading regime will avoid going down the deregulation route. Indeed, despite all the reassurances, the TAC notes that the FTA leaves room for the UK ‘to adopt decisions under the agreement, together with Australia, that may constrain its freedom to regulate in the future,’ and that ‘these decisions are not necessarily subject to parliamentary scrutiny in the same way as amendments to the agreement, although any implementation of these decisions in domestic law would follow ordinary parliamentary procedures.’ In other words, while the FTA leaves room for the UK government to defend its environmental, animal welfare, and public health standards, it also leaves room to do the opposite. It is not hard to guess how the current government will use this leeway.
Regardless of the impact on environmental and animal welfare standards, we should not forget that the impact of the FTA on the UK economy is most likely going to be negligible (adding .08% to GDP, according to the Office for Budget Responsibility), while nothing in the report suggests that the impact on UK sheep farmers will be positive.
Trade in services – the right kind of growth?
In other Brexit-related trade news, we are getting used to shock headlines, such as City AM announcing based on new HRMC figures that between 2020 and 2021 the number of British businesses exporting to the EU has dropped by a third due to Brexit red tape (an interpretation that HRMC cautions against due to methodological changes to the way data are collected). There are also more of the now familiar stories of agricultural produce rotting in the fields due to a lack of buyers, most recently the case of a beetroot farmer in Staffordshire.
Yet, there are also some positive headlines. Thus, City AM reported that ‘City firms launch recruitment drive despite Brexit warnings.’ The article comments on a report that shows that banks, brokers, and insurers in the City of London are recruiting for 73 per cent more roles in the first quarter of 2022 compared to 2021. No doubt, Brexiters will call out Remainers for fearmongering over the job growth in financial services. Yet, the article also makes it clear where that job growth comes from, namely ‘[s]tronger income generated from deal making.’ In other words, what is booming is a speculative financial activity that generates profits for shareholders, but oftentimes few economic benefits for the firms concerned or for the wider economy.
An article by Richard Barfield for the UKICE think tank provides evidence that rather than a financial service boom, what we are witnessing is a displacement from some financial activities to others. Indeed, overall, post-Brexit financial service exports to the EU have declined by 38% between 2018 and 2021, while they remained stable with the rest of the world; professional service exports declined by 12% compared with a growth of 40% to the rest of the world. That is a dramatic decline, with important implications for the UK economy given that services accounted for 80% of UK economic output and 47% of its exports, earning a ‘trade surplus of £117 billion in 2018, including £23 billion with the EU.’
The reason for the decline are the direct result of Brexit as changes to trading arrangements ‘impede UK champions such as financial services (loss of passporting rights) and professional services (derecognition of qualifications).’ Therefore, it is likely that what we observe is a growth in those types of financial and professional services that do not rely on access to the EU market, but a steep decline in those that do. Activities like mergers and acquisitions can be carried out remotely, something services firms increasingly do since the pandemic, thus avoiding any post-Brexit issues with mobility of service workers. But even here, Brexit may eventually put a limit to how much the City can grow. City AM notes that “[f]inance firms are struggling to plug roles due to a scarcity of highly-skilled workers.” Therefore, to maintain growth in the service sector in the long run ‘the UK has little choice but to negotiate lower barriers with the EU’ as Barfield notes.
Yet, to date, there is no evidence that the UK government is ready to do anything of the sort. The Brexit ideology of ‘sovereignty’ is so engrained that all the government is willing to do is applying band-aids to gaping wounds. An illustration of that approach came this week regarding cabotage rules for touring musicians. Since Brexit, the number of unloads in the EU is limited to three in ten days, after which the truck has to return to the UK before being allowed to re-enter the EU, putting at risk many tours of the continent. This week, the Department for Transport (DfT) has agreed to bring in a short-term, temporary license that would allow the ‘big five’ haulage companies to operate their vehicles under both GB and EU operating licenses depending on where their vehicles are needed for a particular tour. That will still mean extra costs for tour operators, but avoids the most disastrous effect of the impact of the Trade and Cooperation Agreement (TCA) on the industry. Once again, Brexit works best when it is not implemented.
In short, then, the impact of Brexit on services is variegated. Some activities may not be as badly hit as others, and may indeed benefit depending on how regulations evolve. For instance, if the government went down the Singapore-on-Thames model, turning the UK into the world’s largest low regulation, off-shore tax haven and refugee for dirty money, that could potentially lead to an inflow of capital and thus arguably generate aggregate economic growth. What matters, however, is not so much the evolution of an abstract econometric measures such as GDP growth, but how that growth affects people’s lives. A Singapore-on-Thames strategy will not bring back jobs to the formerly industrialised areas in the midlands and north of England. It will generate capital inflow into financial centres, most importantly the City of London. As such it will mainly benefit the already rich elite of financiers and rentiers rather than improving the living conditions of people in formerly industrial heartlands of the UK. Therefore, such an approach would make things worse not better. Indeed, average GDP growth is not all, regional and sectoral distribution is everything. It is on that front that the Johnson government is failing. This was illustrated this week by the long-awaited publication of details on the UK Shared Prosperity Fund (UKSPF).
Sharing prosperity or spreading pain?
After considerable delay, Michael Gove’s Department for Levelling Up finally published the prospectus accompanying the UKSPF, which constitutes the centrepiece of the government’s ‘levelling up’ agenda and is meant to replace EU structural funds. Since this post is already getting too long, I will not go into the details of the SPF here. An excellent summary of its functioning and key issues was provided by the FT’s Peter Foster in his weekly Britain after Brexit column.
Suffice it to say that from the reactions of the regions concerned it becomes clear that few people seem ready to believe the government’s reassurance that the SPF does indeed guarantee that no region will be worse off than during EU membership. Indeed, rather than matching the £1.5bn yearly that regions used to receive under the last EU budget, the government only promises to gradually increase spending to reach that amount by 2025. In the meantime, the government counts transfers of remaining EU funds towards the overall amount and will only spend £0.4 billion this financial year, £0.7 billion in 2023-24 and £1.5 billion in 2024-25. In other words, more band-aid treatment for a gaping wound. Unsurprisingly, the reactions in the regions most reliant on EU funding were scathing. The Northern Powerhouse Partnership estimates a real terms cut in funding of more than a third compared to EU membership and Welsh First Minister Mark Drakeford fears a shortfall of £1bn for Wales.
Moreover, Peter Foster considers that rather than delivering on the promise to make funding easier compared to the EU system, all the UKSPF does is replacing EU bureaucracy with home-made red tape. The Institute for Fiscal Studies, in turn, considers the UKSPF a missed opportunity to update the system to take into account demographic changes in different regions and address the inequalities in the EU funding regime. Instead, the UKSPF entrenches them further. In other words, once again, where there was a real Brexit opportunity – however limited – the government did not manage to deliver on it due to bad policy making.
As the fog of the pandemic is lifting and the clouds of Brexit promises are dissipating, while actual post-Brexit policies and economic developments become clearer, there can be no doubt that we are miles and miles away from the sunlit uplands we were promised. Not even the staunchest Brexiters can deny that, as is becoming clear especially from the desperate attempts to ridicule any effort to analyse the impact of Brexit. Thus, Time Stanley’s newly-coined term Brexit Derangement Syndrome, that I wrote about last week constitutes a plea to stop talking about Brexit. However, as Chris Grey noted in his usual perceptive way, it reveals the opposite of what it pretends to capture: ‘Presumably, Brexiters believe that leaving the EU will make long-term differences to the UK. If not, then why bother to leave? But, if so, then why would it be deranged the discuss the effects? The obvious answer is because they have been so dire that they discredit the decision to leave.’
This week’s Brexit-related events provide no evidence whatsoever to reconsider that conclusion. The separation from the EU has left gaping wounds all over the UK – the Northern Irish border being the most egregious one, but the shortfall in regional funding, and the massive effect of Brexit on the UK’s most successful export industries follow not far behind. Yet, all the government has to propose are band-aids. Needless to say, that the haemorrhage will not be stopped until the UK government moves back from the world of fantasy and wishful thinking to the reality of policy making.