Sunday 9 February 2020

Trade deal: a slow puncture or a blow out?

There were some good tweets last week from well connected and thoughtful people. The people (I'm afraid it's all men) are Peter Foster of The Telegraph - soon The FT, Dmitry Grozoubinski, former Aussie trade negotiator, Chris Giles, the FT's Economics Editor and John Peet, Political and Brexit Editor at The Economist.  All wise men.

Grozoubinski writes the Explaintrade blog and has a post trying to see where the two sides in the future trade talks might make an agreement, which is one of the starting points for Foster's own thread. The other is this article by Chris Giles (HERE no£).

Both Grozoubinski and Giles seem to be on the same track with a forecast that some sort of limited trade deal will be reached by the end of the year.  Grozoubinski offers a couple of likely scenarios where both sides can claim victory of sorts.  But Giles makes the most interesting point:

He says "The British government does not want to take back control from the EU, it wants the right to do so. It has accepted Britain will pay an economic price for this privilege, but knows the costs will be difficult to identify even decades into the future, "

To you and me this probably sounds completely stupid but has a kind of bizarre logic.  It means the government will be able to say it has come out of the EU's regulatory orbit only to enter it again of its own free will - and can diverge in future if it wishes to.  Insane?  Yes, but then that's Brexit isn't it?

There will be a huge cost to pay for divergence eventually but the bill won't come in for a long time when the present cabinet will be out of the picture and living the high life somewhere. They will say it was all 'done wrong'.  On the other hand we could just carry on voluntarily sticking to EU rules forever. That would also be crazy.

Foster's Twitter thread starts:
He (Foster) is a bit more sceptical of a thin deal being reached and the economy then suffering what he terms a slow puncture. All four by the way see damage to the economy under a negotiated trade deal so nothing new there. Foster believes the EU position is predicated on Brexit Johnson bottling it as he did last October but cautions that he may not because, "people like me constantly hear [ ] that the Brexiteers/ERG do *actually* believe in the upsides of #Brexit - a fudge that is all frictional cost and no space for (hypothetical) upside is politically not doable"

Even with a majority of 80, it only takes 40 Tory MPs to vote against a deal and he's in trouble. The ERG could scrape that many and therefore the PM may not be able to fudge a deal which delivers a lot of friction but with little or no upside as seen from the ERG's distorting lens. They may force a rapid blow-out at the end of the year. Foster again:

"The assumption must be that, as @DavidHenigUK  speculates, when we get closer to exit day and the supply chain issues actually present themselves, then the Govt will soften - but this is to ask 'revolutionaries' to accept a truly Pyrrhic victory before battle has even been joined "

Foster thinks Brexit Johnson will eventually compromise to avoid the closing of car factories and long queues and delays in Dover but he (and government officials also) thinks Johnson is seriously underestimating the risks here, even of a thin trade deal. The car companies and logistics firms may still find the friction too much.

He then links to another thread from John Peet:
Peet also thinks a compromise deal is possible, he says:

And trust in Johnson’s promises not to [undercut the EU] is understandably lacking. Not just because some genuinely want deregulation but because he is serially untrustworthy, eg on effects of NI protocol. The trick may be to agree an enforcement system that seriously disadvantages big divergence from EU standards while not requiring dynamic alignment. Not a Swiss nuclear option but a gun to fire at will.

 See, Peet is on the same wavelength as Giles.  A voluntary following of EU rules. The danger as he sees it is this:

"Hence the EU may be underestimating Johnson’s willingness to go for no trade deal, while Johnson may be overestimating EU’s fear of such a result."

 For Johnson, read the ERG.  Peet incidentally thinks the difference between a Canada 'dry' deal and no deal is quite small economically so not that much of a risk as far as Johnson is concerned. I'm not sure this is true or that others would agree.

How does this all play out in Sunderland? I ask because they are the one of the big pawns in this game and because they were being given assurances on Thursday while all these tweets were pinging around, by the Business Secretary Andrea Leadsom. She told them the UK Government is committed to a Brexit deal that guarantees 'low tariff, low friction trading' for Nissan and other UK firms. Note this is not the no tariff, no friction deal we have at the moment.

Sunderland should be nervous. I had a look at Nissan's accounts for 2018-19 On a turnover of just over £6.172 billion they made a pre-tax profit of £133 million or about 2%.  I know international groups can choose how much tax to pay by introducing management charges and obscure inter-company pricing arrangements to reduce profit and minimise taxation but still 2% is not a lot. How much friction do you need to wipe that out?

However on page 22 you can see wages, salaries and pension payments amounted to £435 million, much of which is I assume pumped into the local Sunderland economy. And this does not include parts suppliers here in the UK.  The government is gambling big-time with all of this. 

What if it miscalculates? How would Sunderland replace such a benevolent golden goose if Nissan decide to upsticks?  I would say it's impossible.

Brexit Johnson is a capricious, low gravitas person, with little idea of what he's doing and yet the future of Sunderland and pretty well the whole of the north east is in his hands.  Worrying isn't it?
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