Brexit on the beach

Brexit has consequences for an eclectic collection of territories that are attached in different ways to the UK. They are mentioned in the Withdrawal Agreement, and they include

  • Gibraltar (which took part in the Brexit referendum in the UK, and voted overwhelmingly to remain.)
  • the Channel Islands and the Isle of Man
  • the “Sovereign Base Areas” in Cyprus
  • and finally the  “UK Overseas Territories”, a diverse collection, mostly islands, scattered around the world: Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands.

Many of the UK Overseas Territories have benefited from the European Development Fund, but they will no longer have access to it after current commitments have been implemented. Some of these entities have tiny populations: Pitcairn, for instance, has a population of 50. Others, such as the Cayman Islands and Bermuda, are prosperous.

But when they have economies in a real sense, they are dependent on two main industries, financial services and tourism. Financial services are now the subject of growing international scrutiny. The UK territories are not independent sovereign countries and do not have a seat at the table in international negotiations., and the UK in the future may not be either as able or as willing to defend their interests.  Of course, financial services in a tropical island may be seen as just a way of working from home, when the home is sunny and sweet. But they are in competition with other attractive but less remote locations, and the outlook must surely be rather gloomy, given the slow but steady shift in international governance, international tax policy, and public opinion.

As for tourism, the territories are dependent on air and sea links, the latter often involving cruise ships. Both these forms of transport at present benefit globally from a bizarre exemption from fuel taxation. This will surely change.

Competition: it’s not me, it’s not you, it’s us

Last year, Toyota increased its shareholding in Subaru, and Subaru bought shares in Toyota for the first time.  There is no intention it is said of Toyota actually acquiring Subaru but they need to work more closely together in the light of global changes and autonomous cars. Similarly Ford and Volkswagen have joint shareholdings in each other and in another company for similar reasons. This kind of cooperation looks modest in comparison with the recent Fiat Chrysler merger with Peugeot. But it is nevertheless strategic and in fact it is a considered alternative to a merger.

Cross-shareholdings are the method by which companies try to increase their competitiveness by what looks like an anti-competitive maneuver. We can see similar patterns of small cross shareholdings in many internationalised industries, including airlines. (Here the purpose is not so much to improve technological advances as to reap the benefits of scale by enabling coordination of passenger transfer, including rationalization of routes.) Usually, competition law is only concerned with shareholdings that give effective control, and this allows structures of smaller cross-holdings to provide both companies with information and communication channels, formal and informal, for strategy and technology development.

Is all this anti-competitive? Perhaps, in that the companies are deterred, to a degree determined by the shareholdings, from competing with each other, but more importantly through the impetus given to alternative directions for each of them, which derives from the enhanced perceptions of the other’s strategy. Each may identify something better to do than going head-to-head. All the paraphernalia of international competition law, including that of the EU, is irrelevant in the face of this cleverness. Big companies are learning that there are better things to do than to seek dominant positions.

Trade agreements: breaking them up is hard to do

A possible trade agreement between the UK and the US has become a controversial issue in the UK elections. The Labour Party alleges that the UK’s National Health Service (NHS) is on the table in negotiations.  (In Northern Ireland, at least, the NHS seems to be on the floor, and in general is delivering no more than average results in European terms. Nevertheless it is much prized in the UK) . For the Conservatives, a trade agreement with the US is a big priority after Brexit. The US Secretary of State, Mr Pompeo, had earlier said that this will also be a priority for the US. The then US National Security Advisor, Mr Bolton, suggested that there could be a series of partial agreements on individual sectors. But this was a bad idea for lots of reasons. Let’s take just three of them. Firstly, no US-UK agreement, even partial, can be finalized until the nature of the future UK- EU relationship is clear, and those negotiations have not yet begun. Secondly, the tendency is always in modern economies for sectors to become more and more interrelated, and so it’s harder and harder to treat them separately. Thirdly, statisticians will recognise the related question of ” degrees of freedom”:  making a number of partial agreements ends up by putting an impossible burden of adjustment on the final sector to be negotiated.

For what it’s worth: evaluation

Evaluation plays a huge role in public policy. Or does it? Anyway, it takes up a lot of time and other resources, such as money and people. Evaluations take a look at interventions and try to see what effects they will have, or what effect they are having or, most commonly, have they done what they were meant to do, and are the negative effects less than, equal to or more than was envisaged. From big investments to programmes to grass-roots projects, everything that involves public money is being evaluated all the time. Which means business for consultants, hotels to house the review groups, editors to re-work the reports, travel for the delegates to assess the outputs, and so on. Within administrations there are then more groups and commitees to derive “learnings” and identify action areas, new guidelines and methodologies, and so on. But what are the substantive consequences of all of this activity? Are there changes in approach  as a result of the evaluation? Even if there are, are they perhaps swamped by other changes as a result of other considerations? Do the people who are preparing new interventions have time to read the evaluation reports in this field, let alone related fields, or are they even aware of them?

I’ve written a note here on what needs to change in evaluation itself if it’s to be of use in the future. In brief, evaluations need to take a longer view, they need to take a wider view, and they need to be quicker. (Also, as I’ve suggested above, we need to change the policy and administrative environment in which evaluations take place, if they’re to have any impact).

Inequality in the EU: less is more, more or less….

Among the many challenges facing the EU is income inequality. (I’ve added a page on the topic here.) The following are key points from it. Income inequality drives migration among the member states (and thus helps the single market to grow efficiently) but it can be a source of political instability. Since the big enlargement of 2004, there has been little change in income distribution in the EU as a whole. The top 1 per cent still draw about 10 per cent of the total income. The shares of the lower groups have hardly changed either.
Looking at individual countries, those that were above the average in 2009 were still above the average in 2017, while those below the average in 2009 were still below in 2017. However, it’s possible to have a low value and still improve. Latvia, Poland and Croatia are examples of this, as is Portugal.
In general, wealth inequality has increased in the majority of the countries over this period, but not enormously. The most improved country is Poland and the most dis-improved country is Hungary.

But there’s another way of looking at it that relates to the way that people mainly see themselves within Europe, as citizens of a particular member state. There is some progress in reducing income inequality between the member states. Adjusting for purchasing power, Luxembourg remains the highest-income country, and Bulgaria the lowest-income country, but the ratio between the two has fallen, and there has been a reduction, across all countries, in the variations between incomes. It’s important for the future of the EU that inequalities between countries are monitored and addressed, because otherwise existing tensions between northern and southern, eastern and western countries will be exacerbated. It’s also important that the progress made be highlighted. Inequality is now less, more or less, and the EU should make more of it.

Now, Voyager? Or maybe later….

Sending goods by sea is the norm. And, if you’re worried about CO2 emissions, you’ll initially be glad to hear that according to the World Shipping Council “Maritime shipping is the world’s most carbon-efficient form of transporting goods – far more efficient than road or air transport.” . They give figures of 10 grammes of CO2 to move a tonne of goods one kilometer. To do the same by rail (diesel train) takes 21, truck and trailer 59, and by air the figure is 470 grammes. But of course an electric train, depending on the source of the electricity, might do better, as might an electric truck in the future. The main problem is that world trade is so big that, even though most of it goes on ships, the total CO2 emissions are enormous.  (So are other pollutants: the fifteen largest ships produce more Nox and SO2 than all the cars in the world).

What can be done? The International Maritime Organisation, a UN specialised agency, has a target of reducing CO2 emissions from world shipping by 50 per cent by 2050. Continued technical progress in ships, engines, and fuels will all play a role. But there are also big benefits from ships going more slowly. This has been an increasing trend in any case as a cost saving measure, but it also reduces the CO2 emissions. An obvious additional step is to start taxing maritime fuel, which at the moment, like aviation fuel, is not taxed at all. The IMF has been looking at this and is quite excited about it:” In short, maritime carbon taxes are an economically and administratively promising instrument” 

Further steps to take include the electrification of rail lines, which opens up the possibility of using alternative energies in rail freight. What about trade wars? New tariffs on trade and “bringing the jobs home” should cut down on international sea freight, shouldn’t it? Well, producing locally of course reduces the need for imports and thus for freight. But it is almost certainly not the most efficient way to go. Tariffs impose a cost on consumers and they hinder growth and this means that there will be fewer resources for combatting climate change or for anything else.

There’s another development, an unfortunate by-product of climate change that may actually be useful. With global warming, new sea routes are opening up in the Arctic, the fabled Northwest and Northeast Passages. They could halve the time of sea freight voyages between some big markets.

Which came first, the chicken or the competition?

In anticipation of Brexit, the United States has outlined its objectives for a trade agreement with the UK. Among other things, it wants to see access for its agriculture to the UK market. But US agriculture includes products such as chlorinated chicken, banned in the EU. Will the UK let these chickens in, if it “takes back control” and can make its own trade agreements?

For the US, the EU ban on chlorinated chicken is seen as a protectionist measure rather than a health protection measure. The US ambassador to the UK in an angry article in the British newspaper “Daily Telegraph” has attacked the EU approach : “Inflammatory and misleading terms like ‘chlorinated chicken’ and ‘hormone beef’ are deployed to cast American farming in the worst possible light…..It is time the myths are called out for what they really are: a smear campaign from people with their own protectionist agenda.” Even a moderate  US journal such as “The Atlantic”  states that “The European Union banned antimicrobial baths in 1997. That ban created a protected market for European and British chicken producers.” 

In fact, the picture is a good deal more nuanced. In production terms, the EU is self-sufficient in poultry meat: from 2009 onwards production has always exceeded consumption.  But the EU imports lots of chicken from other parts of the world, and exports a lot also. It imports chicken from Brazil, Thailand, the Ukraine, among others, to a total of 786 thousand tonnes in 2018, which is about 5.3 per cent of EU production, and it  exports chicken to Ukraine, Philippines, Ghana, China (Hong Kong) and others, to a total of 12 per cent of EU production.

Looking at these other countries, the UN trade statistics tell us that the EU and the US are both selling them chicken in increasing amounts. Quite frequently, the EU is selling more. The EU outsold the US in Ghana (2015-2017), Japan (2014-2016), South Africa and Ukraine (2014-2017). Only in Hong Kong and the Philippines is the EU clearly behind the US, with sales at 56 per cent and 69 per cent of the US total in 2017. It’s also interesting that the EU chicken sometimes does quite well in price terms also, with the average price per kilo higher than that for the US product in the Hong Kong, Japanese,  and South African markets in 2016 and 2017.

So, in third countries, where the EU and US are head-to-head, the EU chicken seems rather competitive. Which means that if the EU really were protectionist, it wouldn’t need to be.

 

Brexit and trade agreements for the UK

First of all,  Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.

Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).

As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.

A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.

Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.

Ghosn but not forgotten

Pronouncing the man’s name is difficult enough. To understand the details of the Renault-Nissan linkage (also incorporating Mitsubishi) is even harder. But the effects are striking. A more or less unique enterprise was created that reflected the strong if different industrial policies of two G-7 member countries. France believes in national champions, and holds onto the best of state-owned enterprises. This is not just because their trade unions would never agree to anything else. It is also because strong French companies are seen as a projection of state power and perhaps more importantly as a basis for economic independence This policy has often been reinforced in practice by the movement of key staff to and fro between government and business. In Japan, the cohesion of government and business is not so explicit. This is because it does not need to be: national cohesion is still very strong, to the extent that most Japanese feel themselves to be part of something greater than themselves.
Renault Nissan is unique in that it is has been a more or less balanced partnership. Other multinational car industry ventures are more hierarchical. The VW group includes Spanish and Czech arms(SEAT and Skoda) but the German end calls the shots. It’s unique also because other joint ventures with the Japanese car industry have not endured (GM and Toyota, Daimler-Chrysler and Mitsubishi, Ford and Mazda, Volkswagen and Suzuki). Of course, there is  international co-operation at lower level (in engines, platforms, etc.).
But what’s the future for Renault-Nissan? Nissan has the experience on electric vehicles that will be needed for the future. Also, Japan has a lot of expertise in solid-state batteries, which are supposed to be the next big thing. But with Mr Ghosn no longer present, does Renault-Nissan have the global strategies it will need, with lots of newcomers going into electric vehicles?For such alliances to work, the lessons of the past need to be drawn from other alliances: communication is key. Without that, you cannot even begin to give and to take.

There are at least two interesting points about electric vehicles. The first one is that they are less complicated to make than the kind with internal combustion engines. One study even says that they typically have 20 moving parts as opposed to  about 2000. This seems absurd: after all if you take four wheels, four windows, five doors, three mirrors, one steering wheel, one handbrake, and two pedals, you already have a total of 20 moving parts, and then there are the windscreen wipers. But in any case we can accept that they’re easier to make. Which might lower production costs. Which might encourage new foreign direct investment in different places. Which means tariffs, especially protective ones, will change to try to keep up.

The second interesting thing about electric vehicles is that they can have very good acceleration, resulting in  higher average speeds even with the same speed limits.

EU: economic policy, please…….

Natalie Nougayrède from the Guardian newspaper had an article recently in which she talked about her encounter with the Austrian Foreign Minister at a public discussion  on the future of Europe. She had criticised the Austrian minister for her participation in a government that includes a very right-wing party, the FPÖ, and she pointed that the Minister had refused to deal with the issue, instead focusing on the lack of participation by the French government ministers in recent EU Council meetings.

I was present at this discussion, and one of the things that depressed me was the Austrian Minister’s response to the question as to what Europe meant to her. She did not mention democracy, human rights, or peace: instead, she concentrated on the geographical and historical definition, emphasising that for her it included the Mediterranean, and even Algiers. What depressed me also were the remarks of two far more impressive speakers at the event: the former Foreign Minister from Croatia said that everything she had valued in Europe now seemed under threat, and the chairman of the Bundestag’s foreign affairs committee said that for the first time he believed that Europe could fail.

What has this got to do with trade and investment, you ask? Well, when this kind of discussion begins to preoccupy the leaders of the EU, economic questions tend to get put to one side. But unemployment, especially youth unemployment, is still high. Economic governance is far from complete. There is still a huge amount of work to be done to make the EU a true Single Market. And the external economic policy of the EU is very limited and needs to be enormously enhanced. All this means politicians working together to take action and give leadership.