The draft trade treaty that should be presented to the European Union

The government is to prepare and publish the draft of a trade treaty to govern interactions between the UK and the remnant European Union.

British negotiators fear Michel Barnier has been unable to get EU leaders to focus on Brexit trade and security talks as a result of the coronavirus pandemic, as Downing Street prepares to publish a draft treaty this week in an effort to reboot the process.

Sadly, it will not be the correct one. For, as we’ve said before and will no doubt have to again, the correct treaty is short, simple and goes full blown unilateral free trade on them:

1.There will be no tariff or non-tariff barriers on imports into the UK.

2.Imports will be regulated in exactly the same manner as domestic production.

3.You can do what you like.

4.Err, that’s it.

Nothing else is required. Well, except for all to understand the most basic point about trade. The purpose of which, the very reason we interact with those foreigners beyond our silver girt islands, is in order to gain access to those things they do better than we do. There are, after all, some such things. As Adam Smith noted, it is possible to grow grapes and make wine in Scotland but for the effort required it’s better to buy it in from Bourdeaux. What would middle class life be without prosecco? That swapping of port for cloth is the very basis of comparative advantage. And while Savile Row tailoring is all very well Hugo Boss was known for some pretty spiffy outfits in his time.

The rules on what we may export to others are of mild interest. What we may buy from others and how much we charge ourselves for doing so are vital. Imports, that is, are the point of trade, exports just being the work we do to get them.

Thus the only correct attitude toward trade is free trade. Unilateral free trade that is, as we did in 1846 with the Corn Laws. Which is what our draft treaty should be.

Of course, the world is more complex now, there are such things as patents and intellectual property rights to consider too. But that’s OK, we’ll not bother with asserting our copyright on the above treaty.

The Importance Of Collaboration, Open Trade, And Innovation In Tackling COVID-19

Today, the Geneva Network is launching its declaration on the importance of open trade and innovation in tackling COVID-19, with the ASI as a signatory. The 31 signatories all recognise the importance of a global response to this global issue.

Protectionism will prolong the crisis and lead to shortages of medical supplies. Abolishing tariffs on medical supplies and medicines will, on the other hand, allow countries to import them with ease and ensure the supply of goods to countries in need. 

Most states are not self reliant. Nor would we want them to be. Specialisation means we can focus on what we’re good at, and trade allows us to have access to all manner of goods. We’re all the richer for it. 

Individuals should not be victims of national pride — they should not prevent free trade and the efficient supply of necessities. Similarly, countries must reject export bans on medical supplies. 

Global markets for medical supplies are essential for a global pandemic. Our concerns do not stop at borders and nor should our supplies. We benefit from the ability to procure components from across the world to construct a final product. Put up in haste by populist politicians looking to be seen to do ‘something’, we must commit to remove export bans. In doing so, countries will be allowing their manufacturers to do their bit and contribute to medical equipment across the globe.  

The declaration calls for Governments to commit to permanent tariff reductions on medical supplies, devices, medicines and vaccines via legally binding WTO commitment: this would be a tool not only in dealing with the present situation but also in future crises too. We should never tax our citizens for the audacity of buying essential goods from abroad. 

In today’s world it is neither possible nor desirable for entire countries to isolate themselves from others. In Britain, entrepreneurial spirit has helped to combat shortages of hand sanitiser. Spirit producing companies, such as BrewDog, have been able to shift production to meet the sudden change in demand while Burberry has flipped production to ‘designer’ personal protective equipment. This entrepreneurial spirit should be rewarded and allowed to help areas where supply is not so responsive through free trade. Market solutions should be allowed to help fill global demand, not just domestic.

As the Geneva Network points out “five Latin American countries (Ecuador, Bolivia, Venezuela, Brazil, and Argentina) have the highest tariffs on protective facemasks, ranging from 17% to 55%”. These tariffs will hurt these countries’ citizens in the name of local business. It is the free market that will mean these necessities are available to all. By removing these extortionately high tariffs, the governments would be introducing greater competition in the provision of medical supplies which in turn forces lower prices and ensures not only adequate supply but also affordability.

The Geneva Network’s declaration advocates the free flow of essential epidemiological and clinical data across borders, a process which will facilitate a solution to this crisis. Having access to international sets of information allows scientists to work together to provide a vaccine. Just as sharing knowledge is important so is maintaining transparency in collecting and sharing epidemiological data. Skewing data to be more flattering to a country does not benefit the scientific cause since the need to assess the data is critical. Accepting decisions made by major drug regulatory authorities such as the US Food and Drug Administration and the European Medicines Agency will facilitate this process further — what’s good and safe for humans in one developed country is the same in another, we can cut time on approvals and save lives. Drug manufacturers can produce a speedy treatment and even a vaccine to face this silent killer and future threats without having to compromise on safety.

Innovation has shown itself vital to solving this crisis and will continue to do so. A key factor in encouraging innovation is intellectual property rights. These rights incentivise the private sector and spur on competition. Scientists need the security that their rights will be protected and not done away with by any state. If this is achieved, it will produce the greatest degree of innovation, the greatest degree of productivity when medicines are developed and greatest efficiency in distributing medicine.  

Now more than ever is the time for all countries to be following Pakistan, Brazil, Colombia and Norway’s examples of exempting COVID-19 related medicines, vaccines and medical supplies from import duties and taxes. These countries recognise the role of free trade in truly protecting their people.

We’re proud to join the call. We hope governments around the world will listen. 

It's what you believe that ain't so that's dangerous

William Keegan tells us something - asserts as a foundational truth - something that just ain’t so. Which, as Mark Twain observed, is what really gets us into trouble:

What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.

The assertion is that geography is the determinant of trade volumes:

At present we do 43% of our trade with what I can still call the rest of the EU, and 15% with the US. All serious authorities on this subject, including the great Paul Krugman – who won his Nobel prize for research on trade – insist that geographical proximity to markets is the most important factor.

This is the gravity model of trade. The amount of trade between two economies is, observably, connected to how large the two of them are plus the distance between them. Larger, closer, economies trade more with each other than smaller more distant and so on through the variations of small, large, close, distant. The advantage of the model being that it’s empirically sound, we can see it every time we go and look at trade figures.

The error here - and while you might have to push Paul Krugman a bit to get him to assent to the correction he would once the question is correctly posed - is to think that it is geographic distance which is being talked about. It isn’t, it’s economic distance.

Trade between Newcastle and London used to be very much greater than between Newcastle and Carlisle. Ships down the coast meaning less economic distance between the first two than the absence of roads between the second pair.

Trade barriers - and we’ve been lowering them among European countries even as we’ve been raising them across the Atlantic - have changed the economic distance between the various economies even as the geographic distance has changed only by those inches a year of continental drift. Trade patterns have been following those changes in economic distance - tariffs and quotas - not geographic.

The geography model of trade is indeed true but only if it is understood what it is actually saying. Which isn’t that trade depends upon geographic distance, but upon economic distance. Failure to get this right will lead us into trouble for we could end up asserting for sure that which just ain’t so.

Privatisation can teach us a lot about preparedness

In 1989, England’s government-run water utility was split into regional companies and privatised.

The timing was unfortunate. A year later, England was gripped by a two-year drought, the worst in 100 years. The new water companies were reduced to rationing water, banning all but essential uses, putting standpipes in the streets and running water tankers to the most affected towns and villages. Complaints abounded, and naturally, privatisation was blamed.

Shortly after, I met the Chief Executive of one of the new companies. As is the way of these things, running a water utility is a specialist job, and like many of his colleagues, he had worked in the old government-run service. I asked him about the crisis.

He looked rather wistful. “When we were in state ownership,” he said, “we were geared up to survive a one-in-five-year drought without imposing emergency measures. Now we are in private ownership, we realise that surviving a one-in-a-hundred-year drought isn’t good enough.”

Today, Covid-19 is the biggest killer since Spanish Flu in 1918. Like droughts, pandemics happen periodically, and we need to be prepared for when they do. Were our health and social care managers—public employees just as the old water board managers were—prepared for this one? Plainly not. After this is all over, the management—and the manageability—of our healthcare system needs urgent reform.

A small note on level playing fields

It appears that the Brexit negotiations - or rather, that having already happened, those on what the trading relationship should be now that it has - are hitting a roadblock, this insistence upon a level playing field.

At the end of the third round of talks between Brussels and the UK, David Frost, Britain’s chief Brexit negotiator, said discussions had stalled because of disagreements over the EU’s demands on the so-called level playing field.

In slightly more detail:

Following a week of talks conducted by video conference, the major stumbling block is over the EU demands requiring the UK to apply similar standards to the EU on areas such as the environment and labour law even after Britain’s standstill transition period expires at the end of this year.

The Commons Library has a nice explainer of the issues here.

The essential demand being that there are rules about how things may be done. In order to have free trade all must be using those same rules. This being that level playing field and this also being an entirely incorrect insistence. For trade, market activity, can and should be trade across different ways of doing things.

For example, it is possible to make bread from rye, from barley and from wheat. A set of rules that insisted that only bread made from wheat could be bought or sold would not be a free market. It would also make us poorer, depriving us of the rye and barley varieties. This is obvious.

But this is also true of things made using different labour laws, or different environmental regulations. Or, to use an example currently in the news, different methods of attempting to reduce food poisoning from chicken meat. We can imagine trying to keep the entire growing chain free from, say, salmonella. We can also imagine trying to clean the meat once butchered. Either might work, either might not. This being one of the functions of a market, of trade, to work out which produces the greater utility for the consumer. One method might be the cheaper one of producing that consumer utility, chicken to eat without being poisoned.

A level playing field in that there’s the same punishment for poisoning the consumer makes that market work better. A level playing field in the insistence that chlorine washed is not OK makes it work worse - for we’ve now not got a level playing field in methods of producing that consumer utility.

That is, the insistence on the one side on this “level playing field” is an insistence on the wrong kind of it. An insistence upon the same broad brush outlines of outcome, don’t poison the customers, is fair enough as not poisoning people is an entirely reasonable goal of public policy. An insistence upon the same rules of how we get there isn’t. Because, quite obviously, there are many different methods of not poisoning people and one of the aims and benefits of a market economy, of competition, is the trial of all of those different manners of achieving the goal through that trial and error. And may the best method win - this being the point of the exercise, to find out.

It is not necessary - indeed it kills off one of the major benefits of competition - to have a level playing field in methods and modes of production. Therefore we shouldn’t have such either. Which does rather neatly deal with this impasse in the negotiations. Given that our very aim here is to have free trade, that variety in production methods, we don’t want to have an agreement anyway, do we? Not if they’re insisting we can’t have the very point of having free markets in the first place.

The Observer might have got the wrong end of the stick

Tomorrow’s Observer front page claims that “Rightwing thinktanks call time on austerity era”. The piece says that the Adam Smith Institute, among others, have “endorsed public spending increases to confront the coronavirus outbreak and state-funded investment to boost the recovery”.

On the former point, this is totally unremarkable. There is a role for temporary state spending during the emergency stages of a pandemic. We have repeatedly said that the furlough scheme and business loans are sensible policies to maintain as much productive capacity as possible while swathes of the economy are closed. In a call with the Observer I explained that all this spending is possible today because of the responsible reduction in public deficit spending over the last decade. For some reason this did not make it into the article. 

On the latter point about infrastructure spending, this is an absurd misrepresentation of my position and at no point does the story quote me supporting infrastructure spending. In fact, I made the point to the journalist in question that state-spending tends to be directed towards politically favoured projects rather than what is economically beneficial. That’s why my colleague, Matt Kilcoyne, repeated our opposition to the wasteful white elephant HS2 project in April. 

The article also quotes me backing the Bank of England’s loose monetary policy and “temporary and short-term” support for Government borrowing. This is sensible during the crisis. But, as I made clear to the Observer, the Government extending their overdraft with the Bank of England, which they intend to repay by the end of the year, is not a long term solution. The Bank cannot, and knows it cannot, fund state spending indefinitely. It would be extremely inflationary if continued. There is still no magic money tree.

This has been an extremely busy time for the ASI. We have been mentioned in the media thousands of times, released four major and timely reports, and written dozens of opinion pieces.  We have pointed out the colossal extent of state failure during this crisis, especially when it comes to Public Health England’s catastrophic approach to testing, the excessive focus on ‘protecting the NHS’, and how centralised PPE procurement has been problematic.

We have also been fervent advocates for a plan to reopen the economy when it is safe to do so (even reported in The Guardian). We have also released polling that found three-quarters of respondents (72%) think that the Government should reduce taxes after the lockdown to try to increase economic growth and jobs. We have also been part of debates about privacy and contact tracing, freedom of speech, and much much more.

Over the coming weeks and months we will have a huge challenge on our hands to reboot the economy. The ASI have been and always will be emphatic supporters of entrepreneurialism, reducing taxes and regulatory barriers to businesses large and small. The Observer buries the lead in the final sentence of their article:

The four thinktanks continue to believe the Treasury should examine tax-cutting measures to promote innovation and entrepreneurial activity, saying that over the longer term, Whitehall was poor at allocating funds to the economy in the most effective way.

We will have much more to say on this topic in the coming week. Don't you worry, we'll be setting the record straight.

The furlough scheme has a cost and must come to an end eventually

Like other countries, the UK is subsidising jobs during the virus crisis. Now, the Treasury is finding that it’s much easier to give money away than to stop giving it away. But that needs to happen, and fast. 

One reason is cost. The government’s interventions may end up costing a third of the national income. That means higher taxes—which will choke off job-creation and recovery—or cuts in public service spending, or a massive rise in public debt.

Another is that the scheme promotes inactivity. We have fruit and vegetables waiting to be picked but seasonal workers can’t get here to pick them. Yet we have 10m domestic workers being paid to do nothing.

The scheme also prevents businesses adapting to the crisis situation. Sure, we’ve seen restaurants turning into takeaways, and taxi drivers running deliveries. But rather than developing new ways of working, some 900,000 businesses have simply taken the money and sent their workers home at taxpayers’ expense.

After this crisis, our economy will look very different. Jobs in travel, hospitality and retail may be gone forever. It would be far better to let businesses and workers adjust to that reality now, than to keep them idle for six months, only to discover that their jobs have gone anyway.

This all seems slightly pettifogging

It is indeed true that the rule of law is important. And yet quite how that rule should be enforced can be muttered about. Possibly not this way:

The British government has been ordered to pay the European commission’s legal costs after being successfully sued for granting City traders a tax break without EU permission.

The European court of justice ruled that the UK breached an EU directive by failing to notify Brussels of a zero rate of VAT given to commodities traders over the last four decades.

The UK is now expected by Brussels to seek the authorisation of the 27 member states or drop the policy, which it is claimed has unfairly boosted the City of London at the expense of other EU financial centres.

To give a rough background. When the UK joined the EU certain - 11 of them - commodities exchanges were able to trade derivatives without VAT being charged upon the transactions. Over the decades since then new exchanges have opened, new contracts are traded, should they be charged VAT, those transactions upon and in them, or not?

The EU says, well, permission is needed.

The court’s judges, led by a French jurist, Jean-Claude Bonichot, agreed with the commission that the lack of notification did amount to a breach of the EU’s directives. The court added that the judgment held no sway on whether authorisation should be given if it was sought.

Note what this isn’t about, whether VAT should righteously be charged or not. It’s about whether permission was asked.

The English, fueled by the Common Law, approach is, well, commodity futures are unVATed, these are commodities futures, what’s the problem? The EU legal system demands that permission. That is, largely the difference between a legal system that works on basic structures and compares like with like to equalise the law over similars and one that depends upon official documentation from the centre, the bureaucracy, to operate.

We can’t help but think that a legal system trying to cover 450 million people using that second approach is going to end up being overly pettifogging.

Paying for the COVID-19 lockdown

Imagine if you were handed a bill amounting to a quarter or even a third of your annual income. You’d think: ‘How on earth can I pay that?’

Well, that’s the bill the government faces for the cost of its crisis measures, such as the Job Protection Scheme. And they are asking the same question.

The first possibility is to raise taxes. That’s popular with the Left , who imagine that ‘the rich’ will pay most. But tax is paid by ordinary people when they earn or spend. ‘The rich’ simply aren’t numerous enough to make much difference. Meanwhile, the higher taxes will discourage people from creating the new jobs we will need after this is all over.

The second possibility is public spending cuts. Well, I’d love to see bureaucracies and prestige projects being cut back. But again, the biggest spending items by far are healthcare, pensions, welfare and education. That’s what would suffer most.

No, it needs to be borrowing that takes the strain. I usually oppose government borrowing because politicians use it to promise us goodies and pass the bill to future generations. But in World War II we borrowed heavily to defeat Hitler, and it makes sense in this crisis to borrow—much less—to defeat this hidden killer.

Is Behavioural Science a science at all?

Clearly the understanding of how we react to stimuli presented by governments, marketers and others trying to change our behaviour, is important. 

Prime Ministers like to make out that they govern objectively and according to balanced assessment of evidence, or rather as is now common parlance: “guided by the science”.  Advertising agencies likewise use research to sell campaigns to their clients but they recognise advertising is a craft, not a science. Some techniques work better than others and experience shows how modest ideas can be crafted into great campaigns. Governing and advertising may borrow terms from science but that is just part of their persuasion, sugar-coating the pill.  

In both cases “behavioural ‘science’” is a favourite. But just what is behavioural science? The Encyclopaedia Britannica says:

“Behavioural science [is] any of various disciplines dealing with the subject of human actions, usually including the fields of sociology, social and cultural anthropology, psychology, and behavioral aspects of biology, economics, geography, law, psychiatry, and political science.”

And that excludes business studies, notably marketing and advertising. BS, as it is otherwise known, is offered in courses at some 22 English universities. Not a single Russell Group university offers it though. Almost all universities offer social science degrees of some kind, such as PPE at Oxford, and those taking them have been alleged to have better job prospects: “Some 84.2% of social science graduates were employed three years after graduating, compared with 79% of arts and humanities graduates and 78% of graduates with science degrees.”

“Science” is a collective noun for a large number of academic disciplines which share a standard methodology:

Conjecture/theory -> experiment -> proof/rejection -> fresh conjecture/theory cycling on.

Different people correctly conducting the same experiments should, if it is a true science, get the same results. One essay considering whether sociology should be considered a science concluded that “controlled scientific experiments cannot be carried out on society and although many of the areas that are studied in sociology, such as human behaviour, are useful when trying to understand society, there are many different view points on each subject and therefore no one conclusion is drawn from every experiment carried out.”

In August 2013, the perhaps biased, but certainly well-informed Barry Ritholtz published ten reasons why economics is an art not a science. Experiments are hard, if not impossible, to conduct, behaviour is inconsistent, and announcing the predictions can affect what actually happens, to name but three.  For all the maths and equations, my own view is that, like advertising, economics is neither an art nor a science but a craft – a valuable craft for sure but a craft just the same.  Observing what happens is helpful if only to avoid making the same mistakes again.  The potter at his wheel does the same.  But if you cannot explain why the phenomenon happens, predict what therefore will happen, and conduct an experiment to prove it happened as predicted, it is not science.

Even the most far out and extreme thinking in theoretical physics today, including the likes of 11 dimensional M theory which is untestable right now, is set up so that as technology progresses it can tested and either varified or falsified. That is not true for the components of behavioural science listed above. It is not “a science” or even a collection of many sciences.

The uncomfortable truth is that practitioners add the word “science” to their chosen way of thinking to posh it up — “domestic science” sounds far more prestigious than its previous title, “household skills”, for example. So it is that when government claims it is guided by “the science”, it is merely poshing up whatever course of action it intends to take. Dig deeper and you will find claims that behavioural science is being employed and proves the rightness of the policies being deployed.

Be not fooled: it is not science but it is propaganda for the government’s chosen course. It is an appeal to authority. Like any form of advertising, the propaganda may have been tested to see what changes our behaviour more effectively and that may well be good for us and the country as a whole but it is a rhetorical device just the same.

The potter spins his wheel and the politician spins his message but they are craftspeople, not scientists.