January 25 2018
There is a great Brexit opportunity and some really obvious benefits that we can get that improve the condition of the people. This is currently at risk. The negotiations that are about to begin sound as if they aim to keep us in a similar system to the Single Market and the Customs Union. ‘Close alignment’ means de facto the Single Market, it would make the UK a rule taker like Norway, divested of even the limited influence we current have.
90% of global trade growth is expected to come from outside the EU but we would be tying ourselves to a system that seeks to protect the current, declining status quo rather than engaging with the challenge of the next generation.
Conformity with EU rules will also prevent us from making meaningful trade deals with other nations where we could secure reduction of the non-tariff barriers and regulatory distortions which are often worse than the tariffs. They impose such high regulatory burdens on importers that no-one bothers and they are not there for either safety or scientific reasons but for protectionist ones. No sensible nation would negotiate with the UK for a marginal gain when we would merely be a vassal of the EU.
The Customs Union is worse. It protects industries that we often do not have and helps continental producers on the back of UK consumers. The EU-funded CBI, that lover of vested interests, wants it to favour inefficient encumbrance against poor consumers. Whether it is ‘a’ or ‘the’ Customs Union it is a protectionist racket that damages the interests of the wider economy.
This would deny us some of the early Brexit advantages which relate so much to trade, to the ability to trade freely. Economic arguments for one way free trade, let alone for trade deals, are well known. For example, 21% of people’s income is spent on average on food, clothing and footwear. These are the highest tariffed areas in the Customs Union. 11.8% on clothing, 11.4% on footwear. Food is so heavily tariffed and obstructed that it is almost impossible to import.
This hits most on the poorest in society, the poorest who spend an even higher proportion of their income, even above the 21%, on food, clothing and footwear. The first gain that we can have is by removing all the tariffs on those goods which the UK does not produce thus giving a real terms income boost, most of all to the poorest in our society. To that group of people who Theresa May spoke about during her famous speech on the doorstep of Downing Street when she had just kissed hands and become Prime Minister. Just the people that Mrs. May wanted to help. I think Mrs May’s words were inspirational and should underpin what the Government does.
The United Kingdom, though, should be more ambitious than this and take the benefits of the best regulatory models and then challenge for global technological leadership.
Despite our relatively small geographic size we are still the second biggest exporter of services and one of the largest foreign investors, the United States being first in both cases. We are also an open and welcoming nation not least to foreign investment. We have both a large stock and regular inflows of foreign investment coming into this country, by some measures second only again to the United States and even bigger than China (excluding Hong Kong and Macau).
Such a nation should take responsibility for its own future and become a role model for the rest of the world. Already two of our universities are the best in the world. We have a high tech sector and are the site of the world’s premier financial centre. We must build on this comparative advantage in the knowledge economy. Surely we must become an innovative hub, a centre and driver of the world’s technological advance.
To do this we must ensure that our regulatory system promotes competition on its merits and thus enterprise. We should succeed or fail based on the quality of our ideas and our capacity for hard work, not on the ability to lobby the Government to get regulations or laws to obstruct competitors. Our system cannot be tied to regulations that stifle innovation.
At the moment the UK, in the European context, is the best of a bad bunch. Europe lags far behind other comparable regions in the Global Entrepreneurship Monitor’s ranking of the rate of business start-ups. All we manage is to be the best in a sclerotic Europe. Compared to the dynamism of the United States and Asia the UK has a long way to go to translate its brainpower, its little grey cells, into entrepreneurial companies.
To build this capacity is to make our nation ready for the next hundred years. In the future there will be a premium on creativity and judgement, in industries that rely on intelligence as opposed to pure manufacturing. The jobs that people, as opposed to Artificial Intelligence, will do will be in precisely the space where Britain has the greatest advantage.
This does not mean a nation of computer scientists. Innovation and creativity can be applied to the leading edges of any industry and it is these leading edges that Britain is in a position to capture. In a truly competitive, enterprise environment no one can know precisely what those industries are. Our success will depend on our ability to capture the most valuable parts of increasingly complex supply chains.
An example of this is the iPhone. iPhones are manufactured in China but the value is added by the research and marketing being done in the US which reaps the bigger advantage. Consequently, China sees only 6% of the value created.
As I said, we do not know precisely where these areas will be but it will always be important. Interestingly, New Zealand, which produces only 3% of the world’s milk, controls 30% of the value of the global dairy market. It is not just high tech areas that will be dependent upon this knowledge economy. It is even in traditional areas such as agriculture.
Taiwan has developed a system of growing vegetables in a water solution rather than soil using a patent formula of antagonist micro-organisms which boost production with low nitrate levels. It wants to develop this in York and should be encouraged to do so.
Unfortunately, in the United Kingdom there are barriers which may prevent us getting to this bright future. First, the UK-EU relationship may continue to tie the UK to the kind of regulatory framework which has made Europe so inefficient. This would be bad for the economic environment in the UK but it would also be bad for the ability of the country to deal with other, faster growing nations.
A classic example of this is data. If the UK were tied to the European approach to data protection and data flow – a very restrictive one – it will limit the ability of our country to embrace the fourth industrial revolution: big data and all that this offers. Without data flow none of those applications are possible.
It is all very well for UK Ministers to extol the virtues of artificial intelligence and high tech as they are doing now almost, as we speak, amongst the panjandrums in Davos. But no one will take them seriously if they do not have the ability to set their own regulations in this area. The European regulatory system is simply not conducive to the development of entrepreneurial companies. Those companies will continue to come from the United States and Asia. For the UK to be active in this area it needs regulatory autonomy. As Michael Gove has put it: the EU is analogue in a digital age.
Second, the UK must be in a position to encourage pro-competitive behaviour across the globe. Highly developed agreements like the Trans-Pacific Partnership (TPP) represent the blueprint for trade discussions in new areas involving services that rely on the cross border supply of data.
It is noteworthy that the EU was unable to agree to cover new services like these in CETA whereas the TPP members were. In order to do this the UK must be able to determine its own regulatory system and negotiate freely with others.
Third, contracting trade deals is difficult and requires great flexibility. Any restrictions, such as the EU having an effective veto on UK changes of regulation or the UK instantly losing access if there were any deviation without some pre-agreed mechanism to manage divergence, will take the UK out of the negotiating game.
Other countries would not think it was worth their while to discuss trade deals with us. We would merely appear to be a mini-me version of the European Union and thus be of no interest to other countries.
There are disturbing signs that the EU’s position on a host of internal market distortions will mean that it is unable to play in this new world. These are data flow, prescriptive regulations like REACH chemicals regulation, the precautionary principle in agriculture, local content rules in broadcasting which are mainly there to protect unwatchable French films.
In addition to being unable to discuss new services involving data flow in CETA it could not discuss them in the Trade in Services Agreement in the WTO either. A plurilateral agreement that like-minded countries agreed in order to improve trade in services around the world.
This prompted the Americans to question why the EU were in the discussions in the first place. Why were it there if it were not willing to do anything? For the United Kingdom, dependent as she is on our service exports and the creation and realisation of ideas, it would be foolish indeed to put our future into such constrained hands.
If the UK can achieve the independence necessary it can become a rule-setter in the world. It can export with its trading partners ideas about how best to create a governance structure that will spur innovation and enterprise. Its future can be true to its history.
As I said, encapsulated in this College, it is vital to ensure that competition, not cronyism, determines the future prospects of our citizens. Competition allows aspirational societies to be formed where people truly believe that they succeed or fail on their own merits and not some crony interest.
Britain’s success as a nation can be attributed to the application of this competitive principle. It has been translated through free trade and free markets and has allowed people to come together to meet each other’s needs in voluntary exchange.
We have reached the portals of tremendous possibility. If the UK is to execute an independent trade policy then it can play a role in ensuring that there is an injection of wealth into the global economy. This will improve the lot of all mankind and we, the British people, will be propelled forward on this rising tide.
To paraphrase Pitt the Younger we will have saved ourselves by our exertion and we will have saved the world by our example. If, on the other hand, this possibility is taken off the table then Brexit becomes only a damage limitation exercise. The British people did not vote for that. They did not vote for the management of decline. They voted for hope and opportunity and politicians must now deliver it.
If we do not, if we are timid and cowering and terrified of the future, then our children and theirs will judge us in the balance and find us wanting. ‘Mene, Mene, Tekel, Upharsin’ – as the writing on the wall said at the feast of Balthazar. We have our future and our destiny in our hands.
To embrace the world boldly with this new policy is not a foolish leap into the unknown. Sometimes the bold move is the safest one. As Sir Walter Raleigh said: “fain would I climb, yet fear I to fall.”
For too long our negotiators seemed to have been cowed by the EU. Their approach seems to be that we must accept what the EU will allow us to do and build from there. This is no way to negotiate and it is no way for this country to behave. We must negotiate from the international trading framework in which both the EU and the UK sit as equal partners, whose provisions govern our behaviour. We must also not confuse the EU’s opening bid with its bottom line, it is not Holy writ. If we came out with our negotiating objectives nobody in Europe would assume these were set in stone.
If the EU and UK, who start out with exact regulatory alignment, cannot agree some mechanism to recognise each others’ regulations and one that manages divergence without the UK being prevented from exercising its independence, then who can? Both sides’ negotiators must not fail here and I am confident that as long as we are strong and negotiate properly they will not.
I have talked about who we can be as a nation. We must also understand our particular role in the world at this critical time. The world’s economic architecture is stuck and the UK is expected by the rest of the world to advocate policies that will release its energy.
There has been no concluded WTO round for twenty-three years, while indicators show that actual industrial output and global trade are stalled. If the UK is unfettered by the deadweight of the EU then it will play a role in jumpstarting the global economic system. This will unblock many initiatives that have been gummed up for too long.
We must never forget that wealth can be created or destroyed, but it is much harder to create than destroy. We are coming to a fork in the road. We can take the familiar path that leads to a gradual erosion of our wealth, our success and ultimately our values, by staying close to the EU and aligning our regulations to theirs.
We could simply manage decline. Or we could take another road that may look to us now like an unfamiliar one. In which case our best days lie before us. From the Agricultural Revolution to the repeal of the Corn Laws to the birthplace of the Industrial Revolution to being co-architect of the post-war system the UK has led the way.
Britain has been called on to be a shaper not only of our destiny but that of the whole world. If we get it right by opening up our markets, seeing the benefits of free trade and regulations that encourage enterprise others will follow. The EU has too many pen pushers to dare, the US is too big to care. Only a medium sized, flexible economy can lead the way and the next great economic revolution should be made in Britain for the benefit of the world.