Brexit: movement in the undergrowth

Wednesday 22 November 2017  



Having been in London at a private conference, delivered under Chatham House rules, I am in something of a dilemma. If I tell you where I was, I can't tell you anything of the proceedings. It follows, therefore, if I tell you anything of the proceedings, I can't tell you where I was. If I did, I'd have to kill you.

Suffice it to say, therefore, that I was on a panel chaired by a BBC Today person, with a former civil servant of some fame - one, who has been regarded with some approval by this blog and who's views on Brexit very much accord with my own.

My presence on the panel, together with a garden implement who used to be president of an organisation that might have something to do with industry, was highly fortuitous for this anonymous ex-civil servant. He found to his satisfaction that, just for once, he was not the most pessimistic person in the room in his analysis of our prospects for Brexit.

The differences, however, were only marginal. We both agreed that there was not a great deal of cause for optimism, especially as industry seems to be afflicted by a pervasive sense of complacency.

Separately and independently, we had both found that senior ranks within a wide range of business enterprises were almost completely unaware of the extent of the crisis that was about to descend upon them, while presentiments of gloom tended to be dismissed, purely on the basis that the consequences of a failed Brexit were so serious that they could not be allowed to happen.

Quite who is going to step in and prevent the disaster is never actually specified and nor are the mechanisms which will be deployed, which puts the confidence in the realms of a belief system that transgresses mere knowledge and experience. It really is as shallow in is roots as it appears: the disaster cannot be allowed to happen because, if it did, it would be a … er … a disaster.

But the other area of almost total accord was in our estimation of politicians in the driving seat, right to the highest level. The two factors which had the most influence on them was, on the one hand, a most extraordinary level of ignorance and, on the other, an almost complete inability to listen. If anything, the stories that have leaked out on these aspects are somewhat under-stated.

That ignorance, though, was not entirely confined to the politicians. In smaller meeting after the main even, in an impressively modern room with s panoramic view of the Thames that people probably have died for, the conversation drifted into a discussion on the nature of free trade agreements.

It was at this point that I asked for a show of hands of those who had ever downloaded a copy of an EU agreement and read it – even if it was only a skim-read. Apart from my host, not a single hand went up.

Intriguingly, the ensuing silence was broken by the observation from my anonymous civil servant that most ministers similarly lacked ambition in their choice of reading material. These trade agreements were, in a very real sense, a closed book.

The point here, of course, is that it is very easy to be enthusiastic about the utility of free trade agreements if one hasn't actually looked at any of them. But when you read through the detail, one begins to understand quite how limited they are as instruments of trade.

And very much in our collective consciousness was Monday's speech in Brussels by Michel Barnier. In particular, his comments about "access" to the Single Market" struck a chord: you can have "access" but this is different from being part of the Single Market. And now different, people are beginning to find out.

No sooner, for instance, do I write a lengthy piece on the problems facing civil aviation manufacturing than we see in the Guardian a report on Airbus and its evidence to the business select committee.

At least the term "non-tariff barriers" is beginning to get some currency, although there the dead hand of incomprehension is still playing its part. Having finally come to terms with the idea that there is more to international trade than tariffs, we see everything else being translated into "customs delays".

This lack of comprehension on the part of the media came up, but it was also noted that information was not getting through to the higher levels in the corporate environments. The people who really did understand the issues – and there are some – are further down the food chain.

This was evidence in the Airbus submission which has the company's senior corporate representative in the UK, Katherine Bennett, warning about the threat of new customs bureaucracy, which "could deter long-term investment and accelerate a shift to Asia". Yet, for Airbus in particular and the aviation manufacturing sector in particular, customs issues are the least of their problems.

This I actually managed to point out, drawing attention to the plight of the food industry. It's not customs delays that will affect exports but the rather more serious problem of the losing export approval. This followed comments about the NFU and its inability to see there the peril lies, another example of the failure to come to terms with the UK's change of status from EU Member State to "third country".

Here, there is that continued tendency to focus of the effects of leaving without a deal, as here, where the head of the ADS aerospace trade body warns MPs that if the UK was to leave the EU without a deal, it would be "chaotic" for the industry. They simply do not get the point that many of our problems arise from leaving the Single Market, and will cause damage with or without a deal.

Nevertheless, not unhelpful yesterday was another Guardian piece which had Leigh Pomlett, executive director of CEVA logistics group, declaring that it was "bordering on insanity" to think new Brexit customs systems will be in place for 2019.

"It is just the urgency of this that worries me. It takes me longer to negotiate a supply chain contract than we have here. Arguably, it is already too late", says Pomlett. For sure, this is still keeping the focus on customs and the prospect of delays at the borders. But what makes this intervention different is the language used.

Too often, industry representatives are overly-guarded in their statements, their excessive caution (or diffidence) diluting their messages to such an extent that lose any impact. In this instance, he have someone telling it like it is – even if we were writing about it in March.

There are times when I have to sit back and review my own position, wondering if I'm losing my own sanity – not least when we read this (Guardian yet again), where we see the headline: "UK confident Irish border will not stop progress of Brexit talks", retailing the view that "Downing Street still believes the Irish border problem can be resolved by December", despite Dublin's veto threat.

With Mrs May supposedly doubling what she is prepared to pay for the "Divorce Bill", this has senior UK officials, who "remain confident that Northern Ireland will not prove an insurmountable sticking point at the next EU council in December".

Here, it is not just the quality of the media and the politicians which is in doubt. The "Rolls-Royce" civil service is actually closer in performance to a second-hand Trabant. Many of the old skills have been lost and the Whitehall structure is creaking.

Needless to say, we predicted this problem in Flexcit (see pages 174-177). And yesterday, in front of an audience of hundreds of the most senior financial business representatives in the country, I heard this described as the "only credible leaver plan".

If there is room for optimism, it is that all the options have not yet been exhausted. Waiting in the wings (possibly) is a battle over the government's refusal to give notice under Article 127 to leave the EEA. This may (just) be the battle that keeps up in the Single Market, despite the best attempts of the "ultras" to wreck our economy.

All the same, there is nothing yet which can suggest that we are winning the battle. But I do sense movement in the undergrowth. The "ultras" may be making a lot of noise and the government's stupidity may be dominating the headlines, but there are quiet voices making themselves heard.

(pic: Shutterstock)



Richard North 22/11/2017 link

Brexit: future of Europe more important

Tuesday 21 November 2017  



"Europe is today more necessary than ever" and, "the future of Europe is more important than Brexit". The EU is willing to cooperate with the UK, and it will be in the UK's interest to have a strong EU as a close partner. But that's as far as it goes.

So says Michel Barnier, back in the news again with a longish speech (2000+ words) yesterday on his favourite subject – Brexit. It comes to something when we see more of this French politician than we do our own Prime Minister, and he has more to say about the process than our own Brexit Secretary.

Another small but welcome difference with Barnier is that he seems to be able to speak in sentences, in a speech sectioned into paragraphs, instead of the endless stream of soundbites that characterises a British politician's effort.

For all that, there's not a lot new in this speech – not since the last one. Even M. Barnier is having to repeat himself and the "debate" stalls around a few limited issues with nothing intellectually challenging to fuel the discussions.

In deference to the title of the conference at which he was speaking – on the future of the EU – Barnier managed to put Brexit in its wider context, suggesting that it could be "a turning point in the European project" - a time of awakening, making 2016 "the moment when the EU realised that it had to stand up for itself".

Once the rhetorical flourishes had been dispensed with though, it was back to business with the EU's chief negotiator keen to tell us that the "no deal" is not our scenario. "Even though we will be ready for it", he says (which is more than one can say for the UK government), "I regret that this no deal option comes up so often in the UK public debate".

"Only those who ignore, or want to ignore, the current benefits of European Union membership can say that no deal would be a positive result", Barnier declared, then setting out the "three keys" to building a strong partnership with the UK.

These we heard recently and, despite the media's determination to make Brexit all about money, here they are again: citizens' rights; settling the accounts; and Ireland. And it doesn't matter how many times the media ignore the "Brussels Triangle", here it is, ready to swallow up not just the occasional ship or flight of aircraft, but whole nations.

Key amongst keys is, of course, Ireland and M. Barnier has long since run out of patience. "I expect the UK, as co-guarantor of the Good Friday Agreement, to come forward with proposals", he says. "The island of Ireland is now faced with many challenges. Those who wanted Brexit must offer solutions".

As to the second key, that is the "integrity of the Single Market". Clearly, we are not the only ones tired of the superficiality of the public debate. Barnier says the debate "on what leaving the EU means needs to be intensified" – and not only in the UK.

Talking of sound bites, M. Barner observes that there are two such, emanating from ardent advocates of Brexit – mutually contradictory. The first is that the UK will finally "set itself free" from EU regulations and bureaucracy. The second is that, after Brexit, it will still be possible to participate in parts of the Single Market. Simply because we have been together for more than four decades, with the same rules, and we can continue to trust each other.

These views says Barnier, do not seem to offer "a sound basis for going forward". Not just for the English is reserved the art of the understatement. "The same people who argue for setting the UK free also argue that the UK should remain in some EU agencies", Barnier notes. "But freedom implies responsibility for building new UK administrative capacity". He declares:
On our side, the 27 will continue to deepen the work of those agencies, together. They will share the costs for running those agencies. Our businesses will benefit from their expertise. All of their work is firmly based on the EU Treaties which the UK decided to leave. Those who claim that the UK should "cherry-pick" parts of the Single Market must stop this contradiction.
I sometimes wonder whether Barnier reads the blog – him or his researchers. For he then goes on to says: "The Single Market is a package, with four indivisible freedoms, common rules, institutions and enforcement structures". Now where have we been reading recently about enforcement, other than in this piece.

The trouble is that the "ardent advocates of Brexit" don't do nuance. The idea that we are walking away from the "institutions and enforcement structures" of the Single Market hasn't percolated their brains. They think that, because we have regulatory convergence – for the moment – that we can continue as before. But, says Barnier, even walking away from the "four indivisible freedoms" "means that the UK will lose the benefits of the Single Market". This, he says, "is a legal reality" – and he doesn't even get as far as the institutions and enforcement structures.

But what he does say is that "The EU does not want to punish, once again". It simply draws the logical consequence of the UK's decision to take back control. For instance, "On financial services, UK voices suggest that Brexit does not mean Brexit". However, says the man, "Brexit means Brexit, everywhere". He continues:
They say there would be no changes in market access for UK-established firms. They say joint UK-EU Rules would be decided in a new "symmetrical process" between the EU and the UK, and outside of the jurisdiction of the European Court of Justice. This would contradict the April European Council guidelines, which stress the autonomy of EU decision-making, the integrity of our legal order and of the Single Market.
"The UK will, of course", Barnier says, "have access to the Single Market. But this is different from being part of the Single Market. And a good deal on our future relationship should facilitate this access as much as possible. And avoid a situation where trade would happen under the WTO rules for goods and services". To achieve this, he says:
… there is a third key: we need to ensure a level playing field between us. This will not be easy. For the first time ever in trade talks, the challenge will be to limit divergence of rules rather than maximise convergence. There will be no ambitious partnership without common ground in fair competition, state aid, tax dumping, food safety, social and environmental standards.
But then, he says, it is not only about rules or laws. It is about societal choices – for health, food standards, our environment and financial stability. The UK has chosen to leave the EU. Does it want to stay close to the European model or does it want to gradually move away from it?

The UK's reply to this question will be important and even decisive because it will shape the discussion on our future partnership and shape also the conditions for ratification of that partnership in many national parliaments and obviously in the European Parliament.

This, Barnier says, is not said in order to create problems. He seeks to avoid problems. If we manage to negotiate an orderly withdrawal, fully respect the integrity of the Single Market, and establish a level playing field, he concludes that "there is every reason for our future partnership to be ambitious".

The EU will be ready to offer its most ambitious FTA approach and the future partnership should not be limited to trade. But the EU is not going to hang about waiting for the UK, he said, at which point came the warning that the future of Europe is more important than Brexit.

Most of this, though, will go sailing over the heads of the "ardent advocates of Brexit". Barnier's words will either be seen as a threat or they will be misunderstood in other ways. The chief negotiator is speaking but he is not communicating - because the other side isn't listening.

It doesn't want to hear.



Richard North 21/11/2017 link

Brexit: "flabbergasting complacency"

Monday 20 November 2017  



One of the very few articles of interest in the legacy media this weekend was to be found in the Sunday Times informing us that an EU task force had been set up in Brussels to prepare plans for Brexit no-deal "disaster".

This follows on from earlier reports, such as this one in the Guardian which reported that the Dutch parliament's European affairs committee had told the country to prepare for a chaotic, no-deal Brexit.

But, in fact, we'd become aware of the EU development at the end of October, so the Sunday Times is three weeks behind the curve – not untypical for the legacy media, although in many instances it's taking years for them to catch up on the basics.

However, the merit of the current piece is in the detail, not least in having officials say there is a "significant likelihood" that Britain could crash out of the bloc following a collapse of Theresa May's government.

The contingency plans, though, seem to be composite affairs being prepared by the European Commission and by Member State authorities. Unsurprisingly, they indicate the need for the expenditure of "hundreds of millions of pounds" in preparing for the eventuality.

At the EU level, the task force is being headed by Belgian Pascal Leardini, while European capitals are doing their own planning. The Commission's role is to propose "best practices" to be adopted as part of a common strategy to deal with a failure of the Brexit talks.

Meanwhile, countries such as Holland and Belgium are bracing for "miles of queues" at key ports such as Rotterdam and Zeebrugge. The Dutch have said that they would have to hire around 800 customs officers, but officials complain that it would be "impossible" to find that many qualified workers and training new ones could take "years".

The Dutch are being quite forthcoming on what they call noodverband - an "emergency bandage". A senior official says that the EU was "working to get a deal" while at the same time "preparing for a disaster". Officials are looking into how many computers, parking places, customs officials and other provisions need to be budgeted for.

What is striking is the lack of optimism. The Dutch are saying: "It's starting to be doubtful whether the UK government can steer the Brexit ship because the leadership is so weak". The German government thinks the likelihood of a no-deal Brexit had now become "significant".

"A no-deal outcome would be an irrational, systemic failure of colossal proportions … but the likelihood of it is now significant and we are working to minimise cost and disruption", says a senior German finance ministry official.

Belgian firms are asking their government how to adjust to customs procedures for the worst-case scenario, said a senior official from the country's economy ministry: "Half a year ago we were optimistic, now we are convinced that a no-deal is a likely option".

Thus, businesses based outside the UK which are operating in Britain are also receiving guidance on the need to prepare for the UK crashing out of the EU’s single market. "It's an extremely muddy picture of the future, and an infinitely variable one. The longer there is uncertainty, the tougher things get - we have decisions to make about future investment", said Graham Biggs of BMW.

Quote of the month, though, goes to Winand Quaedvlieg, of the Dutch employers' federation VNO-NCW. He says UK companies were showing "flabbergasting complacency" about Brexit. "It is as if chief executives can't believe a government would cause such an economic mess", he adds, before confirming that "Dutch companies are preparing for the worst".

This complacency was something we noted a week ago, with UK business leaders consistently under-rating the consequences of Brexit, right across the board.

Not only did we see this in relation to the "no deal" scenario but also to the impacts of leaving the Single Market. There seems to be an almost child-like faith in the ability of government to pull off a last minute deal, regardless of warnings from EU negotiators and officials that no concessions would be made which threatened the integrity of the Single Market.

There is also a startling emphasis on the effects of tariffs, with little discussion or concern about non-tariff barriers, despite their potential effects being far more serious. Combined with an inchoate belief by some commentators that businesses will somehow "adapt" to the new circumstances, we have the makings of a perfect storm, where the cumulative effect of the newly experienced barriers will bring international trade to an almost complete halt.

However, the sheer scale of the impacts is such that shippers have difficulty believing that the government would allow major adverse effects to arise. The belief that everything will be "alright on the night" thus dissuades businesses from making contingency plans.

We have, therefore, what amounts to a credibility gap – the distance between what businesses might be told what could happen in theory, against their expectations of what will actually happen. Warnings of theoretical harm are not taken seriously when the belief is that official intervention will ensure that any harm is avoided.

This is against the context where nothing even remotely similar to Brexit has ever been experienced. The process is unique, so there is nothing that can be used to shape expectations. Government, in the meantime, will want to play down any adverse consequences of it policies, primarily so as to avoid giving hostages to fortune or weakening its negotiating position.

To all this has to be added the sheer complexity of the EU's trading system, which actually renders identification of potential consequences quite difficult. Advisors and commentators are simply failing to understand how systems will be affected by Brexit.

Faced with all this and the need for businesses to maintain customer and investor confidence, there is naturally a tendency to gloss over any potential problems, or keep discussion of them out of the public domain – which further limits appreciation of the scale of the threat and the ability to devise suitable and timely countermeasures.

Between business representatives and government – particularly at high level, where trade associations are involved – there is also something akin to Stockholm Syndrome, where the two sides unite in the common cause of playing down bad news – which can be injurious to both sides.

Then, government has powerful leverage in granting or withholding access to Ministers and senior officials, and is capable of penalising those who "rock the boat" by going public with comment seen to be critical of government policy or reducing confidence in government.

Despite a perfect storm brewing, therefore, there are strong influences which prevent businesses acknowledging the severity of the threats they confront, or making plans to mitigate their effects. And this is without the political interplay and the effect of certain actors playing out their own agendas.

Where, as it is often said, the spectator sees more of the game, it is unsurprising that the Dutch are seeing "flabbergasting complacency" where nothing of its kind is being acknowledged this side of the Channel. Sadly though, because it is not seen does not mean it does not exist. And breaking out of the torpor can be very painful indeed.



Richard North 20/11/2017 link

Brexit: adding it up

Sunday 19 November 2017  



What should have been one of last week's biggest stories was the attempt by senior figures in our hugely successful car industry to explain to the Commons business committee the consequences of Theresa May's decision that we will leave the EU's Single Market to become what the EU classifies as a "third country".

So writes Booker in his truncated column. He notes that, last year our car industry, on which 770,000 jobs directly and indirectly depend, exported a record 1.6 million cars, representing 12 percent of our total exports. Of those 57 percent go to the EU, worth £40 billion.

What the MPs were told was that every single one of those cars can only be built and exported under an EU "type approval" which, when we become a "third country", will automatically lapse.

Replacing those necessary "type approvals" with a UK equivalent that would be recognised world-wide would be a very long and complex process: meaning that much of our car industry will grind to a halt. Even though this was first explained to MPs back in March, yet again its astonishing significance seemed wholly to pass them by.

But then the car industry is only one of several major industries which are going to be affected by Mrs May's unthinking decision to take the UK out of the Single Market. But it is not only the Prime Minister who seems oblivious to the consequences of this decision.

Most of our politicians seem equally oblivious, even when not dissimilar problems will face our chemicals and pharmaceuticals industries, with exports to the EU currently totalling £45 billion a year. And then there is civil aviation, with exports worth £28 billion, and food worth £12 billion.

All this, says Booker, is what we are putting at risk, with or without a trade deal, by Mrs May's decision that we will shut ourselves out not just from the EU's single market but also from the wider European Economic Area.

What is really terrifying is that it has hardly yet begun to sink in that, entirely by our own choice, we could be sleepwalking towards the greatest disaster to hit our economy since World War Two.

Adding up the value of these industries, in terms of export to EU, the potential losses to the economy could be as much as £125 billion. These five sectors, therefore, amount to more than 50 percent of our EU exports.

Then, there are other potential losses. There is little dispute that UK airlines will be badly affected and we have identified the specific problem of Third Country Operator approvals which will prevent British-registered airlines flying into Europe. Exact losses are difficult to quantify but it has been estimated that spending by foreign tourists who arrived by air supported a £19.6 billion gross value added contribution to UK GDP.

Other enterprises that may be damaged include Formula 1 racing, horseracing and bloodstock exports, and a wide range of manufacturing operation covering such things as ATEX equipment (equipment and protective systems intended for use in potentially explosive atmospheres), passenger lifts and cosmetics.

There is also the financial services sector to take into account. An estimate referred to in a recent House of Lords select committee report suggests that £40–50 billion of UK financial services revenues relate to the EU, with the trade surplus for financial services for 2014 at £19 billion. As to the proportionate impact, it is difficult to estimate, but it would be fair to assert that £40-50 billion is at risk, potentially costing the UK government £20 billion in lost revenue.

The crucial point, common to all these enterprises, is that the impacts will arises irrespective of whether we have a deal or not. It cannot be emphasised enough that the damage arises from leaving the Single Market – something that seems to escape even the high and the mighty.

For instance, in the Observer today, we see the views of Sir Martin Donnelly, the chief civil servant in Liam Fox's Department for International Trade until earlier this year.

He states that leaving the Single Market in favour of negotiating a long-winded, Canada-style trade deal will "damage UK competitiveness and leave us with less investment, lower living standards and long queues at the border". He thus warns merely that leaving the EU's legal structures will leave Britain "more protected, more regulated and poorer".

Nevertheless, Donnelly helpfully spells out that the benefits Britain enjoys from its single market membership cannot be replicated in a trade deal and argues that Britain could buy time through temporary membership of the EEA. Doing so, he says, will allow more time to "see if we can find a realistic alternative that meets our economic needs".

This is very much in line with Sir Ivan Rogers, who warns that there is a "radical difference" between the free trade arrangement that Britain would be offered and membership of the customs union and the single market that it was giving up.

David Davis is also getting some hammer, this time from another of those anonymous "senior EU officials". He dismisses the Brexit Secretary's assertion during his speech in Berlin that the UK should enjoy a better deal than Norway, due to its comparative size.

This official also notes that suggestions from British politicians that the UK could remodel its economy to be more like Singapore "had cut through to EU leaders". They are saying: "But we are a big country so we can get something better than Norway".

His answer is that it is the other way round. Norway is a fisheries and oil economy. They are not a competitor. The UK is a competitor. Particularly when it comes to safeguards against various types of dumping. Threats have been made and safeguards will have to be introduced.

And, it seems, business is beginning to wake up, although the lobbying is over the effects of leaving the EU with no deal. The tourism industry has privately warned that 25,000 jobs held by Britons working in the industry in Europe, as well as £1 billion in tax revenue, are at risk.

However, if we look in crude GDP terms, things begin to look extremely bleak. Our calculations suggest that the possible effect of leaving the Single Market is a hit to the GDP in the order of £140 billion - or £190 billion if financial services are included. This is the cumulative effect of the export losses.

But, through direct and indirect taxation, the government takes 40 percent of GDP which suggests that a fall of that magnitude in export earnings translates into a loss of government revenue of nearly £80 billion a year. That figure would probably not stand up, but it does point up that damage to the UK economy has a direct impact on tax income. And to that, one must add, potentially, an increase of between £15-20 billion in welfare payments to cover an estimated 2.5 million unemployed.

On the basis of these rough and ready figures, there is a case to make that leaving the Single Market could cost us far more that the supposed savings from cutting EU contributions. It certainly outstrips the so-called "divorce bill" payments that are in dispute, and which are deemed to be the price of market access. Here, any gains from holding back payments could turn out to illusory.

Quite evidently, though, none of this has been thought through, with the Brexit debate focused almost entirely on the costs of payments to the EU. There has been nothing like the same emphasis on the potential costs of various policy options.  Adding up, it seems, is so very hard to do.



Richard North 19/11/2017 link

Brexit: déjà vu all over again, again

Saturday 18 November 2017  



It was that 1988 Commercial Union Insurance Company which ran the highly successful series of television adverts using the catchphrase: "We won't make a drama out of a crisis".

This, at the time, was a valued attribute but, such are the values of our time that the reverse now seems to hold true. Nothing holds media attention and even the admiration of the assembled hack corps those have made a perpetual crisis out of one particular drama.

There are no prizes for guessing the identity of that drama, the one that has dominated the political scene for well over five hundred days. But what is really beginning to drag is the tedium of having the same crisis played out, over and over again.

Right from the beginning it was three things: the money, the expats and the Irish question. And now, after all that time, these same three things are dominating the headlines: the expats and the Irish question.

Now, though, we have the added delight of Irish prime minister, Leo Varadkar, telling us that "Brexit-backing politicians" had "not thought all this through" in the years they had been pushing for the UK to leave the EU. As if we didn't know.

But then, in a touch of déjà vu all over again, we have Varadkar tightening the screws on the British and putting Ireland front and centre of the negotiations – just as the hacks wanted to make it all about money, as they always do.

At the informal European Council in Gothenburg, Sweden, he warned that he will block progress of the Brexit negotiations to phase two unless he get a "formal written guarantee" that, come Brexit, there will be no hard border with Northern Ireland.

"We've been given assurances that there will be no hard border in Ireland, that there won't be any physical infrastructure, that we won't go back to the borders of the past", Varadkar said. "We want that written down in practical terms in the conclusions of phase one".

The slight problem with this is that the UK government hasn't the first idea of where to start on all this – hence their risible attempts to pretend that a hard border can be magicked away with new, all-singing, all-dancing technology.

As if that wasn't enough, déjà vu was also very much in evidence when Donald Tusk decided on a short statement, reminding us that internal preparations on the second phase of negotiations had started in October, covering "transition and the future relationship".

Thus, he said, "we will be ready to move-on to the second phase already in December. But in order to do that we need to see more progress from the UK side". Then repeating something we must have heard a hundred times or more, he told us: "While good progress on citizens' rights is being made, we need to see much more progress on Ireland and on a financial settlement".

The European Council President had earlier told Mrs May during a bilateral meeting that "this progress needs to happen at the beginning of December at the latest". He hoped some movement would be made by next Friday when the two leaders are due to meet again.

However, inside the warm, velvet glove was a fist of the best European steel. "If there is not sufficient progress by then", he said, "I will not be in a position to propose new guidelines on transition and the future relationship at the December European Council".

The previous day, we had had a particularly inane speech from David Davis in Berlin, which demonstrated nothing more than the simple fact that he doesn't have the first idea of how the EU works.

This is the man who thinks that the UK has made some "concessions" to the EU and, therefore, the EU should give us something back. Right from the start, these idiots have been treating the Brexit negotiations like a bargaining session in a souk. Now, having given something, the clever Mr Davis wants some "concessions".

Mr Tusk, on the other hand, wasn't in the mood to put him out of his misery. Referring to those "concessions", he told the media gathered at Gothenburg: "I can say only that I really appreciate Mr Davis's English sense of humour". If it hadn't been irony, one might have said that, in this, Tusk was very much on his own. We have long since tired of Mr Davis's "humour".

And so, we're back where we started, back where we've always been – making crises out of a drama and repeating them again and again. Yet, even in the unlikely event that the UK does make the cut in December, we're not out of the woods.

As has been long predicted, in another magnificent example of déjà vu we have been told that there is no chance of Mrs May's "deep and crisp and even" agreement. The best we can hope for is a Canada-like deal.

Barnier had already advised us of this, informing us that, "from the moment the UK told us that it wants out of the single market and the customs union, we will have to work on a model that is closer to the agreement signed with Canada". The Single Market, he said, "is a set of rules and standards and is a shared jurisdiction. Its integrity is non-negotiable, as is the autonomy of decisions of the 27. Either you're in or you're out".

When she departs this mortal coil, this needs to be etched on the gravestone of Mrs May and on those of her other faithful ministers and hangers-on. And now it isn't just Barnier. We're getting that in an internal discussion paper prepared by the European Commission, spelling out precisely the thing, that rejection of the Single Market puts us on the naughty step.

Bluntly, the Commission states that "single market arrangements in certain areas" or the "evolution of our regulatory frameworks" could not be managed within the EU body of law as it stands and therefore the UK would have to be satisfied with a "standard FTA".

This should be ringing alarm bells but, as we observed yesterday, the world out there has no conception of what a "standard FTA" really means. There is some dim appreciation of what "no deal" means, but the impact of stepping outside the Single Market simply hasn't sunk in.

Gradually, we see some elements being picked up in the media, done late and done badly, with usually only part of the picture given. What none of them are doing is putting the whole thing together. We see glimpses of the torment to come, but nothing of the scale of things to come is getting through.

So, instead, we get déjà vu all over again. Meanwhile our politicians prance and prattle about things of which they know little and fill the air with noise.



Richard North 18/11/2017 link

Brexit: aerospace manufacturing at risk?

Friday 17 November 2017  



My brief mention of aviation products yesterday might have given a clue that I was looking at this issue in the context of Brexit. In fact, I've been looking at it, on and off, for some months and never really got a grip of the essentials. To say the system for certifying aviation products is complex is not an exaggeration. One needs to approach it with care.

One of the difficulties with this subject is that the EU is a relatively late entrant to the business of aircraft airworthiness certification, the whole aircraft and the components and systems that go into making them. Historically, certification has been left to member states and some of the residual functions remain with them.

The current certification agency at EU level is the European Aviation Safety Agency (EASA), which was established in 2002 by Regulation (EC) 1592/2002. This regulation also set up common rules in the field of civil aviation.

With the Regulation (EC) No 736/2006 and then Commission Regulation (EU) no 748/2012, we have the core suite of regulations which enable the Agency to function, the latter being the regulations "laying down implementing rules for the airworthiness and environmental certification of aircraft and related products, parts and appliances, as well as for the certification of design and production organisations".

According to the Commission website, these create a complex system whereby, in the EU, " certificates attesting that aeronautical products, organisations and personnel comply with the common rules are issued either by the competent national authorities of the Member States or by EASA".

EASA, is says, "has been entrusted with the responsibility to issue certificates in lieu of Member States when it has been considered more efficient. For instance, EASA is entirely responsible for the certification of aircraft types and other aeronautical products.

National authorities of the Member States continue to issue, under EASA monitoring, individual certificates to aircraft and most organisations and personnel located in their territory. However, EASA issues certificates for organisations located in third countries.

From this and a study of the labyrinthine regulations, and in particular Annex1 of Regulation 748/2012 (known as Part 21), it seems that certification of aircraft and products is open to all comers, including applicants in third countries. Unlike other "prior approval" systems, there is no specific requirement for them to be established in the EU.

On that basis, post-Brexit it would appear – on first sight - that UK enterprises might continue to obtain safety certification from EASA and, as importantly, existing certification will remain valid. However, nothing is ever that simple.

It is not only the case that aircraft and the components that go into their making must be certified, but the companies which design and make them must (except under very specific exemptions) also be approved. Respectively, they are called design and/or production organisations and they must undergo an elaborate approval process, conforming with criteria set out in Part 21.

Approval of these organisations is not undertaken by EASA, but by the "competent authorities" of countries in which they operate. And here, we begin to have problems. Competent authorities, in the case of EU members, are appointed by the Member States. Third country competent authorities have to be approved directly by EASA.

Currently the UK competent authority is the Civil Aviation Authority (CAA) and it has approved design and production organisations within the UK. However, come Brexit, the UK will become a third country and, therefore, the CAA will no longer be a valid competent authority. It must apply to EASA for recognition.

In the interim, there is then the question as to whether companies in the UK which have been approved to design or make aircraft or aviation products will retain their approvals. EU law on this is unhelpful – and unsurprisingly so, as there is no provision of countries in the EU ceasing to be Member States.

Those looking for inspiration might refer to the relevant "Acceptable Means of Compliance and Guidance Material" where it is made abundantly clear that approvals are issued by the "competent authority of a Member State of the European Union" or EASA. On that basis, it is arguable that products designed and/or produced by UK companies after Brexit no longer hold valid approvals, until such time as the status of the "competent authority" has been regularised.

Such matters, clearly, are precisely those which need to be addressed during the Article 50 negotiations and one might need (and therefore request) a statement from the Commission and EASA to the effect that the CAA remains a relevant competent authority and that approvals issued by it remain valid. Without that, a vital industry could be at risk.

In aviation matters, though, there are alternative mechanisms available. Undoubtedly because of the international nature of the aviation sector, and historical relationships, there are is genuine provision for mutual recognition of certifications, many of which predated the formation of the EEC and have been carried over.

Mutual recognition, however, is not by any means automatic. It is implemented via a series of bilateral agreements, an example of which is the 136-page US-EU Agreement on Aviation Safety signed in 2008. For the UK to trade with the EU, it could – once it has re-established the full technical capabilities – certify its own aircraft and parts and seek a similar treaty agreement with the EU.

However, since the UK no longer has the technical capability for safety certification in this field – having transferred the function to EASA – we must rebuild our own organisation and re-acquire the skills, before we could enter into agreements with other parties. This could not be a rapid process.

But here, there is a double bind. We currently rely on access to the market of the United States, Canada and Brazil via bilateral agreements between those countries and the EU.

These would no longer apply to the UK once we leave the EU and we will have to negotiate our own agreements. In the meantime, we would have to rely on third country access to EASA and comply fully with EU regulation and certification requirements, including allowing EASA officials to inspect and monitor our design and production facilities.

At the very least, this hardly conforms with the idea of taking back control but, until the status of the design and production organisation approval system has been sorted, this could be the least of our problems. Without approvals, UK companies disappear from the official list and will no longer be able to export goods, putting at risk a £28 billion market.

This would include the production of Airbus wings (by GKN Aerospace) and Rolls Royce aero engines. A host of other familiar names would be affected, such as BAE Systems and British Airways - which has a manufacturing enterprise producing interiors for airliners, and an operation producing aircraft components. Even Dunlop tyres could no longer find their way onto the airliners of the world.

Bizarrely, Rolls Royce has been in the news recently on Brexit, but only expressing its worries about border checks and "supply chain kinks". So far, the industry has only been complaining of customs controls, giving rise to "an increase in costs from extra red tape, as companies will have to track components and their origin at a level of detail not previously seen".

While it has taken the car industry over a year to work out the threat posed by the loss of type approval from UK products, it seems the aviation industry is way behind the curve when it comes to the status of their approvals.

Throughout industry (and business), there seem to be as feeling that catastrophic events must not be allowed to happen, on which sole basis it is believed that they won't happen. But, like the banks that were "too big to fail", nemesis can even strike down the almighty. Complacency is not a clever response to Brexit.



Richard North 17/11/2017 link

Brexit: prior approval

Thursday 16 November 2017  



I am coming to the conclusion that we are fighting a losing battle. Actually, that should read as a plural: we are fighting multiple battles, on diverse fronts and losing most if not all of them.

But here, I had one particular battle in mind – my personal battle to spread information and improve understanding of the EU regulatory system. The purpose of such an arcane endeavour is quite simple: to secure a workable exit settlement, we must have some idea of how the EU's systems work and how, as an independent nation, we can interface with them.

The trouble is that we have a caucus of MPs and journalists – to say nothing of academics and think tanks – who regard regulation in simplistic terms, often calling it as "red tape", believing it to be restrictive in nature and, as far as is possible, to be removed or minimised.

In relation to the Westminster parliament, we have a generation of MPs who work in an institution which has ceded much of its law-making power to the European Union. Thus, they have very little personal or practical experience of regulation, and rarely give any thought to what it is, what it is designed to do and how it goes about achieving its objectives.

Mulling over this, what occurred to me is that many of our Brexit-related problems are stemming from a body of law designed to impose systems of what are broadly referred to as "prior approval" – the particular purpose of which is the ex ante avoidance of harm or injury.

The concept itself, in law-making terms, is a departure from the original function of the criminal code. This, often in relation to non-economic activities, sought to prohibit certain actions, such as murder and assault, thereby establishing statutory offences and penalties which are imposed after the events.

This type of law does not go out of its way, directly to prevent certain behaviour – other than by deterrent. Its primary purpose is to enable the transgressor to be punished in a manner acceptable to society.

However, as human activity has evolved, a body of law has evolved which does not stop at merely punishing "offenders" when they transgress. It seeks to regulate economic activity, bringing it within the scope of criminal law for the primary purpose of preventing "crime" from happening. It is pre-emptive rather than reactive.

At a practical level, we see this applied to the manufacture of a wide range of products. They include medicinal drugs and equipment, food additives, pesticides and veterinary medicines.

They also cover such things as vehicles and their components, aircraft and their components. But then they extend to related services such as pilots' licenses and engineers' certificates, and then spread to major service industries such as banking and insurance.

In all cases, the burden of proof placed on the manufacturer or service-provider to demonstrate to an official body that an activity or product is not dangerous or harmful, before the event. And only when satisfied that the burden of proof has been discharged – including furnishing evidence of conformity with relevant law – do the officials give permission for commercial activity to commence.

For all that, the idea of precautionary law is in some senses still controversial, and it is possible to argue that there are better ways of doing things. In medicines, for instance, there is a good case to argue for nothing more than a duty of care be imposed on manufacturers.

Under such a regime, the manufacturer is solely responsible for the decision as to whether to market a product. There is no official intervention. But if the product harms people, victims (or their relatives) are able to sue the manufacturers for damages. As these can often be punitive, they provide an ex-post facto corrective – and a deterrent to encourage others to get it right.

In fact, most regulatory systems are hybrids and incorporate an element of retributory justice. But the stronger the ex ante component, the weaker the reactive element becomes. Manufacturers who submit to stringent and expensive pre-marketing testing and official clearance are entitled in the event of a product failure to rely on their regulatory conformity, at least to mitigate the "offence".

The difference between the two in part sums up differences between the US and the EU systems. The Europeans tend to major on prior approval, where US can exhibit a lighter touch, relying on civil liability and (well-funded) legal activism to provide the corrective.

It is not my intention here to argue to the merits of the different approaches – or whether the right balance has been struck between the ex ante and the reactive approaches. Suffice it to say that the leading proponent of the "prior approval" approach has been the EU. And, as a member of the EU, we have fully bought into that system and become part of it.

Now that we are about to leave the EU, there is some scope for rethinking the balance between pre-emptive and retributory regimes, the latter usually enabling businesses to enjoy a lighter regulatory touch.

The problem though is that the EU, as a matter of philosophy, is wedded to the so-called precautionary approach. Thus, if we want continued access to the markets of the EU-27 (and the Efta states), we will have to subscribe to the same philosophy.

Here, the use of the term "philosophy" illustrates why we are going to have problems if we seek a lighter regulatory regime. At their extremes, the "pre-emptive" and "reactive" philosophies are incompatible. If you adopt the former you have, by definition, rejected the latter. Furthermore, the philosophical difference rules out any idea of mutual recognition. Neither regime can recognise the other.

Thus, come Brexit, we have a choice to make – which regulatory philosophy to adopt. But there is actually no choice. The EU is by far and away our biggest export market and many of our trading partners also adopt EU regulatory systems. We thus choose the EU path or pay a hefty price.

Sadly, though, things are not that simple. They rarely are. While prohibitions can be cast as law relatively easily – and thus have universal application – the pre-emptive system is far more problematical.

At its heart is the fact that we are talking about systems. But, above that, it is a permissive system. The potential trader must be put through a series of hoops and the nominated official body must be called on to pass judgement as to whether the product or service complies. Then, most often, this is a whole life process, so continued permission requires constant assessment of conformity.

Within this sort of regime, the official bodies and the post-release surveillance and control is as much part of the system as the relevant law. Thus, simple regulatory conformity is not enough to ensure participation. You must buy into the whole package.

And this is where the UK is coming unstuck. Government ministers and their advisors seem to be labouring under the false impression that participation can be secured simply by regulatory conformity. They don't seem to realise that the other elements of the Single Market package are an integral part of it and cannot be separated or cherry-picked.

From a political perspective, though, acceptance of the reality presents a Tory government (and certainly the "ultras") with a serious problem. Having sold a prospectus of deregulation, doing away with burdensome "red tape", Ministers are finding that they have no scope in the short-term for any changes. If they want market access, they must buy into the system they are running away from – thus negating much of the rhetoric used to justify Brexit in the first place.

Sadly, much of that rhetoric was (and is) misplaced. It is based on a child-like view of regulation and a failure to appreciate that modern control systems have evolved to meet consumer demand, as much as anything, and cannot be changed.

The irony is that the mad deregulators are largely out on their own. Within industry, there is no great upwelling of demand for a bonfire of regulation. In fact, many businesses prefer the certainty and the predictability of a pre-emptive regime. If you want to see a pharmaceutical industry executive go white with fear, suggest to him the dismantling of the current regulatory system.

Nor at the consumer end will you find any enthusiasm for winding down the regulatory system and the media invariably speaks with forked tongue. Whenever there is a product safety failure, it is newspapers such as the Mail which are in the vanguard, calling for new or tougher laws.

And so, Mrs May and her Ministers are going to have to think hard about where they are going – if indeed they are capable of such an exercise. The commitment to leaving the Single Market was made without any clear idea of what was involved, and the consequences. And even now, there is a complete failure to come to terms with the status of the UK as a "third country", outside the Single Market.

Without a re-think, we are going to see many more examples of potential disaster awaiting us. On Brexit day, as it stands, most of our food exports to the EU will cease; likewise chemicals and pharmaceuticals, vehicles and their components, and much more besides. Alongside a whole raft of manufactured products, we will see many aviation products blocked because UK-issued certification will no longer be valid.

And, once again, this is not the EU "punishing us". Neither the Commission nor the other EU institutions are taking action against us. This is what we do to ourselves by stepping outside the Single Market. It was never necessary, and we only have ourselves to blame for the consequences.



Richard North 16/11/2017 link

Brexit: an unrecognised bombshell

Wednesday 15 November 2017  



Without any awareness of quite how useless they are, the legacy media is currently giving a quite startling demonstration of their inability sensibly to report on Brexit issues.

The occasion is the rather limited reporting of the evidence given by the car manufacturing industry to the Business, Energy and Industrial Strategy Committee in the House of Commons yesterday, where the accounts published completely miss the point.

An example – which typifies the rest – is the account in the Guardian which, bizarrely, has Honda UK warning MPs of the consequences of leaving the customs union. This focuses on the supposedly "devastating impact of a hard Brexit on the UK car industry", where MPs "were told every 15 minutes of customs delays would cost some manufacturers up to £850,000 a year".

Yet, right up front, we had something far more serious. Patrick Keating, Government Affairs Manager, Honda Motor Europe, gave evidence on the post-Brexit type approval situation, which will have a catastrophic effect – and apply whether we get a deal or not. Incredibly, this evidence, despite coming within the first ten minutes of the session, was almost totally ignored by the media, and barely acknowledged by the Committee.

I don't suppose the situation was at all helped by having the questions led by Labour's Rachel Reeves, chairing the Committee. Seriously thick, with no light of intelligence shining in her eyes, she clearly had no comprehension of the EU's vehicle type approval system. 

Even when she had it explained to her, both by Keating and the wearily patient Mike Hawes, Chief Executive, Society for Motor Manufacturers and Traders, she showed no signs of understanding what she had been told. Most of the evidence sailed over her head.

For all that, once the crucial points had been brought up right at the beginning of the evidence session, they should have dominated the inquiry. As Keating explained, the "real risk" to the car industry will be triggered not in the event of a "no deal", but "as the UK leaves the Single Market". When this happens, the type approvals issued by the VCA, the UK Vehicle Certification Authority, will either no longer hold validity or not be able to be extended. 

This technical jargon conceals a life-or death issue for the industry. For Honda, all the vehicles manufactured at its Swindon plant – with a huge proportion exported to Europe – are approved by the VCA which means that, post-Brexit, their products  will no longer be cleared for sale in EU Member States. 

This will also apply to all other vehicles approved in the UK, effectively bringing export sales to a complete halt, until such time as the vehicles can be submitted to an EU Member State approval authority, and gain new certification. And that won't be easy or quick.

Not helping his cause, Keating actually put this in a rather diffident way. This doubtless served to persuade the media not to raise the alarm. Rather than say outright that approvals would no longer be valid, bringing the industry to a halt, he told the Committee: "we're picking up from the Commission is that type approvals issued by the VCA, the UK Vehicle Certification Authority, will either no longer hold validity or not be able to be extended. So we need to find a way to bridge that gap".

This, to my mind, was an odd way of putting it - and very weak, lacking the necessary emphasis. My immediate thought was that he should not need the Commission to tell him what is happening to the industry. He should be able to look up the law and work it out for himself. And that would have told him that there was no way of bridging the gap. It should have told him that a huge crisis faced the industry.

The problem for Keating (and us all) though, is that we don't know exactly what the law will be in 2019. The current law is undergoing revision and is, at the moment, going through the European Parliament. Most likely, the proposed regulation will be in force by the time we Brexit but, at this stage, we cannot be absolutely certain that all the details currently in the draft will apply.

However, this is only a detail. It is almost certain that the UK, having acquired "third country" status by virtue of having left the Single Market, will have to submit its products for type approval again, before they can be sold. There will be no recognition of third country approvals.

Here, the legislation mirrors the REACH regulation, with third country manufacturers each having to appoint a "single representative established within the Union to represent the manufacturer before the approval authority". Additionally, the manufacturer has to appoint a single representative established within the Union for the purposes of market surveillance. These can be the same representatives appointed for the purposes of EU type-approval.

Interestingly, I have written about this before and it is no exaggeration to say that the issues are complicated. Specifically, though, I wrote in the context of the EU-Korea trade agreement, suggesting that any deal settled between the EU and the UK might look very much like this agreement.

Sure enough, when you read the small-print of that agreement (Annex 2-C), Korean motor manufacturers are still required to submit their products for type approval to an approval authority in an EU Member State, before they can be sold. Additionally, the Koreans have to maintain absolute conformity with EU/UN regulations, including the adoption of new regulations as they are come into force.

In yesterday's evidence to the committee, Keating suggested that one possible way out was for the industry "to work with the UK government to make sure there's mutual recognition of any approvals issued by the UK government". He had, however, already conceded, that even products imported from Japan were submitted for type approval in Belgium.

Since the most comprehensive trade deal with a major car manufacturer also requires it to seek local type approval, the chances of the UK securing a mutual recognition agreement are nil. There is not the remotest possibility that the EU will accept mutual recognition of type approvals. The best one can hope for is a temporary agreement to tide us over any transitional period. Deal or no deal, in the longer term, UK type approvals will no longer be valid in EU Member States.

What we got out of this, in terms of reporting, was the Guardian which stated that Aston Martin (after evidence from Mark Wilson, Chief Financial Officer) also feared a "semi-catastrophic" end to EU recognition of UK regulatory approval, something – the paper reported – "Keating revealed Brussels was now threatening in the event of a 'no-deal' Brexit".

There, in black and white, is the erroneous reference to the "no deal" scenario. But Keating had addressed his remarks to the situation prevailing when we leave the Single Market. And Brussels wasn't threatening. This is simply the inevitable consequence of leaving the Single Market. Once again, the media seems incapable of coming to terms with the consequences of the UK's status as a third country.

The point Mike Hawes (Chief Executive, Society for Motor Manufacturers and Traders) then made, after Keating had delivered his unrecognised bombshell, was that manufacturers could not apply for type approval while actually manufacturing so they would have to cease production while they re-applied.

Then, any new approval would have to take account of any changes to the regulations, which could create significant problems. Conformity might not even be possible. But either way, new approvals are not automatic. They will take months and be costly to gain.

What the likes of The Times published, though, was Mike Hawes saying that "every car maker would need clarity by the end of this year if they were to plan for what Brexit would mean from March 2019". At issue, the paper has them saying, "was the need for a deal on the certification of British-made vehicles to have equivalence or the same recognition as models in the EU certified in Brussels".  

This is a travesty of what transpired, an incredibly weak rendition. In the actual evidence session, Wilson said his company would have have to stop production if there wasn't a carry over of type approval. This, he said, was "semi-catastrophic". It was then that the semi-intelligent Rachel Reeves chose to see this in terms of a "no deal", failing to pick up the reference to leaving the Single Market. 

But Wilson then reiterated that the consequence of having type approvals lapsing would be that production would cease - the result of leaving the Single Market. Let that sink in: leave the Single Market and production would cease. Neither Reeves nor the media understood that. 

The confusion, perpetrated partly by Reeves and partially by the lack of clarity from the industry itself, meant that the prospect of this catastrophic situation failed to have the impact that it should have had. The media should have looked past the fluff, but it didn't. Unless stories are handed to the journalists gift-wrapped, they have no ability to report what they hear.

Nevertheless, the industry isn't doing itself any favours. It still thinks hopes that there will be a solution. With that, there is almost a child-like faith in a near-mystical "transition" giving some sort of relief, without anyone being able to say precisely what is involved. Indeed, no one seems to have the first idea of what is involved or what we can expect from it. Unicorns have more substance.

With less than a year to run before the substantive talks must be completed, and trade issues not even having been discussed, this has the car industry in an impossible position – and all the more so because of the confusion and obfuscation, where the industry itself seems reluctant to confront its own fate. Instead of raising the alarm, it is hedging its bets.

Whichever way you cut it, though, the future does not look bright. But then, when it goes belly-up, the media will be the last to realise.



Richard North 15/11/2017 link

Brexit: will business pull the plug?

Tuesday 14 November 2017  



Yesterday was a watershed, possibly. It may not be obvious. It may even be counter-intuitive. But, with David Davis promising MPs that they could have a vote on the final Brexit agreement was, in my mind, Parliament's redundancy notice. As far as Brexit goes, MPs have written themselves out of the script.

As it stands, the Brexit talks are poised on the edge of collapse. Within two weeks, we are looking at a failure to progress beyond phase one, which effectively means that the chances of an agreement are looking remoter by the day.

Yes, the MPs seem to be concerned about is whether they're going to get a vote on a deal sometime next year, a deal that may not – and most likely will not – happen at all. And if it does, they won't be able to vote against it or we end up with no deal, exactly the outcome that looks like it's going to happen anyway.

Basically, therefore, what MPs say and do between now and Brexit is largely irrelevant, which is just as well. Barring a vanishingly small number who are beginning to get to grips with the issues, they are so far behind the curve, or so besotted with their own agendas, that they have nothing useful to offer.

Far more important then was yesterday's meeting between Mrs May and a group of business leaders. Reported by Reuters, this was supposedly an occasion when a number of CEOs told the Prime Minister that she needed to speed up Brexit negotiations, "amid concern Britain will crash out the world’s biggest trading bloc without a deal".

In fact, the real value of the meeting was, most probably, in the opportunity it gave for the leaders of 15 business groups from Britain and continental Europe (pictured) to meet somebody who knew even less about Brexit than they did. With luck, they've been shocked into the realisation that they are on their own. No salvation is going to come from No 10.

And, after drawing attention to the lack of awareness in the business community, yesterday we got another example – not of total ignorance but a distorted view of what might transpire.

This came from Gabriel D'Arcy, the chief executive of LacPatrick in Strabane in Northern Ireland, one of the UK’s largest dairy producers, courtesy of The Guardian, who warns that food prices "would soar" after no-deal Brexit.

The thesis is not unfamiliar to blog readers, with D'Arcy predicting that a badly handled Brexit could lead to price hikes for food, and scarcity in the shops from April 2019, with dairy and meat products particularly hit. Something which the Downing Street Fifteen would also have found, he also complained that "ministers were too focused on financial services" and were putting the country's food security and food standards at risk.

"The impression in the industry", says D'Arcy, "is we are not relevant or sufficiently relevant to get a strong hearing in the negotiations". He then adds something that is certainly bothering the fishing industry as he says, "The risk is we are a chip that will be traded".

That, the man avers, "might be fine for England and Wales but not here in Northern Ireland", accusing Whitehall of being "fixated" with financial services and "not that bothered about food".

D'Arcy nevertheless professes to be happy for Britain to leave the customs union and single market, but not until someone in government "articulates the vision in detail and with examples, and explains, with concrete examples, why it is better than the current regime". He will have a long wait.

What then gets a little dubious is D'Arcy's claims that leaving the customs union in a "hard Brexit" scenario could lead to the price of meat doubling and the price of dairy, half of which is imported, rising by up to 50 percent.

A block of cheddar imported from Ireland that currently costs £1, he says, will cost £1.41 under WTO rules. With Ireland being a major producer of cheddar, he argues that this would prompt "a vicious economic cycle" and a period of "runaway" food price hikes.

Actually, reference to the current EU tariff rate puts Cheddar at €171.70 per 100kg. And, with the average price of the cheese at £733 per 100kg, £1-worth of cheese (not a large amount) would actually cost around £1.17 (depending on the exchange rate).

Nonetheless, this is a significant increase, although some other products attract no tariffs at all, while others are higher. Then, as regards Cheddar, although the Irish Republic would have problems, the UK would benefit from substantially lower tariffs arising from New Zealand and Australian quotas – the bulk of which the UK would keep.

In other words, there is an amount of special pleading going on here. The actual increased cost to the UK consumer will average out at a relatively low figure – even assuming that we do not go for the unilateral tariff-free option.

As regards milk sales, D'Arcy says that, with production plants on both sides of the border he can segregate his business in a Brexit apartheid, with northern non-EU milk staying north of the border and milk from across the border staying in the Republic of Ireland. However, he worries about the livelihoods of the 1,000 farmers he supports in Northern Ireland as "87 percent of their income presently comes from the EU".

Even that, though, is not that drastic when the current tariff for whole milk is €21.80 per 100kg - although that would be enough to make the liquid product uncompetitive, adding 21p to a litre. Even that, though, is not necessarily significant. Retail prices for whole milk range from a 65p/litre to over £1, so the cost of duty could be absorbed. Furthermore, skimmed milk costs more although duty is less, based on fat content.

With the picture very different from what D'Arcy is telling us, he still claims that, "Tariffs for food are going to be at prohibitive levels so that's going to drive the price of food up, and then it will probably give rise to another government intervention to dampen down food price inflation, which obviously will be very destabilising and that's not what the British voted for when they voted for Brexit".

Tellingly, though, D'Arcy does not mention non-tariff barriers. He does not mention that products of animal origin must be presented to Border Inspection Posts (BIPs) when they are imported into the EU (with similar provisions likely when food is exported from the EU to the UK after Brexit).

He says nothing about the fact that the UK cannot even export food to the EU until it gets country clearance – which could take months – or that the BIPs could take years to provide.

These, in fact, will be the real barriers to trade, and they will exist with or without a deal. Even if we manage to negotiate a tariff-free trade agreement with the EU, we will still be a "third country" and food products will still be subject of sanitary and phytosanitary (SPS) checks. On Brexit, these barriers will be so formidable that it is hard to imagine that there can be any trade at all.

With somewhat more validity, though, D'Arcy raises the issue of opening up the UK market to US imports to keep prices down if EU tariffs rose. "That would certainly give rise to a massive incentive to open the market to American hormone-impregnated beef and chlorinated chicken and food from the cheapest parts of the world", he says. "That will be the way to avoid food price inflation but that will be at some cost".

The deal here, though, will be the relatively low production cost – although these do fluctuate, and US advantage is not always as high as is imagined. However, D'Arcy warns that if the gates were opened to the cheapest suppliers in the world, the country would open the door to disease, fraud along the lines of the horsemeat scandal and threats to the country's food security.

It's a bit rich pinning the horsemeat scandal on cheap food, when that was very much of EU origin, affecting high-priced prepared meals. The more relevant point is that, if food from the US was admitted to the UK, the EU would either refuse to accept UK exports or impose such stringent border checks that it would make trade impossible. The price of "cheap" food from the US, therefore, would be the loss of our EU export trade (if we ever got it back), currently worth about £20 billion annually.

What is coming from D'Arcy, therefore, is wide of the mark. He has a point, but his focus is misplaced and he misses the real threats. Nonetheless, even if for the wrong reasons, there is merit in his claims when he says: "We are putting the domestic food industry at risk, we are putting food standards and safety at risk, and putting a massive amount of jobs and the viability of the rural economy at risk".

D'Arcy, who is being somewhat more forthright than many in the industry, says he felt compelled to speak out because he felt so angry at "this the eleventh hour" that there is no government in Northern Ireland to give farming a voice and no one in Westminster with a vision of Brexit.

"No one is banging the desks in Whitehall" to explain the dangers of a hard Brexit, not just to the farmer but to the consumer, he says. "The impression is in the [food] industry we are not relevant or sufficiently relevant to get a strong hearing in the negotiations".

And on that, not only is he right – he is massively under-stating the problems. But then, he is also under-stating the problems of a negotiated settlement. He, like most of the business community, has yet to come to terms with the consequences of the UK leaving the Single Market and acquiring "third country" status.

The level of ignorance here is bizarre, where even the worst case scenarios from industry don't actually approach reality. And when the politicians are further discounting the problems, we end up in cloud-cuckoo land – where we currently reside.

Then, that is without looking at the broader issues arising from a "hard border" with Ireland, where the pressure from Dublin is quite capable of collapsing the Brexit talks.

That brings us back full circle. While the MPs in Westminster obsess about their final vote, as each day passes, a deal looks more and more remote. By the time our politician wake up to this peril, it will be far too late, and many will never have seen it coming.

And there, business is truly on its own. If that was the message they took from Downing Street, it cannot be long before they draw their own conclusions and take the necessary measures, further reinforcing the irrelevance of Westminster. It may be business, rather than politics, that pulls the plug on Mrs May's version of Brexit.



Richard North 14/11/2017 link

Brexit: fools rush in

Monday 13 November 2017  



Food and non-alcoholic beverages imported into the UK is valued at approximately £35 billion a year. By value, they account for 40 percent of food consumed annually in the UK, with EU imports accounting for about 70 percent of food imports – or about a third of our total consumption.

The £35 billion cost represents landed prices, which include cost of production and shipping, plus any tariffs paid. To this must be added distribution, etc., costs and retailers' margins, to get to the over-the-counter spend. Likewise, UK production values represent farmgate or ex-factory prices, so distribution and retail margins must also be added.

At a rough figure, the total import/production cost of the UK food supply (the net cost) is in the order of £120 billion (UK production less exports, plus imports).

Actual consumer spend (direct and indirect) is difficult to calculate. The retail spend in the grocery sector (including supermarkets) is about £192 billion, but to that must be added specialist shops, restaurant sales and institutional meals (works canteens, hospitals, etc). At a very conservative estimate, that puts the consumer spend (final cost) at about £240 billion – about twice the net cost.

As to the effect of Brexit on food costs, there have been various studies on the impact of tariffs, with one suggesting that the price of imported fruit and vegetables will rise by up to eight percent.

Elsewhere, it has been claimed that the average tariff on third country imports is 22 percent, which means that falling back on WTO MFN tariffs would have that level applying to EU produce.

Actually, this is flawed. The average tariff does not represent the amount paid. For that you need the trade weighted average - a figure adjusted for the relative volumes of the different products imported. That, currently, is closer to four percent.

Should we then apply MFN tariffs to EU produce, the "basket price" – the increase across the range of goods bought - would thus work out at that four percent. But, since EU imports are only 30 of total food consumption, the effect on the net price 1.2 percent. If that was then passed through without a multiplier, the cost to the consumer would work out at 0.6 percent – considerably less than food inflation and less than the effect of currency fluctuations.

However, people such as JD Wetherspoon's chairman, Tim Martin, argue that, far from triggering an increase, we could actually see price reductions if the UK went for a unilateral "zero tariff" policy. This would mean that the current zero tariff arrangement with the EU would continue, and we would no longer be paying tariffs on third country goods.

Indeed that would mean a saving by, overall, a four percent reduction on 12 percent of our food supplies, passed through unchanged to retail level, would account for a less than 0.3 percent saving – about 14p on the average £56.80 weekly shopping basket. This would be easily lost in normal price fluctuations.

What this points to – and tends to reinforce – is that the effect of tariff changes, either up or down, would be marginal. They are simply not a significant issue.

That is not the case, of course, with non-tariff barriers. And here we have J Sainsbury CEO Mike Coupe, who has obviously got the point about leaving the EU without a trade deal.

"There is a very straightforward fact", he says, "which is that thousands and thousands of lorries cross the channel carrying food every day", adding that, "It's inconceivable that there isn't some kind of arrangement put in place".

Exactly a week ago, he was warning that fresh food "could be left rotting at the British border" if "strict customs controls for EU goods are put in place after Brexit".

"If you take our fresh produce supply chains, for example", he said, "we put things on a lorry in Spain and it will arrive in a distribution centre somewhere in England, and it won't have gone through any border checks".

Making the obvious point, he then said: "Anything that encumbers that has two effects: it adds cost, and it also has a detrimental effect on freshness - if you're shipping fresh produce from a long distance, even a few hours of delay can make a material impact".

Interestingly, Coupe claimed that the repercussions of supply chain disruption were "not fully recognised" in Westminster, leading him to warn that if it gets nearer to March 2019 and a solution has not been found, retailers and food producers will "make that point and make it very strongly".

What Coupe also managed to do, though – albeit unwittingly – is demonstrate that he had "not fully recognised" the impact of Brexit on his business. "Our wish", he said, "would be for unencumbered trade relations to remain", clearly not realising that, with or without a trade deal, the UK was never again going to see " unencumbered trade relations" with the EU.

He talks of problems if "strict customs controls for EU goods are put in place after Brexit", clearly not realising that strict border controls will be necessary in any event, given the UK's newly acquired status as a third country. It is not a question of if but when. Furthermore, Coupe does not seem to be making the distinction between customs controls, and sanitary and phytosanitary (SPS) checks. But then, Weatherspoon's Tim Martin seems to be having the same problem. The "free trade" that he advocates "also facilitates customs clearance", which has him rejecting the "bloodcurdling stories about the need to turn half of Kent into a lorry park".

That the SPS checks require physical intervention, therefore, has completely passed Martin by, with him failing to understand that up to half of all consignments must be inspected.

Nor does he appreciate that the checks must be carried out on both sides of the border. As long as we maintain any checks on third country produce (and we have pledged to keep EU-style controls in place), we must subject EU goods to the same regime, to avoid falling foul of WTO non-discrimination rules.

Bizarrely, though, Martin shares his ignorance with the UK government which is still asserting that the Irish border question can be resolved "by letting big companies notify customs authorities electronically before goods are shipped, as well as setting up schemes for 'trusted traders' who would face minimal bureaucracy".

In addition, small firms would be exempted to facilitate trade while rural roads would be monitored with numberplate recognition cameras to prevent smuggling, a suggestion that has already been rejected by the EU. Crucially, though, there is no mention of the SPS checks that must be carried out, or that these will be the factor causing the greatest disruption, especially as the necessary infrastructure is not yet provided and there are no plans for installing it.

Between the government and business, therefore, it seems that there is an almost complete failure at all levels to come to terms with the UK's coming status as a "third country".

Even the pharmaceutical industry is suggesting that problems can be resolved by ensuring "maximum alignment between EU and British pharmaceutical regulations". Yet no amount of alignment will overcome the requirement for holders of market authorisations to be established in the EU, a requirement set to cause havoc in the industry.

And then we have James Dyson, speaking yesterday to Andrew Marr, further demonstrating how business figures are failing to grip the implications of Brexit. Confronting the EU's supposed demands for ""billions and billions to leave", he argues that we should "walk away".

"I've been dealing with the EU and the EU countries for the last 25 years, on IEC standards and energy labels and all that kind of thing", he says. "There's no way to deal with them. You have to walk away. And if you walk away they’ll come to us. Because they want to export all their products to us, and so they’ll come back to us".

This, in Dyson's view, puts us in an "incredibly strong position", leading him to repeat that, "We shouldn't give them any money, we should just walk away. And they'll come to us".

It's small wonder that the EU is planning for the collapse of the Brexit talks, making "technical preparations" for when the UK becomes a third country. Barnier warns: "A failure of the negotiations would have consequences on multiple domains, [not] just on the ability of British planes to land in Europe, the United Kingdom leaving the single sky, or on dogs and cats to cross the Channel".

David Davis, having rejected Barnier's two-week deadline, seems content to let this happen. But since Davis too seems to lack any understanding of the consequences of a "no deal" Brexit, one can see why he is relatively relaxed about the prospect.

More and more, this is the living embodiment of the proverb, fools rush in where angels fear to tread. Whether grocer Coupe, pub owner Martin, vacuum cleaner maker Dyson, or ex-sugar salesman Davis, they all have that much in common.



Richard North 13/11/2017 link
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