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Brexit: IEA fantasy corner

2017-08-19 06:07:23

What immediately strikes one is the poverty of the debate, typified by the narrowness of the source list and the superficiality of the argument.

Professor Dowd, for instance, wants us to accept from him the proposition that his new, heavenly post-Brexit Britain would make a "market-friendly Global Free Trade Agreement" with like-minded countries, the key elements of which would be minimal trade barriers, strong property rights, reduced regulation, openness to foreign investment and greater freedom of movement.

The call for greater freedom of movement might come as a shock to some of the supporters of the Institute of Economic Affairs, for whom Kevin Dowd has written his paper, entitled, "A trade policy for a Brexited Britain", but nonetheless it is one of his objectives.

But the crucial issue to which I would direct attention is his assertion that: "There would also be a shift away from regulatory harmonisation (as in the TPP and TTIP) towards the use of 'mutual recognition agreements' that acknowledge differences between different countries’ regulatory systems rather than attempt to steamroll over them".

Now, the point here is that the role of mutual recognition agreements is a major, contentious and complex matter, that has over time (many years) concerned many true scholars, who have explored the subject at depth.

This one in particular comes to mind – 37 pages long under the title Mutual Recognition in Goods and Services – an Economic Perspective. Written by Jacques Pelkmans and published by the European Network of European Economic Policy Research Institutes, it is nearly twice the length (and much more so in word count) than Dowd's 20-page effort.

There are other papers dealing with the subject, such as this one a 2016 paper by Shintaro Hamanaka and Sufian Jusoh for the Institute of Developing Economies, embracing the title: "The Emerging ASEAN Approach to Mutual Recognition – A Comparison with Europe, Trans-Tasman and North America", this is a mere 23 densely-printed pages.

The sheer range of papers that one can find, and their diversity, suggests a vibrant, extensive debate where one is not surprised to find a variety of opinions and different views as to the utility of mutual recognition in international trade. But, to the likes of Dowd, mutual recognition is a done deal, the preferred mechanism for regulation between nations, replacing all others and in particular regulatory harmonisation.

To make his case, Dowd devotes less than a full page of his own paper, supported by a lengthy quote from Iain Murray, a staffer from the right-wing US think-tank, the Competitive Enterprise Institute (CEI), who provides him with his one and only citation on the subject, a blogpost from the CEI blog dated 23 January 2017.

Far be it for me to decry the use of a blog to make a point, one nonetheless looks askance at this being offered as the primary (and sole) reference to support the adoption of a specific and complex policy in what is supposed to be a serious research paper from a prestigious London think-tank – still the flagship of UK right-wing Conservative thinking.

Then, this isn't a serious paper and the IEA, once the flag-bearer for Thatcherism, has long since seen better days, and now survives on the fringes, churning out unreadable (and largely unread) tracts covering arcane points on regulation and healthcare, for a diminishing audience.

As to mutual recognition, this is not an alternative to regulatory harmonisation, but a complement to it. Furthermore, it is relied upon extensively by the European Union to the extent that, says the Pelkmans paper, nearly 50 percent of intra-EU goods trade is subject to it.

That actually makes mutual recognition the primary mechanism of regulation applying to the flow of goods between EU Member States, as our own Government acknowledges. As such, it is the major tool for facilitating the free movement of goods within the Single Market – something we will probably lose when we drop out of that Single Market, hugely complicating our trade relationship.

So valuable is the mechanism that the EU has probably exploited it to the full extent of its current utility. As Pelkmans points out, there are important limitations to its use. In such cases, regulatory harmonisation, amongst other mechanisms, is seen as the better option.

And this illustrates what I mean by the poverty of the debate. In the space of less than a page, Dowd turns a complex and important issue into a black-and-white pastiche, presenting it as a binary choice between two competing mechanism, citing a single, right-wing think-tank as his source. That is what, for the IEA, passes as its idea of a grown-up debate.

Dowd himself is a professor of finance and economics at Durham University, a prestigious, long-standing university. But, although he is a member of the lobby group, Economists for Free Trade, he is not a trade expert. He writes extensively on the history and theory of free banking, the mechanics of monetary systems without the state and the failings of central banking and financial regulation.

But he is also a senior fellow of the Cobden Centre, tying him into the right-wing free trade network dominated by the Legatum Institute and their sinister agenda.

In this specialism, therefore, he is just another polemicist, writing outside his area of expertise, relying on the "prestige" of his university and the tarnished authority of the IEA to project his views. As for his polemic, it has already been quite widely trashed, but what is worth looking at is the treatment of the paper in the media.

Here, one observes in passing that few newspapers these days would freely publish a paper written on, say, eugenics, indicating that there is still left some degree of editorial discretion. But this, it seems, does not apply to the partisan, inadequate scholarship promoted by the IEA in favour of the tired and potentially damaging concept of unilateral free trade.

Thus in yesterday's Telegraph we see an article by Jamie White, Director of Research for the IEA, given over to supporting Dowd. But White's opening argument is positively childish, displaying not the slightest grasp of the subject.

In this he starts by asserting that we do not need to negotiate a trade deal with the EU in order to trade freely with the Member States after Brexit. Free trade, he says, "does not require trade deals between governments", then continuing:
People living in Leeds can now trade freely with people living in Bristol. Yet there is no trade deal between the Leeds City Council and Bristol City Council. Suppose councillors decided to take an interest in trade between the two cities and struck a deal. The terms of the deal could only create barriers to trade where there were none. The same goes for international trade. If governments genuinely sought free trade, there would be nothing to negotiate. Each would simply refrain from creating any barriers to trade. This is precisely what the UK should when it leaves the customs union in March 2018.
What this bizarre example ignores is that the people in Leeds can trade freely with those in Bristol because the UK is a single market - a common regulatory area with common standards – precisely the situation the EU had been seeking to achieve with its 28 Member States.

We have achieved this status because the UK has a central government which has progressively removed internal barriers to trade, including the dozens of different weights and measures systems which, in antiquity, had different measurements for the bushel in virtually every region.

As far as international trade goes, barriers to trade emerge spontaneously as sovereign governments impose tariffs and also legislate locally and differently for their own territories, over a wide range of issues. This is even recognised by Dowd, who declares in his paper:
Nowadays achieving free trade isn't so much about tariffs or classic bread and-butter trade policies; it is about regulation and the general degree of economic freedom. Many restrictions to genuine free trade arise from current regulations in areas such as the environment, consumer protection, health and safety, and data security. These regulatory restrictions are pervasive and constitute barriers to free trade that are at least as important as the barriers created from trade policy.
Thus, the purpose of a trade deal is to remove external (i.e., international) barriers to trade – including differences in regulation - by which means we can expand the domestic market and benefit from economies of scale and from the advantages of specialisation.

But since we will have no jurisdiction over other countries' territories with whom we wish to trade (having left the EU, where we shared jurisdiction over each other's), we have to negotiate regulatory parity or other mechanisms, such as mutual recognition, in order to remove barriers - hence trade deals.

The idea that we do not need trade deals with other countries, therefore, is absurd. It is based on a childishly facile argument that does not stand one moment's scrutiny.

This brings us back to where we started. Dowd wants unilateral free trade with the EU (the Minford stupidity), which will deal with tariffs (he hopes), but for regulation, he wants our Government to "commit to zero barriers on imports" and invite the EU to make "comparable commitments".

His idea of "zero barriers" is to adopt universally the mechanism of mutual recognition, using the Trans-Tasman Mutual Recognition Arrangement (TTMRA) as a model, apparently unaware that it has major areas of exemption and limitations.

Further, what can apply between two countries which share the same language, the same basic legal system and are at similar levels of development, will not apply to countries which have major differences between them.

Then, in the event that there is no trade deal with the EU, "the default position should be that a Brexited Britain would continue to trade with EU on the same tariff-free basis as it presently does". He adds: "The UK does not need a trade deal with the EU and the UK should be willing to walk from any bad trade deal". In this, he tells us, "imposing tariffs on imports from the UK would be a major act of self-harm".

So, according to the Dowd plan, we allow in all goods from the EU on a tariff free basis and automatically recognise their regulation, accepting goods (and services) without hindrance.

We then invite the EU to drop all its tariffs against us, despite WTO rules requiring it to impose its CET on all MFN partners, while expecting it to waive all its regulatory requirements – applicable to all other nations in the world – and apply mutual recognition to whatever regulations we may or may not impose on our domestic market.

This is not intelligent scholarship. It is a childish fantasy which has no basis at all in reality. And it represents the final departure of the IEA from the stage, consigning it to the margins of a debate it never really understood and from which it is quite evidently incapable of learning.

As for the Telegraph, it long ago ceased to be a sensible newspaper and has now become the "Ultra" comic. It and the IEA deserve each other.