Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 27 February 2018

Labour's embrace of a customs union could end the Brexit fantasy


The UK was always going to stay in a customs union with the EU the moment that the EU put the Irish border as one of the three items to be settled at the first stage of negotiations. The logic is straightforward. Putting it at the first stage meant that the EU would not sign any trade agreement which resulted in a hard border. To avoid a hard border Northern Ireland has to be in a customs union with the EU and in the Single Market for goods. There is no wish in the UK to have a sea border between Northern Ireland and the rest of the UK. Parliament will not allow a No Deal Brexit. So any deal will have to involve the UK being in the Customs Union.

It is clear that Theresa May will try and avoid that logic for as long as possible because she wants to keep the Brexiters on board. She hopes she can do so until we have formally left the EU. That was always going to be very difficult, but Labour have now added an additional hurdle: parliament could vote to stay in a customs union before 2019. I will leave it to others better qualified than I am to work out whether that will happen, and what the consequences of that would be.

I just want to make two points: one for Remainers and one for Lexiters. It has frequently been suggested by some Remainers that Corbyn is an entrenched Lexiter and as a result that he would never allow Labour to stay in the Customs Union. Too many people have an image of the Labour leadership as hard edged and uncompromising. In contrast I have always argued that Labour remains a centre left party that just happens to be led from the left, because the Labour leadership above all else want to change the UK. You can only really change the UK by being in government, which is why we had a populist Labour manifesto in 2017. Once in power you can only make changes that the PLP are happy with because of parliamentary arithmetic.

For that reason I have always talked about Labour triangulating over Brexit, and I argued recently that this strategy would require a move to support staying in a customs union. [1] Labour’s move to do just that suggests not only that Labour are triangulating, but also more generally that the Labour leadership are prepared to compromise to achieve power. Remainers that had written Corbyn off need to adjust their view, and realise that stopping Brexit is only possible if Labour supports it.

For Lexiters this is a wake up call. There are still too many people in the Labour party that are as prone to brush aside the costs of Brexit as Brexiters are. Some believe, for example, that the argument that with Brexit we would have less tax and therefore less government spending is austerity talk. They are wrong. Fiscal expansions can counteract periods of deficient demand, that may be created by Brexit uncertainty for example, but not slower growth coming from the supply side because of trade destruction. A Labour government having to preside over a slow growth economy is almost sure to disappoint the high expectations that will be placed on it.

Even worse are Lexiters who have listened to too much MMT type rhetoric, and think that ‘taxes do not finance spending’ and that therefore slow growth and less taxes put no constraint on what Labour can spend. This is nonsense even in an MMT type world, because trade destruction would mean inflation would become a constraint on spending much more quickly. In the real world where the Bank of England controls inflation, ignoring a lower tax take would result in higher deficits and borrowing which is ruled out by Labour’s very good fiscal credibility rule. Labour will try to stick to this rule, which means government spending will be much tighter after Brexit than without Brexit.

Avoiding that outcome has always been implicit in Labour’s ‘economy first’ stance, and what that means has now become more explicit. Labour’s move could start to unravel Brexit. Remainers should not bemoan that Labour has not gone further, but instead focus on building on the elements of reality that Labour have thrown at the Tories Brexit fantasy. For example the emphasis that Labour put on avoiding a hard Irish border requires staying in the single market for goods. If this is helpful for goods, why not services which are the UK’s comparative advantage? We need doctors and nurses from the EU to save our NHS. Each time we take a step further to BINO (Brexit in name only) it becomes clear it is better to have a seat at the table. This is the only way that Brexit can end.

[1] The cost to Labour in votes of moving to support a customs union may not be that great, particularly as few voted for Brexit so that the UK could do its own trade deals. As Corbyn said yesterday when asked what he would say to Leavers who had voted Labour and might feel betrayed by his endorsement of a customs union: think it through. I wish politicians would say that more often, particularly for probably the most not thought through policy in the UK’s recent history.




25 comments:

  1. Another excellent post, thanks! I had often argued that a Corbyn Labour government would be unlikely to be able to offset the negative economic impact of Brexit through Keynesian stimulus, but I hadn't seen it articulated as clearly (demand-side vs supply-side) as to why that is the case.

    "A Labour government having to preside over a slow growth economy is almost sure to disappoint the high expectations that will be placed on it."

    I'd just like to add to this that Lexiters should also consider the implications of an economy that under performs when implementing a Corbynite agenda.

    Many Lexiters I've spoken to consider that we are at an inflexion point and see Brexit as an opportunity to reverse decades of neoliberalism, kicking off a generation of social democratic governance.

    However, given the probable hit on the economy and what we know about the mainstream media in the UK, it seems very clear that every negative impact on the UK's economy would be blamed directly on Corbynomics rather than Brexit, likely cutting off any future potential for a new democratic socialist hegemony.

    It seems to me that Lexit requires a similar level of rejection of evidence and ideological assumptions as Brexit.

    ReplyDelete
    Replies
    1. If we want a future Keynesian economic policy without stop-go, we need to always have control over the balance of payments. We can't have that while in the EU because the common market means as we get closer to full employment, we suck in more and more imports per pound spent. So we should have at least some tariffs. It's staying *in* the EU that would get Corbynomics in trouble.

      https://www.concertedaction.com/2016/03/13/the-paradox-of-protectionism/

      Delete
  2. I think you may be overstating the case against domestic policy as an offset somewhat.

    I do agree that the harder the Brexit the worse the impact on trade, and that BINO would be a better policy. But there is room in the economy to counterbalance that.

    1) We already have a big problem with inequality-driven low demand which has been accumulated over the austerity period. Purchasing power is overconcentrated. A program of redistribution would go some way to counteract that. If we simply reversed the impact of austerity and brought things back to the pre-2008 trend this would counteract at least a "soft Brexit" hit, although it probably wouldn't help about a hard Brexit crash out. Yes, it would be *even better* if we could do this without a Brexit hit, but if you can get the plus column higher than the minus column it's still a positive number.

    2) If infrastructure spending is good then it's good. The reason people say the response to a Brexit recession should not be to cut back on spending is because counter-cyclicality is good no matter the cause of the recession. You could argue that Brexit would be a longer term and thus structural shift rather than a cyclical recession, but I would say that the 2008 crash really *should* have been regarded as a structural shift, and I don't see why the policy response of spending cuts would suddenly have been appropriate if we viewed it under that frame?

    3) Corbynism isn't Blairism. Blairism was about taking the gains of a (overheated, property-inflation-driven) market economy and using those to fund broadly social democratic programs. Corbynism (or perhaps more accurately McDonnellism) is much more about addressing concepts of ownership and changing the relationship between capital and labour. As such, we're "intensely relaxed" about people who have become incredibly wealthy over the Neoliberal period suddenly feeling the pinch. The trick, and I fully appreciate it's not without its challenges, is to put the purchasing power that's *already here* in the hands of those who aren't sitting on vast piles of property wealth. There are probably few changes that would be more radical and beneficial than reversing the trend of lending people money in lieu of wages, and actually paying them wages instead. This is more radical than I think a lot of people give it credit for being, and it means that the analysis that would hold during the Blair years doesn't hold as strongly any more.

    I am not suggesting all of this will happen or that there aren't ways it could fail to deliver, but no policy (not even "staying in the EU") survives contact with the enemy. The broad point is, I think, that domestic policy won't directly stop any Brexit slump but could have beneficial effects on the overall economy which could, depending on how the individual variables end up looking in the massive spreadsheet of life, come out as a net positive.

    A final point, which is political rather than economic, is that many of the people claiming we'd have no choice but to engage in another round of austerity post-Brexit aren't credible on it because they were claiming exactly the same thing about the banking crisis. Their concern for the living standards of the poor appears to be rather convenient after 8 years of using them as punching bags. I appreciate that this doesn't apply to you, but it's an important piece of context to note in the discussion.

    ReplyDelete
  3. This comment has been removed by the author.

    ReplyDelete
  4. "A new customs arrangement would depend on Britain being able to negotiate agreement of new trade deals in our national interest.”


    J Corbyn yesterday.

    A customs union?

    I think you hear what you want to hear.

    ReplyDelete
    Replies
    1. Varadkar has repeatedly said he wants an EU-UK customs union after Brexit, because rather than being alarmed about the Irish border causing terrorism (it won't), the Republic is alarmed about loss of trade to its biggest export destination, GB. They are lying through their teeth about the border to try and make an EU-UK customs union happen.

      Delete
  5. When you look at the voters who switched from the Lib Dems, Tories, and the Greens to Labour in the 2017 General Election Corbyn has followed the direction of his voters.

    ReplyDelete
  6. Do you have any thoughts on the following by Billy Mitchell? He seems to be arguing much the opposite on fiscal self-restraint.

    http://bilbo.economicoutlook.net/blog/?p=38776

    ReplyDelete
  7. The EU doesn't want the UK anymore. A hard exit and then dissolution of the UK is the only way this will end. That is what is really going on. The Tories think the de Rothschilds in Russia will save them, but they are wrong.

    It will be a credit event and financial markets will crash globally.

    ReplyDelete
  8. "You can only really change the UK by being in government"

    One-word rebuttal: UKIP

    ReplyDelete
  9. Just wanted to say many thanks for your insightful blog. I'm an avid reader.

    S

    ReplyDelete
  10. Very much agree with almost all of this - but surely you are not still disagreeing with MMT, or as I prefer MMP, Modern Monetary Practice?

    ReplyDelete
  11. Simon, I've tried before and will try again!

    Why does the Irish border matter? I live in NI. Yes, we do some trade with the RoI and customs checks would inhibit it to some extent. We do several times MORE trade with GB, just like Scotland does 4x more trade with England than with rEU.

    The terrorism argument is either ignorant (British Remainers) or dishonest (southern politicians and commentators), because customs posts would be what *allows* continued trade. The small, weak, unpopular dissident republicans cannot afford to attack them, because they will be in constant use by civilians. Therefore, they have not threatened to. It is not a peace process issue.

    ReplyDelete
  12. That a "hard" border must be avoided is itself a fantasy, and customs checks can be far less intrusive than many Remainers (and I am one) seem to believe. https://twitter.com/Kilsally/status/968523656669392896

    ReplyDelete
    Replies
    1. That post on twitter seems to miss the crucial detail that the Isle of Man and the UK are in a customs union and hence the Isle of Man CAN do it's customs checks in Great Britain (the fact that the Isle is also small and most trade links are through GB facilitates this arrangement). So if the Isle of Man is being used as an example then it supports the contention that NI would have to be in a customs union with the EU.

      Delete
    2. This is ultimately irrelevant; any physical location tied to the division of ireland could be a target for paramilitaries. This is why "the weakest possible border" is useless; there must be no border.

      Delete
    3. The paramilitaries argument is completely bogus, and the Irish govt knows this. The dissident republicans are small, weak, very unpopular, and have killed only 6 ppl from the security forces in 20 years.

      Customs posts are used all day by civilians. The terrorists cannot attack them, and they're easy enough to defend anyway. Terrorists also don't get to decide the UK's foreign policy, sorry. Can you name any terrorist organisation which has made such a threat, btw? I live in NI and the answer is none.

      I don't want to leave the EU, but the RoI shouldn't be allowed to dictate that the UK has to have a customs union with the EU on false grounds. That's about defending their argiculture, and not the peace process.

      Delete
    4. PS... suggestion of dissident republicans blowing up customs posts would inhibit trade with the Republic, not save it, so the public would know they are damaging the economy. It's as absurd as suggesting loyalists would succeed in blowing up stuff in Belfast harbour to try and stop a sea border.

      Delete
  13. The problem with this line of argument is that you continue to assume that Brexit will damage the supply side. This is hard to reconcile with historical evidence that a country normally builds up productive capacity in a relatively more "protectionist" environment than in a "freer" one; and also with the experience of 40 years of progressive European integration that have gradually weakened UK industry and supply side in general, not made it stronger.

    If the argument in favour of frictionless trade was so clearcut why not proposing a unilateral action from the UK, 0 trade barriers to any EU import, regardless of whether the EU reciprocate or not. That would solve in a stroke all the negotiations. None is seriously proposing this because even the Tories have understood by now that free trade is not in the best interest of the country.

    ReplyDelete
    Replies
    1. Because such unilateral action cannot be limited to the EU alone. Jeez, its like despite all the information out there on the WTO MFN clauses that has been disseminated for months, some people are still totally unawares about it.

      If the UK decided unilateral to have zero trade barriers to any EU import after Brexit without any kind of free trade agreement/customs union with the EU, it would have to do so for ALL imports from ALL countries after Brexit. In such a case it would only allow frictionless trade from the Republic of Ireland into NI, not vice versa (since with zero barriers to imports into the UK then goods from countries which the EU has not FTA with, e.g. China, could then go into the UK and get into the EU via NI/Ireland if the EU also decided to simply reciprocate unilaterally (which it won't do since it doesn't want to face legal action in the WTO)).

      Delete
    2. Correct me if I'm wrong but under WTO rules the UK cannot offer more favourable terms to any other country, unless it enters a free trade area such as the EU. After we leave the EU, we have to treat them the same as anyone else.

      Lately I am interested in the Kaldorian argument that free trade (even just inside the EU) inhibits our economic growth rate because we lose control of the balance of payments. That means we can't keep running the economy at full employment. So we should have at least some tariffs and no free trade areas. Point is not to protect certain industries from competition but to maximise economic growth by maximising use of Keynesian policy.

      Delete
  14. The argument in the first paragraph is unanswerable. I made it myself in a slightly different form, a little ahead of you, in a little-read blog post here: *****samefacts.com/2018/02/britain/does-the-red-hand-win-at-brexit/. Neither of us should claim deep insight, it is glaringly obvious.

    So far Labour have only supported a customs union, not the full single market. But the logic is the same. Take chlorine-washed chicken, which Wilbur Ross has already indicated would be on the table of any post-Brexit trade deal with the USA. Whether it can be sold in the UK or not is a single market issue but not a customs one. There is no tariff, the stuff is simply banned in the EU. Suppose it can now be imported into Belfast. The Republic would have to set up customs controls at the border to stop onward shipment in trucks to Dublin. That's a hard border. It's still a hard border if the trucks can travel in bond to a big holding and inspection centre near Dublin. The British government promised in December it would not allow a hard border. Therefore chlorinated chicken can't be imported into Belfast. Under the second promise to the DUP of no hard border between NI and the rest of the UK, it can't be imported into Liverpool either. The UK has to stay in the single market. QED.

    Some Brexiters have been saying that the undertaking only applies to the British side. If the Republic sets up customs posts, that's their funeral. Such sea-lawyering is dishonourable. More's the point, the EU is taking the undertaking at face value and is putting it into the draft withdrawal treaty. It will stay there. A hard border means the hardest Brexit crash-out without any treaty, and economic disaster for the UK.

    Then we have Boris' handwaving about magic technology that will keep the chlorinated chicken in NI painlessly. In a dystopian SF world, maybe you could tag every carcass with an RFID chip and monitor them all in real time, alerting the Gardai every time one of them sneaks south in a van. The infeasibility of this fantasy is indicated by the fact that HMC simply cannot set up a new but entirely conventional customs system by March 2019.

    ReplyDelete
    Replies
    1. Well it's a hard border if you say so! But isn't the situation that the fewer checks there are, the less people will care?

      When ppl like SW-L talk about "the Irish border issue" there is a problem. That means different things to different ppl. Some even think it mans terrorism (it does not, see my other comments on this page). Is the issue that nationalists will complain about checks? Is it the actual reduction in trade (a sea border means 4x worse)?

      I wanna stop Brexit for larger macroeconomic reasons for the whole UK. What if Brexit causes a recession? Well if the EU/ROI side insists that the UK has to stay in the single market or no deal, or avoid whatever a "hard border" is or no deal, or allow EU immigration or no deal, the higher the chance of the government not agreeing or not being able to get it through the Commons.

      And no deal means automatic hard border.

      Delete
    2. "Is the issue that nationalists will complain about checks?" The issue is that the British government has promised no checks, and the EU is holding them to their promise.

      Delete
  15. Simon often laments media misinformation and bias, including room for improvement in the BBC. He may have a point:

    https://www.thecanary.co/trending/2018/03/02/viewers-noticed-something-familiar-mouthy-audience-member-last-nights-question-time/

    ReplyDelete

Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time. In addition, I cannot publish comments with lots of site URLs that I cannot check.