Monday, 16 January 2017

The art of the possible - taking a pragmatic approach to trade and Brexit

“Politics is the art of the possible, the attainable — the art of the next best”

It's fair to say that Bismark was - as were many other 19th century politicians - pretty much a cynic. Or a pragmatist as a spin doctor might put it nowadays. Grand old Otto wasn't alone in this, Lord Palmerston, Benjamin Disraeli, Lord Salisbury all fit the same pattern. And set against them were a bunch of folk who had a vision of that shining city on the hill, a glorious future, an untroubled world - Chartists, socialists, liberals all approached politics as if man was perfectible and the ideological schematic they adhered to need only be implemented for us to reach Utopia.

The bad news is that mankind is not perfectible (something that the god-fearing have always know), human nature is not innately good, and what looks like the solution to life the universe and everything probably isn't.

So that's the end of it? We can dismiss ideology as simply the domain of Toryboys, Marxists and Libertarians can we? Get a solid broad-bottomed coalition of people who stress the practical, who are focused on action rather than thinking? Perhaps not for, in doing this, we abolish strategy in favour of a cavalcade of beautifully spun tactics - "what matters is what works", Tony Blair famously said without thinking about or defining what he meant by "works".

It seems to me that there are three possible responses to our vote to leave the European Union:

1. Ignore it and stay in

2. Implement some sort of Utopian dream of UK independence

3. Be pragmatic and practical - apply Bismark's dictum

One and two above are essentially ideological responses. I know that the Remainers want you to believe that they are somehow saving Britain from thick, stupid, xenophobic voters (and thereby saving 'law and democracy' from the 'extreme right'). There is no talking with such people since their position is immutable and absolutist - the referendum was 'advisory', parliament must 'vote', we need a second, presumably advisory, referendum, the law trumps democracy, and leaving is far to complicated. All of this is entirely ideological.

For the Brexit Absolutists there's a different obsession intended to rescue Britain from the arrogant, elitist, out-of-touch, anti-democratic establishment. As with the Remainers, there's no talking with such folk - Britain is full, Brexit means having nothing at all to do with the EU, problems in the NHS, social care and education are down to immigration, and we shouldn't wait but should leave now by repealing the 1972 European Communities Act.

One of the things that both Remainers and Brexit Ultras talk a lot about is trade. In the case of the former, we apparently had no trade at all with anywhere in Europe prior to 1972 and trade is entirely down to the granting of permissions by governments. The Brexit Ultras are divided on this between those who want a smaller, UK-only version of the EU's protectionist model and those who sign up to the 'Go Global' idea and talk a lot about free trade.

Now some people think all this talk of free trade is an ideological obsession bordering on a cult - introduce free trade and, alakazam, all will be well and everyone will be rich. And the logic of economic theory tells us these cultists are right - here's Don Boudreaux:

Put differently, the only economic reason for trade is that each of us produces some goods or services at costs lower than the costs that our trading partners would incur to produce those same goods or services. That is, each of us has a comparative advantage in supplying the goods or services that we sell to others, and a comparative disadvantage in supplying each of the many goods and services that we buy from others.

Any barriers placed by governments in the way of allowing this trade to happen - borders, tariffs, regulations and so forth - make that trade less likely and us all poorer (in purely economic terms). So when Brexit Ultras like John Redwood or Tim Worstall argue for absolute free trade they are doing so on the basis of a robust base of evidence. More open trade does make us all better off so, logic tells us, absolutely free trade is ideal since that would give the greatest chance of all being richer:

Edwards notes that past studies have suggested that countries that are more open to the rest of the world are better able to absorb the rapid technological advances of leading nations. If the costs of technological imitation are lower than the costs of internally developed innovations, then a poorer country will grow faster than a more developed one. This faster rate of growth will continue so long as that country remains open to capturing new ideas until, at some point, an equilibrium is reached and the rate of growth slows.

Edwards uses a new comparative dataset for 93 countries to analyze the relationship between openness and total factor productivity (TFP) growth. He notes that past limitations in appropriate comparative measures of openness have left studies on the relationship between openness and productivity open to question. To bolster his case, he uses nine alternative indexes of trade policy.

Edwards finds that more open countries indeed have experienced faster productivity growth, and that result holds true no matter which openness index he uses. He further finds that his results are not specific to a certain period, but apply generally throughout the decades 1960 to 1990.

One of the ironies the we can take from this fact is that the Brexit Ultras and Remainers are using the exact same argument on trade but coming to different conclusions. The latter tell us the UK will be poorer because we will leave the single market and lose the benefits of more open trade across the EU. And they are probably right. For the former, the EU is protectionist and leaving opens up new markets and new opportunities in fast growing parts of the world. Again they are probably right.

Indeed, it is true to say that the pragmatists - those seeking to find a way of squaring the circle implicit in the ideological positions of Remainers and Brexit Ultras - are supporting solutions that are less (in pure terms) economically advantageous. As ever the answer is that, even if we just use Adam Smith as our economics source book, the argument is not really rooted in classical liberal absolutism but is rather more subtle:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

We are, Smith says, protectionists by preference so it isn't necessary for us to be made protectionists through fiat. The local preference that opponents of free market liberalism claim to support (and wish to enforce) is right there in the founding text of liberal economics - made possible by the 'invisible hand'. All other things being equal we prefer to deal with the bloke we know rather than the one we don't. Indeed making your business or product seem comfortable and familiar is one of the main purposes of brand advertising!

It seems that the ideologues are wrong. Not wrong in saying that mankind is enriched by trade and the more open the better, but wrong in suggesting that open trade creates a level playing field between Peoria and Penge, Peshawar and Peking.

I voted to leave the EU in the full knowledge that this could have a short-term negative impact on trade and, therefore, on our economic well-being. We would lose access to those currently important, (more-or-less) barrier-free EU markets more quickly than we could replace them with new open relationships elsewhere. This isn't an argument against leaving because we have to set that loss against a different set of economic problems - the train crash of the Euro, the collapse of political stability in Southern Europe, and the continuing slow growth across much of the continent.

It is, however, an argument for interim or transitional arrangements even if those arrangements result in a longer period during which the UK pays money 'to the EU' and in fewer domestic controls over immigration than we would prefer. We should always resist the blandishments of regulatory bodies - national or international - who tell us their purpose is to facilitate trade when this is seldom the case. But this doesn't mean those bodies that promote standardisation, encourage food safety, help control environmental risks and police fair dealing are somehow unwanted, merely that - for all their value in consumer protection - they do not enhance or promote trade.

The process between now and the point when the UK leaves the European Union is about these arrangements, about balancing between maintaining access to the EU and openness elsewhere, and about the UK deciding upon and implementing a trade strategy. It's not and never has been about there being some 'plan', a sort of ideological blueprint for leaving the EU. Such planning's main function is in allowing the testing of different scenarios and in exploring how UK domestic decisions play out internationally:

But this question also has a common sense answer that every trade policy practitioner knows: governments negotiate trade agreements not because they wish to reduce their own trade barriers but because they seek to reduce the trade barriers imposed by their trading partners, and they are willing to "pay" - with market access "concessions" of their own - for the enhanced access to foreign markets that lower foreign barriers would bring.

It is true, as some Brexit Ultras would argue, that governments can simply ignore this process and implement whatever they wish (this is, after all, the entire point of sovereignty as a concept) but the realpolitic of international trade is that the other side expect concessions. If we have nothing to concede then there is no trade negotiation and no trade deal. This was essentially the point made by Phillip Hammond in his interview with Welt am Sonntag - the discussions we will have with the EU are not one-directional meaning that the Union (or its individual member states) cannot dictate the terms and the consequences of demands from one side may not be helpful to a satisfactory conclusion.

In some respects the very loud argument between Remainers and Brexit Ultras (plus the Farageist protectionists) is helpful to the government. Not because it protects them politically but because it provides them with the means of controlling both sides - "look over there", they'll say, "that's what you'll get if you don't play the game our way." The result of this is very clear in the manner of concerns from both Keir Starmer as Labour lead on Brexit and the Brexit Select Committee of Parliament. Questions are asked, doubts are raised but there is a consistent message of "we won't prevent the referendum being implemented". This infers, however, that the 'deal' depends on the process complying with the pragmatic approach and derives philosophically from Bismark's dictum and Salisbury's doubt rather than from a predetermined ideological end-game.


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