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Wednesday 8 November 2017

Insightful comments made by the US Commerce Secretary are a lesson in why a close alliance with the EU is bad for business. 

The US Commerce Secretary has been in London this week to promote the prospect of a trade deal with Britain. The United States is UK’s biggest export market, deepening that relationship is a win-win.

“Any trade deal is important, but especially one with a country with whom we have such intense relations as we do with the UK, from a geopolitical, military, and a commercial point of view. Our two economies have $1.2 trillion invested in each other. That is a very big number,” he told the Telegraph.

Remainers and soft-Leavers quickly pointed to the sterner warnings issued by Mr Ross:

“The EU rules are not science-based. This could potentially create problems with us. What happens will be very much conditioned by the terms of the departure agreement between the UK and the EU”.

This should be interpreted as advice from a concerned friend, not, as the sceptics would have you believe, a threat from a global bully, a title more appropriately applied to the EU.

“While the EU talks a lot of free-trade rhetoric, it is really quite protectionist,” Asserted Trump’s man on trade.

His argument is rational and straightforward, the more strings attached to the UK’s replacement trade deal with the EU, the less the UK will be able to put on and take off the table in subsequent deals with bigger markets like NAFTA and soon-to-be larger ones like China. This is not a question of marginalisation, but mobility.

Unreasonable regulations

At the heart of the discussion is Ross’s astute point about protectionism. The very un-British (although, we should add, extremely Corbynite) practice of making life harder for global exporters to enter your market goes way beyond tariffs. According to the World Bank, the EU’s average weighted tariff is only 1.6%, the same as the United States’.

Regulations, otherwise known as non-tariff barriers, are the EU’s preferred instrument of protectionism. The EU’s market building playbook is inspired by the French habit of legislating the hell out of everything. One of the problems encountered by British negotiators in Brussels is EU bureaucrats’ preoccupation with rules and process. The obsessive need for the Prime Minister to provide a signed document re-pledging the eye-watering funds already promised in Florence is a notable example.

By contrast, the British economy, and the American one for that matter, is largely managed via hands-on regulators and guidelines, rather one size fits all rules that punish smaller or less conventional businesses. Take financial services. In the aftermath of the crisis, the EU, under the purview of Michel Barnier no less, spat out reams of new legislation while tightening up existing ones. Meanwhile, the UK re-hauled its regulatory apparatus, building new institutions and procedures to check in on financial institutions and examine their exposure to risk. The EU prefers to rain down rules from above and sit back, allowing potential profits to be foregone at the better run institutions and for risk to metastasise at the dodgy banks and building societies with a knack for exploiting loopholes.

The EU and the UK were complementing each other one might argue, if so, why has the EU not sought to encourage other Member States to adopt the UK’s more hands-on, yet less burdensome and more effective approach? Because it is not regulation based. If a solution has nothing to do with piles of burdensome red tape, the EU is not interested.

The chlorine case

No properly regulated market does not apply inflexible rules on agriculture, but the EU has gone above in its efforts regulations sprees without making us any safer. Chlorinated chicken, which is banned by the EU, is the contentious issue at the heart of the US trade deal debate is a highly informative example of EU regulatory gluttony.

Bizarrely, the EU’s own European Food Safety Authority says chlorine dioxide washed chicken “would be of no safety concern”. You would have to eat five whole birds a day for months on end to reach the safety limit. Chlorine washed chicken limits the prevalence of deadly salmonella to 2%. The EU average is 15%-20%. The EU bans chlorinated chickens from European dinner tables, just one example of a costly regulation, one that also acts as a non-tariff barrier. Indeed, banning the consumption of chlorine-washed chicken is the condition of EU membership Mr Ross alludes to that would block a US deal, should the UK hold onto it post-Brexit.

Regulations exist to restrict risk, cutting down on dangerous processes and shoddy practices that consumers would not otherwise know about. Regulators have a duty to protect our health and safety, decisions over ethics and quality should be left largely to the consumer. The line that separates the public from the state in deciding what to consume runs in parallel to the one that demarcates a prosperous market economy from a dysfunctional, controlled one.

In recent years, British consumers have become increasingly conscious of where livestock they consume is reared and how. If Brexit Britain were to pare back regulations on chickens, these consumers would remain in a powerful position to continue to make those choices. Such a deregulation would also empower less fussy consumers who care more about cost, predominantly those on low incomes.

Re-regulation, not deregulation

The common rebuttal to this desirable scenario is that deregulation puts the public at risk. In the case of chickens and how they are washed, this is simply not true. Widening the scope to other areas of heightened regulation such as construction materials reveals countless examples of higher standards in the US than the UK, and by extension the EU. Could it be that standards in the regulation-light US are not lower, but more efficient and dare we say it, better?

The cladding that surrounded Grenfell Tower is famously banned in the United States, where a strong – market based, it has to be said – litigation culture has applied huge pressure on regulators and businesses alike to limit the level of risk posed by manufactured products and agricultural goods. This type of pressure does not exist in Brussels, where EU bureaucrats wander around blindly, trying to figure out where the point at which risk is contained on a given good or service. They have scientific expertise at hand – note Ross’s observation that EU regulations are not science-based –  but the biggest influence upon how regulations are drawn up is political and usually protectionist. After all, getting agreement from 28 wildly different economies is hard enough for anyone trying to draft legislation, find ways mitigating risk efficiently naturally falls by the wayside.

It is no coincidence that poultry farming is a key industry in several Member States and EU regulations handily cut out more competitive US imports. It is important to note that If American poultry was not washed in chlorine, it would still be much cheaper. EU bureaucrats were able to find something done in the American poultry industry and not in the EU, slapping a ban on it would thereby protect European producers. That’s protectionism folks.