Boris Johnson’s real agenda: The ‘Singapore scenario’

While immediate political attention has focussed on urgent questions of how, when or if Britain’s new Prime Minister, Boris Johnson, will succeed in taking the UK out of the EU, the longer-term agenda of a Johnson-led Conservative administration has been pushed into the background. This is unfortunate. Johnson’s dream, should his premiership survive, is of a post-Brexit Britain akin to a European ‘Singapore of the West’, writes Charles Woolfson (Linköping University). He cautions, however, that this ‘Singapore scenario’ leaves a lot to be desired.

In Johnson’s eyes and those of fellow ardent free-marketeers, a ‘Singapore scenario’ would be achieved by an ultra-business-friendly environment with low or zero corporation tax, low wages, weak trade unions, vestigial welfare provisions and a significant temporary migrant ‘non-citizen’ workforce (around 30 per cent of the total workforce), largely without the protection of national labour laws or access to welfare provisions.

Yet, as the Prime Minister of Singapore pointed out, the transposition of a Singaporean model to the UK is not so simple. Currently, the UK government spending on the public sector accounts for 40 to 45 per cent of the GDP, while for the Singaporean government it accounts for a mere 16 to 17 per cent of the GDP (Bloomberg News, 2018). Furthermore, the Singaporean economy, while ranking second in the World Bank index of 190 countries in terms of ‘ease of doing business’ (pro-business regulation), is also accompanied by powerful regulatory social controls and an extensive system of government patronage (Trading Economics, 2019). Social inequalities in Singapore are rising. A recent review of 157 countries in terms of commitment to reducing inequalities ranked Singapore overall at 149, among the 10 worst performers, and at 157 in terms of redistributive progressivity of tax policies (Development Finance International and Oxfam Report, 2018). Noting a decline in ranking since the previous year, the report concludes, ‘On labour, it (Singapore) has no equal pay or non-discrimination laws for women; its laws on both rape and sexual harassment are inadequate; and there is no minimum wage, except for cleaners and security guards’. As a prescription for a post-Brexit labour market, a ‘Singapore scenario’ leaves a lot to be desired.

None of this has dampened enthusiasm for turning Britain, free of European regulation, into some kind utopian free-market paradise. Johnson’s trademark rhetoric has consistently excoriated the EU for ‘trussing the nations together in a gigantic and ever-tightening cat’s cradle of red tape’. It was exemplified by Johnson’s theatrical appearance before the cheering Conservative Party faithful on the final leadership election hustings. Brandishing of all things, a kipper, Johnson claimed (incorrectly, as it happens) that ‘Brussels bureaucrats’ required that each kipper sent through the mail be accompanied by a coolant bag, an unnecessary and ludicrous burden on business.

There are echoes in Johnson’s buffoonery with the 1980s satirical BBC TV series, ‘Yes, Minister’. A 1984 Christmas special edition depicted an incompetent and opportunistic James Hacker as Minister heading the Department of Administrative Affairs, reluctant to sign a Xmas card to a Brussels Commissioner (one rather French-sounding ‘Maureece’ by name). In contention was a proposed Brussels directive to standardize the ‘EuroSausage’ and re-designate the ‘Great British Sausage’ as an unappetising ‘emulsified high-fat offal tube’. In the same election hustings speech, Johnson proclaimed, kipper to hand, ‘And when we come out, therefore, we will not only be able to take back control of our regulatory framework and end this damaging regulatory overkill but we will also be able to do things to boost Britain’s economy, which leads the world in so many sectors’ (New Statesman, 2019).

Hostility to EU regulation is merely a surrogate target for hostility to regulation in general, seen as holding back burgeoning British free enterprise. To realise full ‘regulatory divergence’ from EU controls (the glittering prize of a no-deal Brexit), Johnson has now proposed the creation of free economic zones or free ports, offering lower import taxes and customs tariffs, favourable manufacturing locations, and looser regulation to lure investment in up to 10 ports around the country. These free ports will be situated mainly in declining and ‘left-behind’ areas such as Teeside. Such zones are not specifically precluded by EU regulations, although it is true to say that they are regarded by the Commission as potential havens for counterfeiting goods and money laundering. In fact, over 80 exist within the EU, the majority in the newer member states of Eastern Europe. Besides providing free-enterprise zones where capitalism can be let loose to do what it does best, their attractiveness for employers is that they are typically insulated from employment protection and minimum wage legislation, while collective bargaining and trade union representation are generally non-existent. Free ports are ‘the Singapore scenario made real’ in the UK context. They will be the forward positions in a greater national project of wholesale deregulation accompanied by comprehensive labour subordination, UK-apore as one big free port.

The post-Brexit foreign trade and investment environment

Ironic, therefore, is the announcement by Brexit-supporting Sir James Dyson, one of Britain’s most celebrated entrepreneurs of the relocation of his corporate headquarters from England to Singapore. This comes only a few months after a previously announced ongoing UK investment programme, much welcomed by Theresa May, and portrayed as a sign of business confidence in Britain’s post-Brexit future. For Dyson, the business logic is presumably compelling. While preserving his UK sites, the company already has manufacturing and new R&D facilities in Singapore, in part following a previous relocation from the UK. The Singapore investment is proximate to profitable East Asian markets for his luxury products, not to mention providing a suitable base for Dyson’s new plan to develop electrical automotives. Not least, however, the move to Singapore potentially offers zero corporation tax. A further incentive is access to labour markets in the East Asia region providing both compliant and relatively cheap human resources when compared to the UK. Dyson Ltd presents a paradigmatic example of ‘foot-loose’ capital investment shopping for regulatory regime advantage in a globalised ‘race to the bottom’. As a pointer to the investment potential of a post-Brexit Britain, Dyson’s decision is ominous.

An additional dimension to the post-Brexit competitive challenges facing the UK economy is the fate of existing foreign direct investment. Japan, for example, is a significant investor in the UK. Nissan, Toyota, and Hitachi between them account for 40 billion pounds (nearly half of Japanese direct investment intended for the EU in 2015 and 144,000 UK manufacturing jobs. Japanese business has sought reassurances that the UK will remain in the European customs union and single market, a demand that is profound anathema to Johnson.

In or out of the single market and customs union, the fact is that the EU is itself remoulding the global trade and investment environment through an extensive series of Economic Partnership Agreements (EPAs), several of which it was hoped would be with potential trading partners for the new ‘Global Britain’. Recent among these is the EU-Japan Economic Partnership Agreement (EPA) of 2017. This will remove nearly all significant tariff barriers to trade. While the UK has already one of the least regulated labour markets in the EU, such agreements place further competitive pressure on a post-Brexit UK to show even greater ‘flexibility’ on labour and other standards. It is pressure to downgrade that will surely intensify as the UK government embarks on the mammoth task of ‘replicating’ forty years of existing European trade deals or tries its unskilled hand at forging new ones. If preliminary exchanges with the US regarding food safety standards in a future trade deal (specifically, the acceptability of chlorine-washed chicken) are anything to go by, the prospects are not enticing.

Labour migration: an unresolved contradiction

Theresa May’s successful wooing of Nissan investment in Sunderland may prove to have been only a temporary demonstration of foreign investor confidence in the future of the UK economy. As the Japan Ministry of Foreign Affairs warned, ‘Japanese businesses rely on inexpensive labour from Eastern Europe in the manufacturing and agricultural industries in the UK’.

Labour migration, the toxic driver of the Brexit debate, will present unique challenges to a free-market Johnson government, not least as its internal logic would suggest a more liberal and open regime. Migration, therefore, presents an unresolved contradiction at the heart of the ‘UK-apore’ project. To appease his core supporters it is more than likely that Johnson’s government will be forced, reluctantly or otherwise, to replicate much of the exclusionary path towards continued free movement of labour that informed the policies of his predecessor.

As Central-Eastern European migrants return home, (or refuse to come to the UK for the wages and conditions on offer) both of which increasingly they appear to be doing, UK nationals will need to be ‘persuaded’ to accept those low-paid ‘3D’ (dirty, dangerous, and demeaning) jobs that they had previously rejected. The ‘Singapore scenario’ applied to the UK would mandate a downgrading of current welfare and labour standards in a massive recalibration of labour expectations of the domestic labour force. Such a recalibration would be achieved by a radical shrinking of what remains of the welfare state, combined with a raft of ‘incentives’ to accept whatever jobs are on offer.

Questions of the downside of globalisation are not new but much accentuated by Britain’s current precarious political and economic conjuncture as it departs from the EU. In short, Boris Johnson’s ‘UK-apore’ can only be realised in a ‘race to the bottom’ to the significant detriment of existing standards. If the business model of labour and welfare devaluation in a ‘Singapore scenario’ is the pathway towards Britain’s economic salvation, then such standards now become integral to the democratic politics of post-Brexit Britain.

This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image by David RussoSome rights reserved.

Charles Woolfson is Professor emeritus of Labour Studies at the Institute for Research on Migration, Ethnicity and Society (REMESO), Linköping University, Sweden. Since arriving in Sweden in 2009 after a decade of residency in the Baltic states, he has written on East-West migration from the newer EU member states, and on the impacts of radical austerity programmes in the Baltics following the crash of 2008. He co-edited with Jeffrey Sommers, The Contradictions of Austerity: The Socio-Economic Costs of the Neoliberal Baltic Model, Routledge, 2014.

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To deal or not to deal: these are the questions

Why is the new government prepared to countenance no deal, when it would be so damaging to Britain? Iain Begg (LSE) says the question is not whether but how much it would harm the country.

To judge by the early pronouncements of the Johnson government, a ‘no-deal’ Brexit is not only worth contemplating, but could well occur. Although both sides continue to profess their hope – and expectation – that a withdrawal agreement can be negotiated, the risks have plainly increased, despite Johnson’s bold assessment of there being a one in a million chance of a no-deal Brexit.

His stance is belied by the ramping-up of no-deal preparations and a statement in the Sunday Times on 28 July from Michael Gove (now charged, as Cabinet Office Minister, with over-seeing a possible exit without a deal) that: “no deal is now a very real prospect, and we must make sure that we are ready”. For several ministers, it appears, no-deal is now the working assumption.

Manifestly, after the bluster and increasingly exaggerated claims made during the Tory leadership campaign, the reluctance of the EU to re-open negotiations on a withdrawal deal is now being taken seriously. Gove is one of a small number of senior ministers assigned to a new cabinet committee charged with accelerating no-deal preparations. The EU Exit Strategy Committee (its beguiling shorthand code is ‘XS’) is to be chaired by the Prime Minister, with Gove as Deputy Chair, and will meet frequently to review progress. Intriguingly, two-thirds of the May government’s cabinet committees have been culled, leaving just six, of which three have the word ‘exit’ in their title.

Leaving aside the vexed matter of whether the only ‘pure’ Brexit is one which extricates the UK fully from the EU prior to negotiating some form of future relationship, several questions about the new willingness to countenance no-deal need to be answered.

First, what does no-deal mean in practice? The simplest answer is “not Theresa May’s deal”, or being prepared to walk away if all that is on offer is one on broadly similar terms. What was thrice rejected by the House of Commons covered citizens’ rights on both sides, settlement of financial accounts and, especially, arrangements to ensure no hard border in Ireland, thereby reconciling Brexit with the commitments made under the Good Friday Agreement.

These three components are the EU’s pre-conditions for moving on to negotiations on a subsequent deal to redefine the relationship between the EU and the UK, yet in all the recent talk of no-deal, this has barely surfaced. Hence, a second question is how no-deal now would influence the future relationship. The most plausible answer is adversely, especially if it were accompanied by equivocation over the UK’s willingness to honour its EU budget commitments.

Third, what would the consequences be for the Irish border? No-deal would mean the UK leaving the EU customs union and, necessarily, different trading regimes applying in the two parts of Ireland, yet all sides have committed to avoid border controls. This is why the backstop was devised. The ironic outcome of no-deal could be the hard border no-one wants; vague promises of (untried) technological solutions will not do.

What about the economy?

A fourth set of questions concern the aggregate macroeconomic effect of a no-deal Brexit, and its implications for particular sectors of the economy and UK public finances. There will also be an economic impact on the EU27, with member states trading most intensively with the UK – Ireland in particular – most affected.

The answer from external analysts, such as the IMF, is unambiguous: no-deal will damage the British economy and is a risk for the global economy. Even if similar analyses by the likes of the Bank of England are summarily dismissed on the (disturbingly spurious) grounds of pro-EU bias, the same conclusion has been drawn by all but a tiny minority of commentators.

Studies looking at the effects on the EU27 – for example by Goldman Sachs – suggest the aggregate effect could be a little greater than for the UK, but relative to the size of the respective economies, the magnitude would be five times as great for the UK. The car industry – a major UK exporter – would be profoundly hit, as would certain agricultural producers, such as Welsh hill farmers.

Much the same is true of the public finances. The Office for Budget Responsibility (OBR), in its 2019 Fiscal Risks Report, uses the IMF scenario as a basis for estimating the fiscal consequences of no-deal. As the OBR puts it, the scenario “is not necessarily the most likely outcome and it is relatively benign compared to some”, but it would nevertheless add £30 billion a year to public debt from the 2020-21 fiscal year onwards. By fiscal year 2023-24, public debt will have increased by 12 percentage points of GDP, undoing the effects of the last decade of austerity and pushing debt well above the level reached in the aftermath of the financial crisis. The OBR states that a more disorderly Brexit “could hit the public finances much harder”.

Inevitably, such estimates are condemned by pro-Brexit optimists as the latest manifestation of “project fear”, usually citing in evidence the recession predicted by the Treasury that did not happen after the referendum. But it is disingenuous to regard any economic assessment of anything to do with Brexit as inherently flawed or misleading. Projections are subject to margins of error, but hardly anyone doubts no-deal will hit the economy. The double question for those relaxed about no-deal is not “whether” the economy will be hit, but “how much?” and “for how long?”.

The political implications of no-deal

One of the obvious attractions of a hard deadline for Brexit is to enable the country to move on and to start focusing on what many see as the real problems of our economy and society. But in the latest of a series of analyses of no-deal, Anand Menon observes “whatever the superficial, intuitive attraction, no-deal will not make it easier to focus on other things. On the contrary, it will make it harder”.

This brings us to questions about UK politics and governance. The prospect of no-deal has already elicited strong objections from the Scottish and Welsh First Ministers, and who knows how it could affect the delicate politics of Northern Ireland. For the Conservative Party, the exile of so many prominent ministers from the May government to the backbenches portends trouble which could metamorphose into a fresh contest between parliament and the government.

Meanwhile there is a growing recognition in the Labour party of the damage being done by the weak and indecisive leadership of Jeremy Corbyn. Labour is performing badly in the polls at a time when it ought to be prospering, given the disarray in the Conservative party, while the case for a softer Brexit (or none at all) is being inadequately put. At the end of July, one party grandee, Peter Mandelson, openly called for Corbyn to go. The wonder is that it has taken so long.

Without persuasive answers to the many questions about what will happen if a mutually satisfactory withdrawal deal cannot be secured, the UK would face great uncertainty. As should be repeated and repeated again, no-deal would not result in the maintenance of the status quo, but a fundamental shift in how the country relates to the rest of the world. It would also affect how many domestic policies, from agriculture to anti-terrorism, are conducted, because policies and regulatory arrangements would have to be recast, potentially in a disorderly manner.

Summing up, the most telling question is why the Johnson government would knowingly plump for a no-deal expected to have an adverse effect on the UK economy, to foment division inside the UK, to raise the prospect of a break-up of the Union, and to pose an existential threat to the Conservative party? The most benign answer is that is a bluff designed to put pressure on the EU.

Granted, no-deal might further discomfit the Labour party and pave the way for a Tory general election win, but are these valid justifications? The more worrying explanation, however effective the preparations are to limit the damage, is that the new government has failed to think through the consequences and has allowed its zeal to deliver the referendum result to trump (to coin a phrase) its judgment.

Let’s hope the remaining grown-ups dotted around the green benches of the House of Commons can find the parliamentary wherewithal to stop this folly.

This post represents the views of the author and not those of the Brexit blog, nor LSE. It first appeared at the Dahrendorf Forum blog.

Professor Iain Begg is the Academic Co-Director of the Dahrendorf Forum and Co-Chair of the Dahrendorf Working Group “The Future Of European Governance”. He is also a Professorial Research Fellow in the European Institute at the London School of Economics and Political Science.

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Long read: Post-Brexit trade policy must serve British society, not just free trade

Brexit provides an opportunity to agree new Economic Partnership Agreements with the world’s largest economies such as the US, China, and India. These cannot make up for the trade it will lose through leaving the Single Market, according to Swati Dhingra (CEP & LSE) and Josh De Lyon (CEP). Nevertheless, the UK has an opportunity to forge a new generation of trade deals that could help spread the benefits of free trade and address widespread unhappiness with recent waves of globalisation.

The UK is one of the most open economies in the world – and international trade and investment are the biggest areas of economic policy that the UK will need to decide on as it prepares to exit the EU. Greater integration with the EU can limit the economic costs of Brexit, and does not need to prevent the UK from pursuing beneficial Economic Partnership Agreements (EPAs) in the future.

port of dover

The Port of Dover. Photo: frattaglia via a CC-BY-NC-SA 2.0 licence

All trade agreements begin with a sense of realism on which trade partners to prioritise for negotiations, which can be lengthy and demanding of resources. The EU is the UK’s most important trading partner, making up around half of the UK’s international trade and investments. The UK economy is highly integrated with the EU and separation would be very costly. It is estimated that a ‘No Deal’ scenario would cause a 40% reduction in trade with the EU over the next 10 years, translating to an average cost of £1,890 per household every year. These costs would be halved if the UK agrees a comprehensive ‘Norway-style’ deal with the EU. The evidence suggests that potential gains from greater integration with the US, India, and China cannot offset the losses of leaving the EU, at least in the near future.

The UK government has shown some level of appreciation for this: the so-called ‘Chequers’ statement set out proposals for a single market for goods between the UK and EU, and a customs arrangement that seeks to accomplish smooth trading relations with the EU while maintaining the ability of decide UK’s tariffs outside the EU. However, the proposal remains vague on practicalities. Most importantly, it provides few details on services, which make up 80% of the UK economy and where single market membership provides greater market access than even the most ambitious of EPAs.

Until the 1990s, trade agreements focused on reducing tariffs. Today, tariffs in most industries are low and the services sector – which has no tariffs – dominates economic activity in many countries including the UK. The bulk of modern trade agreements is about reducing the costs of doing business across borders by, for example, streamlining customs procedures or avoiding regulatory duplication between countries. These are so-called ‘non-tariff barriers’ (NTBs). The aim is to create an integrated international market where domestic and foreign businesses play by the same rulebook.

These modern trade deals can stimulate economic activity. But there is an inevitable trade-off between integration and national sovereignty as countries must agree to similar rules and standards. For countries with similar preferences over these standards, the costs of alignment are relatively small. For instance, the UK gives up some sovereignty when it applies the EU’s Toy Safety directive on its businesses but UK consumers are unlikely to object to safer toys.

EPAs aim to balance market access for businesses with the need to maintain high standards in products, services, environmental, labour and consumer rights. But they have not always been successful in striking this balance. The rules-based trading system is facing the pressures of the increasing dominance of multinational corporations, the centrality of global supply chains, and the growing importance of services trade. They have generally not been able to uphold the spirit of equitable rights across stakeholders. Dani Rodrik argues that the regulatory standards in EPAs tend to empower politically well-connected businesses, including international banks, pharmaceutical companies, and multinational firms.

The UK has an opportunity to help shape a model trade policy that recognizes the new realities of the rise in global value chains, services and multinationals and that takes on board the concerns of those who have been left behind by the growth of the last few decades. The UK could gain an advantage by leading the way on a new generation of EPAs that promote inclusive growth.

There is a concern that the UK could be pressured into a race to the bottom on domestic standards, especially when it is negotiating with large countries with very different standards. The UK can alleviate these concerns by drafting a modern EPA, which ensures that the same rules and rights apply to all stakeholders – domestic businesses, multinational firms, workers, consumers or investors.

Non-discrimination across stakeholders has always been the fundamental principle underlying EPAs, but it has been eroded by the fragmentation of production across borders. The key to the success of a post-Brexit policy will be the extent to which it reinstates the principles of National Treatment for all businesses and Non-Discrimination across all stakeholders.

Reinstating National Treatment for all firms

National treatment is a fundamental principle of most EPAs, which ensures that countries do not discriminate against foreign companies so that all businesses compete on a level playing field. The UK could take a leadership role in advocating national treatment by applying the same rules on the opposite side – multinational enterprises (MNEs) should be accorded the same treatment as smaller businesses and domestic firms.

MNEs directly account for half of global exports, a third of world GDP and a quarter of all employment. They have the ability to source inputs and credit from different countries and to shift profits across different tax jurisdictions. This amounts to MNEs facing different business conditions than firms that might be smaller or purely domestically oriented. Tax shifting is the most striking example of this. About 40% of multinational profits are shifted to tax havens globally, and non-tax haven EU countries, like the UK, are estimated to suffer the greatest revenue losses as a result.

It is feasible to plug the loopholes that enable MNEs to shop around for tax benefits and other cost reductions and the UK has been involved in previously negotiated tax treaties and data sharing. One approach for reinstating national treatment is through multilateral bodies to enable coordinated action, but many would argue that their multilateral provisions are weak because they are non-binding guidelines and do not prevent a race to the bottom whereby countries offer attractive tax breaks to attract MNEs.

The UK could support multinational efforts by implementing unilateral actions such as taxing all MNEs that sell in the country and enforcing equal treatment of all domestic firms and MNEs in terms of profits. Any planned action would need to involve carefully weighing the potentially conflicting commitments in previous tax or investment treaties with the objective of maintaining real competition. A post-Brexit reset in trade policy is an opportune political moment to have this overdue discussion.

Reinstating non-discrimination for all stakeholders

Non-discrimination has been eroded because many EPAs give greater rights to investors over other stakeholders. Since 1975, the UK has negotiated over ninety bilateral investment treaties, almost all of which include provisions to enforce investors’ rights. Until now, the bulk of these treaties have been with countries that are net recipients of investments from the UK, so the investment agreements were largely designed to protect UK investors from expropriation of assets in developing countries with politically unstable conditions.

With the fragmentation of supply chains, most EPAs today contain provisions regarding settlement of disputes brought by investors against host governments. These are often referred to as Investor State Dispute Settlement (ISDS) clauses. They give foreign firms the right to bring claims against the host country if they have not been given fair and equitable treatment. ISDS clauses are increasingly being used by investors to challenge governments in developed countries.

The main contention with ISDS clauses is that the language of what constitutes a violation of investor rights is too vague. This constrains governments from changing laws and can lead to a regulatory chill due to the fear of expensive litigation from foreign investors. Furthermore, the settlement procedure is typically opaque and costly. There is also a growing recognition that ISDS confers rights to foreign companies that are not available to domestic companies.

There still isn’t a standard solution to balancing the rights of foreign investors for fair compensation and the right to regulate for host governments. New solutions for balancing investor rights with regulatory discretion are being proposed, and the UK can join these efforts to develop workable proposals such as enabling countries in EPAs to opt out of ISDS as well as reviewing foreign investments in sensitive areas and providing safeguards in these sectors.

The UK could go further in ensuring that its public services and domestic standards are not compromised through ISDS procedures. One way that many EPAs do this is by including chapters on social clauses – environment, health and labour rights – and ensuring that stakeholders, like workers and consumers, have similar rights and dispute settlement procedures as those that are given to investors.

Instituting a new social compact

Wages have decoupled from productivity and many working families in the UK have never really shared in the prosperity that globalisation has brought to many global firms and their workers in the last few decades.

The UK economy has suffered as a result of the Brexit vote. Immediately following the referendum, sterling suffered its biggest one-day loss since the introduction of free-floating exchange rates in the 1970s. The sterling depreciation from the Brexit vote was expected to benefit UK exporters and improve the earning potential of domestic workers. But new research from the Centre for Economic Performance shows that wages and training of workers have fallen since the referendum. The rise in the costs of imported inputs have led to lower wages and fewer training opportunities for workers in the UK, which could reinforce the trends of anaemic wage and productivity growth.

As a starting point, what’s needed is an adjustment assistance fund that compensates people who are displaced by economic changes. A post-Brexit UK would be more inclusive of ordinary working families if they had access to an enforceable mechanism to compensate them for job losses induced by broad economic changes.

But compensation alone will not solve the problems of the constant churn to which workers are exposed. To undo the years of economic stagnation faced by many, a post-Brexit economic policy would need to commit to investing in skills so that people face lower risks of being left behind in the future. Ultimately, wage and productivity growth require re-training and upskilling of the workforce. The UK can ensure these policies are supported along with market access provisions in EPAs by linking clauses on labour rights, compensation and rehabilitation policies.

Multinational tax revenues raised through instituting national treatment could provide the funds necessary to support these upskilling activities. This is a practical proposal by Philippe Martin from the French Council of Economic Analysis to ensure globalisation and technological progress are politically and socially sustainable.
Anticipating exactly who will be hurt from a particular policy is always difficult – it can take years before the link between job displacements and economic policies becomes apparent. Whether the UK operates its post-Brexit trade policy independently or via a customs union with the EU, it should be pushing for EPAs that deliver market access without compromising the UK’s high standards on labour, products, services and safety.

It will be exceedingly hard to replace any loss of access to the EU market and to find trade partners that share the high quality standards that the UK has always maintained. Any new EPAs with China, India or the US need to respect these high quality standards. If it ends up outside of the EU customs union the UK’s best strategy would be to pioneer a new generation of trade deals that balances the rights of different stakeholders and addresses the new economic reality of global value chains and multinationals. The three rebalancing provisions – national treatment, non-discrimination and a new social compact – would be the first steps towards an inclusive economic model. In the current era of strong anti-globalisation sentiments, a post-Brexit trade policy must be re-geared to truly serve British society, not just free trade.

This post represents the views of the author and not those of the Brexit blog, nor LSE. It is an edited extract from Brexit and the Future of Trade by Swati Dhingra. 

Reference

S. Dhingra, ‘Brexit and the Future of Trade‘, in G Kelly and N Pearce (eds.), Britain Beyond Brexit, The Political Quarterly, Vol 90, Issue S2, 2019, pp. 21-31.

Josh De Lyon is a Research Assistant at the Centre for Economic Performance at LSE and a DPhil Economics candidate at Oxford University.

Swati Dhingra is Associate Professor of Economics and Research Fellow at the Centre for Economic Performance at LSE.

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No-deal Cabinet: time for another Bank of England stress test

With the new Cabinet made up of ‘Vote Leave veterans and right-wing free marketers’, Costas Milas discusses how the Bank of England may want to respond.

Evan Esar quipped in his Comic Dictionary that statistics is ‘the only science that enables different experts using the same figures to draw different conclusions’. This definitely applies to the notorious Brexit divorce bill figure of £39bn. Brexiteers believe that they can avoid paying the bill and extract a ‘better’ deal from our EU partners. Others interpret the above figure quite differently: it is a financial commitment that the UK has to fulfil.

Boris Johnson started his premiership with reference to this divorce bill. It is quite astonishing that his first speech as Prime Minister hinted that the UK stands ready to ignore its financial commitments in the case of no-deal Brexit. How reassuring can it be in the country’s ongoing efforts to sign trade agreements with the rest of the world when the Prime Minister declares he is ready to ignore existing international financial commitments? The £39bn bill nonetheless accounts for approximately 0.27% of the EU annual GDP (based on 2018 data) – it is not as big as Mr Johnson makes it seem. Assuming a 31 October 2019 exit date, the bill will have gone down (based on the latest estimates by the Office for Budgetary Responsibility) to £32.8bn.

Mr Johnson’s choice of cabinet ministers attracted, to a great extent, negative comments from the press. For instance, The Guardian noted that the new Cabinet is made up of ‘Vote Leave veterans and right-wing free marketers’. A definite worry about this combination is that many Cabinet ministers do not see no-deal Brexit as a problem for the economy and the country as a whole. Sure, the UK economy will eventually absorb the negative shock; that said, two important questions need immediate answers. First, why would the UK want to inflict on itself huge (short to medium term) economic pain when it can definitely avoid it by either agreeing to a version of Theresa May’s deal or by negotiating a further short-term extension which would then lead to another (but again not that different) Brexit deal?

Second, what is the exact size of the economic pain in case of a no-deal Brexit? The latest Bank of England Financial Stability Report points out that the 2018 stress test of the UK banking sector was sufficiently severe to deal with a disorderly Brexit. The assumptions of the test involved, among others, a 4.7% fall in gross domestic product, a 27% drop in the sterling effective exchange rate and a rise in the bank rate to 4% (presumably to defend our currency and stave off inflationary pressures). Nevertheless, recent comments by Bank of England policymakers, including Gertjan Vlieghe, suggest the very possibility of a near-zero interest rate in case of a no-deal Brexit.

Consequently, it makes sense for the Bank of England to assess the implications for our economy of a bank rate cut to zero rather than a rise to 4%. Would, for instance, the banking sector be able to absorb a potentially huge drop in bank deposits as customers will be looking for alternative returns outside a sinking (at least in the short term) UK economy? This question needs to be answered before Mr Johnson presses the no-deal Brexit ‘button’.

This post represents the views of the author and not those of the LSE Brexit blog, nor the LSE. It first appeared on LSE British Politics and PolicyFeatured image credit: “Boris” by Raymond Wang is licensed under CC BY-NC-ND 4.0.

Costas Milas is Professor of Finance at the University of Liverpool.

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Brexit behaviourally: which do you think is the bigger figure – £350m a week or £4,300 per household per year?

tessa buchananThe Leave campaign’s ‘£350m a week’ figure cut through to voters in the 2016 referendum, while the Treasury’s ‘£4,300 per household per year’ didn’t. Was the relationship between the two figures intuitively self-evident? One is six times bigger than the other. Tessa Buchanan (University College London) looks at some of the behavioural lessons that can be learned from the campaign.

Psychologist Daniel Kahneman, who picked up the Nobel Prize for economics in 2002, describes himself rather charmingly as “mediocre in math”. It’s fair to say that this is in comparison to university classmates who went on to become world-class mathematicians. However, this all-too-human admission underlines a wider psychological point.

As Kahneman wrote in his 2011 book ‘Thinking, Fast and Slow’, while many people do simple calculations (e.g. 2 + 2) in their head using their automatic ‘System 1’ processes, they shy away from complicated sums (e.g. 17 x 24) that require them to engage the more effortful ‘System 2’ style of thinking. And if people are indeed reluctant to do the maths, then this has important implications for communicators, including those who worked on the 2016 EU referendum.

For example, if you were asked: “Thinking about the UK as a whole, which of these figures do you think is bigger: £350m a week or £4,300 per household per year?” what would your immediate answer be?

Sources: Vote Leave campaign 2016/ Stronger In, citing HM Treasury, 2016

This question was posed as part of a wider piece of research I carried out in September 2017, findings from which were published this June in Mind & Society. Given that pollsters, journalists and academics alike were surprised by the results of the referendum, I wanted to explore what behavioural lessons could be learned from the campaign – not on the basis that behavioural science could fully explain the result, but rather on the assumption that in a close contest, even marginal gains could make a difference.

Over 450 Leave voters took part in a survey designed to test the extent to which individual elements of the MINDSPACE framework (2010) had been at play. This mnemonic was developed by academics including LSE professor Paul Dolan and founder members of the UK’s Behavioural Insights Team, then working at the Institute for Government, to raise awareness among civil servants of “nine of the most robust (non-coercive) influences on our behaviour”.

“I”, in this instance, represents “Incentives”. As described by Dolan et al.:

“Our responses to incentives are shaped by predictable mental shortcuts such as strongly avoiding losses.”

Loss aversion was an early discovery by Kahneman and his research partner Amos Tversky. They established that people care twice as much about potential losses as gains. In politics, this can be linked to nostalgia (consider the sense of loss in the phrase ‘Make America Great Again’). Certainly, it was deployed by both sides in the referendum campaign. Dominic Cummings (portrayed by actor Benedict Cumberbatch in the 2019 Channel 4 drama ‘Brexit: The Uncivil War’) was the campaign director of the official Vote Leave campaign, and is now a senior advisor to the Prime Minister. In a 2017 blogpost, he said that he amended his initial slogan of ‘Take Control’ to ‘Take Back Control’ as: “‘back’ plays into a strong evolved instinct – we hate losing things, especially control”.

In my study, I asked participants: “In your opinion, which of these slogans worked best?” My expectation was that twice as many would prefer the longer version. In fact, four times as many opted for “Take Back Control” over “Take Control” (67% vs. 16%).

One factor may be that, according to a 2016 British Election Study report, control was a particular issue for Leave voters. Those with an ‘external locus of control’ (who felt they had little control over what happened in their lives) were “much more likely” to vote Leave than those with an ‘internal locus of control’, it said.

Loss-framing was also used to present two of the most important economic arguments used in the campaign: the £350m which the Leave campaign said was being sent to the EU every week, and the £4,300 per household per year which HM Treasury said UK households stood to lose if voters opted for Leave (albeit after 15 years in one of three potential scenarios).

The figure of £350m a week was announced relatively early in the campaign and has since become indelibly associated with the UK’s new Prime Minister Boris Johnson. Research published by Bobby Duffy in autumn 2018 suggested that 42% of the UK public still believe it to be true, despite criticism from the UK Statistics Authority that it was a “clear misuse of official statistics”. And views are split. One in five Remain supporters believe the figure, compared with two-thirds of Leave supporters.

The Treasury figure was linked to George Osborne, then Chancellor of the Exchequer. Gary Gibbon, political editor of Channel 4 News, describes in his 2016 book ‘Breaking Point’ how he was summoned to HM Treasury for the announcement of their figure. “Fingers in ears, the government fired off its great gun and waited for reaction,” he wrote. “Then they waited some more. And then a bit longer still.” This was in contrast to the Leave campaign’s £350m a week, which Gibbon said “got through to people”.

Why did the Treasury’s figure fall flat? Geoffrey Evans and Anand Menon, in Brexit and British Politics (2017) argued that it had “spurious specificity”, being too precise for what was essentially a forecast. But was the relationship between the figures intuitively self-evident? Putting to one side questions about credibility and any time preference effects, I asked participants to compare the two figures at face value in the present time. Given that there were 27m UK households in 2016 (ONS), the question can be expressed mathematically as follows:

Is £350m × 52 weeks > £4,300 × 27m households?

The left-hand side of the equation amounts to £18.2bn a year, while the right-hand side amounts to £116.1bn a year – a figure six times larger.

When I asked participants in this study if they remembered these figures, £350m a week was recalled by ten times more people (72% vs. 7%). This was unsurprising as it was used prominently and spent longer in the public eye. I then asked participants: “Thinking about the UK as a whole, which of these figures do you think is bigger: £350m a week or £4,300 per household per year?” Only a third (35%) gave the correct answer, as against 39% who thought the Leave figure was greater and 26% who didn’t know.

Finally, I gave the participants the information needed to perform the calculation (the number of UK households) and asked them to choose which of four graphs showed the figures in the correct proportions. The correct graph was the least popular choice, picked by only 15%. The majority (39% + 18% = 57%) chose options showing
£350m a week as the larger figure.

Fig. 1 £350m a week vs. £4,300 per household per year

“If there are 27m households in the UK, which option do you think shows £350m a week (in red) versus £4,300 per household per year (in blue) in the correct proportions?”

It is well known in psychology that many humans find the relationship between smaller numbers easier to grasp intuitively than that between larger figures. For this reason, it is commonly held as best practice in government communications to do as the Treasury did, and reduce big numbers to more human-sized amounts.

In this instance, the folk wisdom failed, and this was not the only surprising finding that emerged from my research. Looking at the other elements of MINDSPACE, as a messenger, an anonymous “local businessman” was seen as more trustworthy on every issue tested than a cabinet secretary; the study threw up clues as to why the status quo bias, seen as the default by many, didn’t prevail; and by deploying affect and other behavioural insights in a narrative, I found that Leave voters’ views on immigration were not necessarily fixed.

However, the main message for communicators is that even experts can benefit from seeking out evidence on which to base their decisions. It’s good advice, as the Behavioural Insights Team suggests, to ‘Test, Learn, Adapt’; and to make it easy for people to understand your message. And it’s clearly rash to assume that voters will do the maths for themselves. After all, as Cass Sunstein and Richard Thaler say in ‘Nudge’ (2008), when it comes to politics: “voters… seem to rely primarily on their Automatic System.”

References

Daniel Kahneman’s self-penned biography is published on the Nobel Prize website.

MINDSPACE (2010) was produced by the Cabinet Office and the Institute for Government and co-authored by Paul Dolan, Michael Hallsworth, David Halpern, Dominic King and Ivo Vlaev.

Thanks to Dr Shabnam Mousavi, Dr Severine Toussaert, Dr Lee de-Wit, Dr Alan Renwick and Dr Matteo Galizzi for their advice and support.

This post represents the views of the author and not those of the Brexit blog, nor LSE. It draws on an article published in the June 2019 edition of Mind & Society (Tessa Buchanan, 2019. “Brexit behaviourally: lessons learned from the 2016 referendum,” Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer; Fondazione Rosselli, vol. 18(1), pages 13-31, June.)

Tessa Buchanan (@UCLTessa) is a doctoral student at University College London. She studied for a master’s degree in Behavioural Science at LSE.

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