Export Subsidies vs Refunds of Foreign Import Tariffs

This article is a follow up to my previous post entitled ‘Nissan, Felixstowe, Lettuces and Whisky’ in which I proposed a system of refunding foreign importers of British exports for the import tariffs they will pay to their own governments after Brexit, thereby allowing our exports to continue unaffected. If nothing is done about this our exports will suffer. Even though the economy overall will get a net boost from a No Deal Brexit, because the effect of import substitution will be so much greater than that of export substitution simply on account of the massive trade deficit we have with the other EU countries, and the Treasury will benefit from another £25 billion in revenues from the import tariffs, it is still a fly in the ointment and better to remove if we can.

The impact on our exports is the only logical element of Project Fear left that has any substance, given that all the remaining issues are being quietly dealt with through side agreements with those concerned. If we can deal with the export issue as well, that leaves the anti-No Deal brigade completely naked.

So I thought it prudent to check my interpretation of the WTO Rules with a leading QC. His reply was instant, unequivocal and offered no discussion of the rules themselves. He said my scheme is clearly prohibited! When I pressed him in reply I have not received any response. The good news was that he confirmed by default there is no other aspect of the Rules, other than than the Agreement on Subsidies and Countervailing Measures to which I referred in my previous post, that affect the decision, so I have not missed anything. The nature of his response left me suspicious that these lawyers will just play safe and protect their own backsides, especially if they are not being paid! So is he right?

You will find the critical articles at https://www.wto.org/english/docs_e/legal_e/24-scm.pdf.  Let’s look more closely at them:

Article 1 defines a subsidy in various ways none of which include payments to foreign importers. Indeed it specifically refers to payments or discounts within the territory of the Member government. It goes on to say that such subsidies will only be prohibited if they are ‘specific’ in accordance with Article 2.

Article 2 defines specificity as payments (etc. as above) to ‘an enterprise or industry or group of enterprises or industries within the jurisdiction of the granting authority’. My scheme is therefore clear on both counts, namely that it is general to all exports and countries, and that the recipients are not within the jurisdiction of the granting authority (UK government).

Article 3 deals with prohibition directly which it defines in three ways, namely (1)subsidies contingent on export performance, (2) subsidies contingent on the use of domestic over imported goods, as well as (3) the provisions of Articles 1 and 2 above. Quite clearly my scheme clears all of these hurdles.

Article 4 is even more fascinating. It deals with remedies for complaining members. It sets out procedures for complaint, arbitration and appeal, all of which are dealt with within the WTO itself. So suppose, despite all the above, a decision went against us; what is the worst that can happen? There are no provisions for fines or exclusion, only that the offended member can take its own countervailing measures against us, and then only if the WTO thinks they are appropriate.

So what countervailing measures could the EU take against us? The most obvious one is that they could do the same and start paying our importers for tariffs paid to us. But hang on a sec, isn’t that just a reversion to free trade anyway? Exactly what the numpties in Parliament want in the first place! We would still be faced with taking our own countervailing measures against all the barriers the EU has mounted against us over the past twenty years (the WTO may even support our own complaint against them!), but at least our exports would be protected and our consumers would be delirious.

Alternatively the EU could do something like double its own tariffs. In which case we do exactly the same to them. It would be a trade war (partly sanctioned by the WTO – we would then be contravening the most-favoured nation principle, but so what if the EU is allowed to do so), but one we would win easily on account the massive trade deficit we have with them.

So whichever way it goes there is nothing to fear. It’s win-win. So let’s just get on with it – leave the EU unilaterally and protect our exporters in this way at the same time. Publish and be damned!

Finally two further thoughts: 1). If I can be given wrong advice by a lawyer, what have government minsters and business leaders been getting?, and (2) the SCM Agreement is actually very cleverly written to give remedy to deficit countries but not to surplus ones, thereby creating an automatic stability mechanism. Unfortunately it is routinely misunderstood. The WTO should clarify and promote it to address the massive international trade imbalances that currently threaten the global economy.

 

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Nissan, Felixstowe, Lettuces and Whisky

I am sure we all understand the situation Nissan and other companies which export a majority of their UK production to the Eurozone will find themselves in after Brexit. They will face 10% tariffs by the EU on these exports, and it stands to commercial reason they would then be better off re-locating their production into the Eurozone, where they would face 10% tariffs only on their re-exports into the UK – a lesser percentage of their total turnover. Neither we nor they want that.

The obvious solution is export subsidies. Payments would be made directly to the foreign importer on presentation of their receipt for import tariffs paid, with the exporter acting simply as agent. We could for example implement an export subsidy regime which is a mirror-image of our import tariff regime, with the latter funding the former. For as long as we run a deficit the Treasury would make a profit, but when we move into surplus it would make sense to negotiate trade deals wholly or partly removing both subsidies and tariffs together. Provided our import tariffs, and thus export subsidies, on cars are the same as the EU’s Nissan will not be affected by Brexit. Indeed the effect would be like unilateral free trade for exports only – no need to negotiate anything with anyone!

The question then arises as to whether this would contravene WTO rules. These are governed by the Anti-Dumping Regulations and the Agreement on Subsidies and Countervailing Measures, often referred to together as “AD-CVD”. Dumping and subsidies — together with anti-dumping (AD) measures and countervailing duties (CVD) — share a number of similarities. Many countries handle the two under a single law, apply a similar process to deal with them and give a single authority responsibility for investigations. Occasionally, the two WTO committees responsible for these issues meet jointly.

I am not a lawyer but it seems clear to me that my proposal would neither be dumping – defined as the export of a product at a price lower than the price it normally charges on its own home market, nor would it contravene either of the two categories of subsidy –Prohibited subsidies: subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods, or Actionable subsidies: in this category the complaining country has to show that the subsidy has an adverse effect on its interests, otherwise the subsidy is permitted.

In any case the most sensible course of action, which needless to say Theresa May’s government has not taken, is to negotiate a special transitional agreement with the WTO which could remain in force until we have eliminated our trade deficit. Such an agreement would be in the WTO’s interests as it has been unable to negotiate any further General Agreements on Tariffs and Trade (GATTs) since 1994, due to the massive international trade imbalances that have developed around the world since the onset of globalisation.

We need a new international regime which promotes equilibrium at balance. My proposal would not only do that from the UK’s perspective,  it could also, with the proviso that only deficit countries may pay subsidies, be rolled out by the WTO as an international standard to everyone’s benefit, thereby recreating the conditions under which free-trade deals would be mutually beneficial. Otherwise there is always the option of not re-joining the WTO! For our economic survival our prime focus must be on eliminating our current account deficit as described in my last post. My proposal gives us for the first time the tools to manage our trade balance.

Let’s also just think through what WTO Rules mean as far as import tariffs are concerned. There are two principal requirements. First the Most Favoured Nation (MFN) rules require us to charge the same tariffs to all countries for each product category, and second, once we have re-joined, we cannot increase our tariffs we can only reduce them.

This means we have quite a wide range of options on how we set these tariffs (strictly speaking after Brexit but before we rejoin). We can level up to the EU tariffs, or even beyond, or we can level down to zero, or we can cherry-pick somewhere in between. It would make most sense to charge tariffs on those goods where UK producers can substitute, but zero-rate those we cannot or where we don’t want a cliff-edge increase in prices such as lettuces. However we do want to encourage UK producers to substitute for imports. This means a gradualist and selective approach; the former would have to be agreed with the WTO. We also want to make sure we raise tariffs as much as we can to maximise revenues for the Treasury as well as reduce the deficit.

Import tariffs are just another tax, but they are unique as a form of taxation that boosts the economy and creates jobs. Obviously (one would have thought) placing tariffs on both sides of the Channel will make foreign stuff more expensive than British stuff, which means people will buy more British stuff and less foreign stuff, thereby reducing the deficit, creating jobs, boosting the economy and providing additional income for the Treasury all at the same time! If we level up to EU tariff rates the additional income for the Treasury could be as much as £25bn. Of course the same is true on the other side of the Channel, but as we have a deficit the impact is less. All this talk of crashing out and disaster is pure Remainian fantasy.

Of course there are always those Magic Money Tree growers who want zero tariffs now! Zero tariffs will have the opposite effect and just increase the deficit still further. But consider this. Given that the Treasury must fund public expenditure somehow, whatever level of expenditure we settle at, and that all other forms of taxation reduce consumer demand and employment, surely it makes sense to have import tariffs in the mix?

In recent days we have seen a resumption of Project Fear, but we must address the points that arise and show how we will deal with them otherwise uncertainty will continue. I have answered the Nissan and Lettuce issues above, so that leaves Felixstowe and Whisky unless I have missed something.

The Felixstowe issue involves bonded containers arriving from Asia with products for re-export all over Europe. The concern is that they will face double tariffs; once here and then again on re-export. Again the solution is obvious – zero-rate imports for re-export! We will be perfectly free to do that. Yes we would lose 20% of the tariff revenues (the other 80% is paid across to Brussels anyway at present), but that is peanuts compared to the revenues we will be getting after Brexit.

The Whisky issue is a classic government cock-up. This concerns those countries with which the EU has free-trade agreements, such as South Korea. On Brexit, if we haven’t agreed roll-over treaties with those countries, our exports will face their normal tariffs – 20% in the case of whisky to South Korea. Needless to say the Government could have started doing this two years ago but hasn’t. As a result there are now ships loaded to the gunnels with whisky for South Korea, for example, and they are not expected to arrive until after 29th March. As the Government is culpable it should bear the cost of these tariffs until the relevant roll-over treaty is in place so that trade can continue smoothly.

Supply Chains of Corruption

Since I postulated in my last post that British companies with component manufacturing supply chains on the continent may be in the pocket of Brussels, and that in turn the Conservative Party may be the recipient of donations from those companies, I have received the following list of companies, which is just a selection apparently, that have moved their manufacturing to Europe with the help of EU subsidies. I have not been able to verify this list for myself but as you will see it is very specific, and so I challenge the Prime Minister to say whether or not it is accurate.

– Cadbury moved to Poland 2011 with an EU grant.
– Ford Transit moved to Turkey 2013 with an EU grant.
– Jaguar Land Rover (now a wholly owned subsidiary of Tata who mis-sold and decimated British Steel pension funds) recently agreed to build a new plant in Slovakia with an EU grant.
– Peugeot closed its Ryton (was Rootes Group) plant and moved production to Slovakia with an EU grant.
– The British Army’s new Ajax combat vehicles are to be built in Spain using Swedish steel, at the request of the EU, to support jobs in Spain with an EU grant, rather than Wales.
– Crown Closures (formerly Metal Box) has been relocated to Poland with an EU grant.
– Gillette has been relocated to Eastern Europe with an EU grant.
– Texas Instruments, Greenock has been relocated to Germany with EU grant.
– Sekisui Alveo’s production at its Merthyr Tydfil Industrial Park foam plant has been relocated to the Netherlands, with EU funding.
– The Hoover Merthyr factory has been relocated to the Czech Republic and the Far East with EU backing.
– Boots was sold to Italian Stefano Pessina who is based in Switzerland to avoid tax, using an EU loan for the purchase.
– The Mini cars which David Cameron stood in front of to showcase British engineering, are built by BMW mostly in Holland and Austria. His campaign bus was made in Germany even though we have Plaxton, Optare, Bluebird, Dennis etc., in the UK.

Anyone who believes the EU is good for British industry or any other business simply hasn’t paid attention to what has been systematically asset-stripped from the UK.

 

I have checked this list of companies with the Conservative Party’s returns of donors on the Electoral Commission’s website. Unfortunately those results do not show anything before 1st January 2017 (why?) and there were no matches since then, but that does not mean donations could not have been laundered through some other institution. So again I challenge the Prime Minister to deny there is any connection between these two lists.

Either way this situation is clearly appalling and unacceptable, so once again I call for the ending of all donations from institutions to registered political parties and for the introduction of modest state proportional funding as well as proportional representation. Only registered voters should be allowed to donate to registered political parties in this country.

 

 

The Economic Imperative for a No-Deal Brexit

Well things are really hotting up now. I have designed a new leaflet which also has been accepted onto the Bruges Group website here, and which you can view in the original  here. I am also in the process of sending a copy by post to ever single member of the House of Commons, so lets hope they get past their gatekeepers and find their recipients in open-minded mood.

A further point has occurred to me and I have asked my own MP, Cheryl Gillan, to ask the following in the House:

“firstly whether any of the UK companies who outsource component manufacture to the continent receive any subsidies from the European Union, and, secondly, whether or not they do, those companies donate to the Conservative Party? It strikes me as extremely odd that such companies would wish to manufacture on the continent which one of the most expensive places to do so in the world. It would surely require substantial subsidies to make that viable. This leads me to wonder whether we have a supply chain of corruption going on here, with the companies in the pocket of the EU, and the Conservative Party in the pocket of the companies. If this is the case then the British public and their representatives need to know before a vote on Chequers is taken.”

Has Jeremy Warner seen the light?

I started to think so last weekend as I read his column in the Sunday Telegraph business section. Each week Warner provides a Remainer view while on the same page Liam Halligan gives a Leave perspective. I always read both as I enjoy the challenge of debunking Warner’s arguments, but this week I found him saying some things which are undoubtedly correct.

First he acknowledged that we have a massive and increasing current account (trade) deficit. He also saw that this is being funded, in foreign currency, by massive capital inflows, causing an increase in the value of the pound making it less competitive. He noted the devaluation since the referendum and the consequent small reversal in the deficit, but was inclined to attribute the reduction in the deficit more to the buoyant international economy than to devaluation.  He then observed that many manufacturers had scaled back investment since the referendum, and even acknowledged this may simply due to uncertainty and concluded by admitting to a degree of uncertainty himself. None-the-less, he stuck to his Remainian position!

What he failed to point out of course was that all and more of our current account deficit is entirely and solely due to our trade with the other EU countries, as shown in this graph. Our trade with the Rest of the World is actually in surplus. So why the divergence?

2017 EU,RoW CA

He is probably right to observe that our exchange rate is not hugely over-valued, otherwise why would our trade outside the EU be so successful? Nor can it due to tariffs as there aren’t any within the Single Market. He also failed to point out that under-investment and the consequent ‘productivity gap’ goes back to the banking crisis and the start of QE, rather than just to the referendum.

I covered this point in my recent facebook post in response to an IEA podcast, and concluded that the only possible cause of the EU deficit is that over the past twenty years Brussels has methodically and surreptitiously been piling up a great stack of regulations and other non-tariff barriers against us. Whether this has been by design or by accident I leave you to ponder! Either way it means that we must recover control over our terms of trade if we are to have any chance of reversing the deficit and thereby avoiding a massive recession when people can’t borrow any more. That is only possible through a No-Deal (WTO terms) Brexit. Any sort of deal with the EU will lock us into this disastrous trend. Even so, it will take many years of painstaking work to unravel these non-tariff barriers. In the meantime tariffs on both sides of the Channel will help to reduce the deficit and create jobs as people revert to buying British rather than foreign, and the Treasury will have a further £25bn or so of import tariff revenues to help with the fiscal position. Exports are likely still to thrive as devaluation at around 12% is far greater than the average tariffs we will face. We would also have the money to subsidise any exports facing tariffs in excess of 10% if we wish. See also my facebook page for a description of how the max-fac import system could work – it does not require any software investment by industry at all!

It is the re-starting of QE together with consequent record levels of personal debt which gives the game away. The Treasury don’t want you to know this as they were facing a big problem in financing the trade deficit domestically before the referendum. They were under pressure to increase interest rates and restart savings and growth. It is not just about paying import bills in foreign currency; it is also the fact that if both we and foreigners are buying more foreign stuff instead of British then unemployment will rise.

If it really is the case, which traditionalists will argue, that the capital inflows will convert into job-creating investment by industry then why restart QE? The reality is that most of those inflows are simply going into the property market and inflating other assets.

So the Treasury were delighted when they could blame the referendum for the restart of QE, when in reality it had nothing to do with the referendum and everything to do with financing our EU trade deficit. They could even wave their arms about and point to a reduction in unemployment and record job numbers when in fact all they had done was puff up the economy using QE. But in truth it is a con as such a policy is unsustainable. Who will be around when these chickens come home to roost?

Finally a comment on the position of the other parties. Labour, entirely in keeping with their historic and somewhat tenuous relationship with the science of economics, say, as we do, that they want to protect jobs; and then get the technical argument completely back-to-front! It is the No-Deal Brexit which will create and protect jobs, not any deal with the EU as they favour. Neither should we fall into the arms of Jacob Rees-Mogg, who looks forward to eliminating import tariffs on food, clothing and shoes. This is Jacob’s very own magic money tree! Yes of course we would all like lower import prices, but as everyone then buys more foreign than British unemployment will rise. It is the balance of trade that matters, not the volume or the level of import tariffs.

As with the ERM and the Euro, once again only UKIP gets it right!

The Economic Case for Brexit

Over the past couple of weeks I have been lobbying as many members of the House of Lords as I can with the following email as they debate the EU (Withdrawal) Bill.  This is not an easy task as there are restrictions on bulk emails, but thankfully many members retain their own personal addresses, and there are ways round the central system to some extent anyway. So here is what I have sent.

Dear Lord or Baroness X

THE ECONOMIC CASE FOR BREXIT

I should be grateful if you would spare a few moments of your time checking out the economic case for Brexit which I set out below.  This has scarcely been examined in any detail in public and we face the terrifying prospect of members of both Houses taking momentous decisions about the future of our country without the benefit of a full and proper briefing. There is no need to depend on the type of bland assertions, lazy assumptions, dodgy forecasts and personal opinions with which the establishment has bombarded us. Hard facts and logic are available and compelling.

Do we really want to carry on like this?

I start with a couple of graphs using data I have downloaded from the Office for National Statistics’ website.

180314 EU BoP CA180314 GDP pc growth

The first shows a deterioration in our trade deficit by almost 6% of GDP over the past twenty years, whilst the second shows how average incomes are growing at an ever slower and paltry rate. With widening income and regional gaps it is likely that many people are experiencing a real fall in their standard of living. This coincides with the onset of globalisation and our joining the EU Single Market. The EU been responsible for our trading affairs over this period of time and is thus guilty of monumental failure. That alone should be sufficient to sack them.

The link between trade and economic growth

I am not talking here about the correlation between global growth and free trade, which is well supported by research. A closer look at that research however shows that it is only the surplus countries, like Germany, Japan and China, which benefit, while deficit countries like the UK and US have missed out and declined. There has in fact been a transfer of existing wealth from the deficit countries to the surplus countries as well as growth in the recipient ones.

At national level a deficit is like having a hole in the bottom of our economy. If nothing were done about it unemployment would go through the roof. Fortunately the Bank of England has been able to put its finger in the dyke using Quantitative Easing. This works by reducing interest rates thereby encouraging people to borrow more, save less and use up their existing savings. As Mervyn King put it in his recent book, The End of Alchemy, people are now spending their future earnings today. This, he goes on, cannot continue for long because sooner or later tomorrow becomes today and they cannot borrow any more. They will also have used up existing savings. The low interest rates also have the effect of limiting saving, which starves the banks of money to lend to business for investment in new technology and productivity growth. The productivity gap has been well documented as you know, though curiously the obvious cause ignored. This does lead me to suppose that the establishment is only showing us the side of the coin it wants us to see.

It is therefore imperative that we end QE to increase interest rates by balancing our trade before a new financial crisis hits us and to re-establish savings and growth. There are only two ways this can be achieved; though devaluation and by increasing our import tariffs. We have already had some benefit from devaluation following the referendum, but its size is determined by the markets. That just leaves import tariffs as a direct instrument of government.

Whilst a no-deal Brexit will be a substantial step in the right direction, there is no guarantee it will be enough. We must retain the flexibility after Brexit to set our import tariffs at a level which will balance our trade. This may mean delaying re-joining the WTO. Conversely any attempt to do a trade deal with the EU, or anyone else for that matter, will limit that flexibility, whilst remaining in the Single Market will lock us into the £115bn trade deficit we currently have. We would then be completely stymied and helpless. Please note that the Government’s enthusiasm about the opportunities for doing trade deals around the world is misplaced, at least until we have established a balance. Indeed this is also the principal reason why the Doha round of global trade talks collapsed; the precondition of balance was not met.

Jobs

We all want to see the creation of more jobs, particularly in the manufacturing sector outside London and the South East, and I am not surprised the Labour Party have recently made this their priority. Their tragedy is that they have got the argument completely back-to-front, by concluding it requires us to remain in the EU customs union and single market when the very reverse is the case.

Even though the above graphs show clearly what a disaster EU membership has been for trade and growth in the UK, the following logic demonstrates it further. We have this massive trade deficit with the EU. That means our imports are greater than our exports. Suppose now we place import tariffs on both sides of the channel, which is what a no-deal Brexit would involve. The result will obviously be a reduction in the volume of trade. Assuming the tariffs are at the same percentage level on both sides, the reduction in percentage trade volumes will be similar. But that means that the absolute reduction in imports will be greater than the absolute reduction in exports since we start with a deficit. This in turn means that the number of new jobs created from import substitution will be greater than the number lost to export substitution, ie a net increase. In short it is the balance of trade that matters, not the volume.

Inward Investment

One of the more amusing spectacles in recent weeks has been that of the Japanese ambassador claiming that Brexit would discourage investment into this country. Now that really is trying to have your cake and eat it! UK manufacturers have already had a competitive boost of about 12% from devaluation, so the 10% cost of EU vehicle import tariffs will still leave them better off. The two go together.

There has also been much talk about supply chains. These will chop and change as a matter of course anyway, but any disruption could be minimised by not charging tariffs on components and spare parts. This would have the added advantage of encouraging all vehicle manufacturers to do their final assembly here in the UK.

The Brexit Fiscal Dividend

Much has already been written about the savings from EU budget payments and I don’t propose to go over old ground here. I trust it is fair to say that a net saving of £10bn a year is not controversial. It is other savings that have been overlooked.

First there is the matter of import tariff revenues on imports from outside the EU. These amount to about 60% of all imports of some £625bn a year, on which the EU customs union currently collects just over 4% as import tariffs, ie about £15bn. We pay 80% of these, £12bn, over to Brussels. Clearly after Brexit we will continue to collect this money. Nor will it cause any inflation to do so as it is already in force. All that will change is that we will keep the £12bn for ourselves! Funny how nobody ever mentions that. So that now gives a total dividend of £22bn.

But that is not all. We will of course also start to collect tariffs on our imports from the EU, another £10bn, total now £32bn. There will be some price increases from this, but spread over the whole economy they will contribute only about half a percent to inflation on a once off basis. Big deal.

There is more. A few months ago the Bruges Group produced a paper calculating savings from welfare and pension payments to immigrants and non-residents in the order of £35bn. You can find it at http://www.brugesgroup.com/blog/brexit-the-end-to-austerity.  I have not been able to verify these figures myself, so to be safe let’s just accrue half, £18bn. That gives a total annual Brexit dividend of £50bn a year, FIVE TIMES the number that was bandied about during the referendum campaign.

How could any government in its right mind even think of throwing this sort of money away for nothing? Yet that is precisely what the Remainian camp are proposing to do. We need that money.

The Economic and Political cycles

Do not be lulled by the latest indications of a fiscal surplus. This is just a cyclical anomaly caused by the combination of loose monetary policy and tight fiscal policy. Neither is sustainable, the former economically as I have explained above, and the latter politically. Before long politically irresistible calls for tax cuts from the Right and/or expenditure increases from the Left will destroy the balance just as the former did in the late 1980s resulting in the boom and bust. Let us not repeat the same mistake.

Brexit offers us a way out by enabling us to tighten monetary policy to increase interest rates as the trade deficit is reduced, at the same time as loosening fiscal policy using the Brexit dividend to assuage political pressures, thereby keeping the two in balance. Carpe diem.

Your support

The European Union (Withdrawal) Bill after completing the House of Commons is now progressing through the House of Lords. Your support for this will be greatly appreciated by millions of voters including myself. Whilst most voters will not understand the economic technicalities I have described above, they most certainly feel the results, and they are angry. The problem is exacerbated by the widening income and regional gaps so that Remainers on their massive metropolitan salaries are insulated from the consequences and do not feel them. This is not some right-wing xenophobic populist aberration; this is genuine democracy in action and a recipe for conflict if ignored and which will only increase without a no-deal Brexit.

I ask you to conclude the European Union (Withdrawal) Bill’s passage through the House of Lords without opposing it or seeking to water down Brexit. And above all else without stipulating that there should be a further and thoroughly unnecessary second referendum. Nor should there be an opportunity for the decision to leave to be overturned. As a democrat I earnestly hope that in accordance with the referendum, the general election, and the EU (Notification of Withdrawal) Act, you will also approve the European Union (Withdrawal) Bill.

Please keep faith with the electorate and help restore our economy.

Yours sincerely,
John Poynton FCA
16th March 2018