Brexit, Trade and Tariffs

Boris Johnson is renowned for being too lazy to bother getting to grips with details. For a populist politician, like Johnson or Trump, details are just an inconvenience that get in the way of their promotion of alternative facts, of easy solutions that they can promote to a gullible electorate, and, when reality then does come along to confront the fallacy of their easy solutions and alternative facts, they simply find some scapegoat for their own failures, they deny the reality for as long as possible, and proclaim that the messengers of that reality are merely purveyors of fake news. Eventually, as appears to be happening to another right-wing populist, currently, Erdogan in Turkey, the reality becomes too undeniable, but, in the meantime, such populists can create considerable chaos and disorder. 

Johnson, has understandably avoided undertaking any rigorous interrogation of his ideas, precisely because of his inability to analyse details, or to incorporate them into his development of policy. His policies are not, in fact, policies at all, but nothing more than a fanciful wish list, like a child drawing up a list of gifts they want from Santa. That indeed, was the nature of the wish list that the Brexiters drew up in relation to the EU Referendum. So, we were told that getting a Withdrawal Deal with the EU would be the easiest thing in the world, and the EU would be so desperate to do a deal with the UK that this easily achieved deal would give Britain benefits from the EU, whilst being outside it that even EU members did not have. Of course, this “have cake and eat it” fantasy collapsed on first contact with reality. Yet, it has not stopped the Brexiters from continuing to push it forward, explaining that reality did not conform to their demands only because Theresa May was not a strong enough leader to implement it. Unfortunately, that line has been facilitated by Labour's leadership too, because they have pursued their own version of the “have cake and eat it” fantasy, ridiculously claiming that Jeremy Corbyn could negotiate such a Unicorn deal, where the Tories cannot. 

Illustrating Johnson's lack of grasp on details, he has repeatedly talked about Britain negotiating solutions to the Irish Backstop dilemma during the implementation period. However, he did not even seem to understand that the backstop is part of the Withdrawal Agreement, and that if he scraps the Withdrawal Agreement, and goes for a No Deal Brexit, there is no implementation period. It would mean that Britain would leave with No Deal, and from the start that would mean that it would go on to WTO terms with the EU. Johnson, and other Brexiteers have also suggested that under Article 24 of GATT, Britain could avoid that, by negotiating to have no tariffs between the EU and UK, as currently exists with Britain's membership of the EU. But, Article 24 only applies, where a trade deal has already been put in place. The whole point about a No Deal Brexit, is that no such deal would be in place! Even arch Brexiteer Liam Fox, has pointed this out to Johnson and co. 

The response of Johnson and his camp is that the EU would want to negotiate such a deal, because it is in their interests to do so. That is just a continuation of the line that the EU would be desperate to do a deal with the UK that they have pushed for the last three years, and which reality has repeatedly shown to be a fantasy. Speaking on “Newsnight”, for example, Bernard Jenkin, when confronted with this reality argued two diametrically opposed positions simultaneously. He began by arguing that in a No Deal situation, the EU would not want to impose tariffs, because if it did, the UK would impose corresponding tariffs on EU exports to Britain. Because the EU sells much more stuff to Britain than Britain sells to the EU, Jenkin argued, it would hit the EU harder if such tariffs were introduced. 

When it was pointed out that, for example, the UK car industry would be badly hit, in that case, he then argued that far from Britain imposing these tariffs, it could scrap tariffs altogether, or reduce them substantially, so as to cheapen imports. But, which is it to be, tariffs on imports to retaliate against the EU imposing tariffs on UK exports, or no tariffs so as to have cheaper imports? It can't be both at the same time, because under WTO terms, unless you have specific trade deals in place, you have to apply the same tariffs on all imports wherever they come from. The whole point about No Deal, is that no such trade deal would be in place. It is likely to take 7-10 years to negotiate any such trade deal, and if the Brexiters continue to insist that they can renege on Britain's obligation to pay the £39 billion it owes for its existing commitments to the EU, no such trade deal is ever likely to be even offered, by the EU. 

But, the argument that the EU would not want to impose tariffs on imports from the UK is again total fantasy. Without a deal, the EU would have to treat the UK as with any other country it does not have a trade deal with. So, it would have to impose WTO tariffs, which for some commodities would be devastating for the UK economy. Its why many car companies are already getting ready to shut up shop in the UK, and to move their operations to the EU. It would also be devastating for the UK farming and fishing industry. The Brexiter argument is that, because the EU sells much more to Britain than Britain sells to the EU, the EU will not want to impose tariffs, because, the UK would respond with tariffs of its own, and that would hit EU exports to Britain. This is like comparing the sales of Tesco to the local shopkeeper, with the shopkeeper's sales to Tesco. Of course, Tesco's sales to the local shopkeeper will be much bigger than vice versa, because Tesco is much bigger, and the same is true with the EU economy and UK economy. 

EU GDP is $18.5 trillion. UK GDP is $2.6 trillion. So, given that the EU economy is more than seven times the size of the UK economy, its fairly obvious that it will sell more to the UK than the UK sells to the EU. In 2017, UK exports to the EU were $274 billion, which amounts to 44% of all UK exports. By contrast, EU exports to the UK were $341 billion, accounting for 53% of all UK imports. Similarly, if we take the EU as a whole, its exports to the UK account for only 18% of its total exports, a fraction of the proportion of UK exports going to the EU. If trade between the other 27 members of the EU is included, in its total trade, then only 6% of its exports go to the UK. 

So, it is ridiculous, as the Brexiters do, to suggest that the EU is more dependent on the UK than the UK is on the EU. Even if we take the EU's two largest economies, France and Germany, the claim that the businesses in these countries would demand a trade deal does not stack up. Firstly, they have not done so yet, as the Brexiters continually insisted they would. German exports to the UK account for just 6.6% of total German exports, whilst France's exports to the UK amount to only 6.7% of its total exports. The truth is that the UK and its economy just isn't that significant any more, however, much the Brexiters go on about it being the fifth largest economy – now at least only sixth even since the Brexit farrago began, and rapidly dropping down the rankings – because the size of national economies is pretty irrelevant in a world dominated by large economic and trading blocs, like the EU, NAFTA, Mercosur, ASEAN, and so on, and where only the very largest countries like the US, and China can compete on an equal footing. 

Exports to the UK from Germany account for just 2.6% of its GDP, 1.4% for France, and 2.3% for the EU as a whole. The reality is that, if the UK imposes tariffs on EU exports, the main casualties of that will not be the EU, but will be UK businesses and consumers. That is what is being seen even in the huge US economy, as a result of Trump's tariffs on Chinese and EU imports. The effect of Trump's 25% tariff on imported steel and aluminium was not to prevent those commodities being imported into the US, it was simply to increase the price of steel and aluminium to US users of steel and aluminium by 25%. That meant that the cost of steel and aluminium for US producers of cars, aeroplanes, domestic consumer products and so on went up by 25%, which in turn raises the cost of production of all these end products. 

A rise in the price of cars, washing machines and so on affects US consumers of those products, most of whom are workers. It thereby, increases the value of labour-power, reducing the rate of surplus value, and squeezing US profits. Because steel and aluminium as raw materials for production, form part of the constant capital of producers, a rise in these costs, means that the rate of profit itself is reduced. But, the US economy has huge advantages that the UK economy does not have, in this respect. It is a $19.4 trillion economy. For many commodities, it has the potential for import substitution over a period of time. If, as a result of tariffs, imported Chinese T-shirts, or toys become more expensive than they can be produced in the US, then US producers will step in to fill that gap. It will still mean a loss to the US economy, because where US consumers previously paid $1 for a T-shirt etc., they would now pay $1.25 for a US made T-shirt, and that will impact US profits, and rate of profit as described above. Similarly, where a US consumer bought an EU produced car for $20,000, they would now pay $25,000 for an equivalent US produced car. Again, it means a hit to the US economy, compared to where there were no such tariffs. The argument that this is counterbalanced by the fact that the US would at the same time provide jobs for workers making T-shirts and cars, is also false. To employ those workers, requires capital. That capital could have been employed in other more profitable ways. For example, it might have employed them producing computer games, and those computer games could have been sold to China or the EU, and obtained a greater quantity of T-shirts and cars in exchange for them, than that amount of capital can produce in the US. 

If the US, with all of its advantages, suffers as a result of imposing tariffs, imagine how much more damage the imposition of tariffs by the UK would impose on its economy, and its consumers and workers. If the UK introduced tariffs on EU produced cars, for example, it would not stop British consumers buying BMWs, Renaults, Citroens, Fiats, Skodas etc. It would simply mean they paid more for them, due to the imposition of the tariffs. It would mean the cost of living of British workers would rise, and ultimately that would mean that UK wages would have to rise, thereby squeezing UK profits, and the rate of profit. It would mean less profit was available for investment, slowing UK growth, and causing unemployment to rise. If, as it would, the EU imposed tariffs on UK produced cars, then EU consumers would have every reason to buy the equivalent EU produced car instead, which would be cheaper by the amount of the tariff. The EU could easily take up this slack given the much larger size of its economy. It would mean that UK car makers would lose a sizeable chunk of their main market in the EU. The consequence is obvious, that UK car makers, as they are already doing, would simply move their production to the EU, so that they no longer faced such tariffs on the EU sales. With more production, thereby, moving out of the UK to the EU, the trade gap between the UK and EU would widen in favour of the EU, causing an even greater drain of capital from the UK to EU, to bridge the deficit. 

The Brexiters have simply built their desire for Brexit on a fantasy that ignores economic realities, and instead puts forward merely their desire for the world to conform to that fantasy even as at every step reality confounds it.