01 March 2016

Peter Mandelson says Leave campaigners are "trying to sell people a fantasy" in major speech

In a major speech, entitled 'Trade and Brexit: Tree inconvenient realities', Peter Mandelson, board member of Britain Stronger In Europe, argued that those who want Britain to leave the European Union are “trying to sell people a fantasy” on the issue of trade.

Trade is how we make our living in the world. 

The EU is our largest market – our home market - and it’s also where thousands of British small, medium and large sized British businesses join cross-border supply chains and production networks.
Crucially, Europe is not just a free trade area for us where border tariffs have been eliminated.

It is a single market, unique in the world, where 28 different countries’ behind-the- border regulation of business and technical standards have been harmonised so that impediments to doing business really have been removed.

It is this combination of removing tariffs and adopting common standards that has intensified the competitive pressure that spurs higher productivity.

I would describe the Single Market as Free Trade Extra Plus. The Extra are the common rules and regulations that matter as much as the absence of tariffs. The Plus is being part of the EU’s decision-making which gives us a big say in how these rules are made and the rights of redress when others do not obey them.

It is this Extra Plus that has led to a boost to the size of the economy. The Financial Times cites leading economic historian Nick Crafts as suggesting the UK economy is a tenth larger as a result, which is many tens of thousands of jobs in Britain.

Brexit supporters on the whole do not contest the importance of trade. 

Some argue that Brexit would offer the possibility of greater trade beyond Europe that would more than offset any loss of access to the EU.

I will explain a little later why I believe they exaggerate both the opportunities for trade beyond Europe and underestimate the difficulties we would face - on our own - of removing trade barriers in those markets.

Others don’t necessarily dispute the benefits to the UK of EU trade. Their claim is that the EU could Brexit one day and the next day regain unfettered access to the EU market.

Now the UK is a very important economy - the world’s 5th largest - and there is the prospect in the decades ahead of the UK’s market being the largest in Europe.

Europe in the event of Brexit wouldn’t shut us out, its advocates claim, and beyond Europe we wouldn’t be ignored.

But what is at stake are the terms on which we would trade, especially for the financial services that are a vital part of UK trade.  And just how long it would take to negotiate these terms.

In Europe we will only get full, unhindered access if we re-accept all the regulatory rules and standards of the Single Market. Period.  It’s a binary choice.

And as for the rest of the world, Britain has not negotiated an international trade deal of its own since the 1970s. Since then, the main economies of the world have moved on and they are looking at opportunities elsewhere.

A bit of experience with trade negotiations and trade policy is helpful in understanding why this whole picture is more complicated than the Brexiters make out and I want to apply that experience to the Brexit argument today.

The case against the idea that Brexit and autonomy in trade policy are good for the UK has three parts and they all matter.

The first is that, upon quitting Europe in such a dramatic way, we would not be in a strong bargaining position and a politically-charged negotiation of a free trade agreement with the EU would, in reality, be much harder than this argument suggests.

The second is that the major disruption of leaving the European single market and the loss of the favourable access our exporters have in other parts of the world as a result of our self-exclusion from the EU’s common trade policy and its international trade deals would have more profound consequences than the Brexit argument admits.

The third is that the answer that the anti-Europeans offer to this – an ambitious new set of British global deals – will be hard to obtain and won’t even come close to compensating for either of these two setbacks.

I want to take them in turn.

The FTA option is now being floated by Brexiters who have spotted the little flaw in becoming a larger version of Norway: namely that Norway pays for access to the Single Market by making a similar per capita contribution to the EU budget as we do, by accepting the rules of the single market without any say over them and by accepting free movement of people. 

They also don’t want to admit that Britain could simply move on to the WTO basic standard and incur new tariffs on imports and exports.

So, runs the argument, let's just do an FTA with the EU instead.  We can have the trade we want without accepting any of the conditions and obligations.

It’s nice being told you can have your cake and eat it. But the world does not work like that.
First, a UK-EU FTA would not allow the UK comparable Single Market access to that we currently enjoy. 

You either accept “the free movement of goods, persons, services and capital” of the Single Market or you don’t and if you don’t you are outside the Single Market. 

While Brexit campaigners blur the distinction between an FTA and Single Market access, each is distinct, with profound implications, and in this debate they must be treated as such.

Anyone arguing that special dispensation would be given to Britain needs to consider the irony of those who say we must leave the EU because we are so weakened within it yet claim that such fundamental change could be achieved from the outside when we leave.

Second, negotiating an FTA with the EU would be far more complicated than it sounds.

Assuming that there is sufficient goodwill from those we have just waved goodbye to for such an agreement to be considered, it seems to me a massive stretch that we would be able to hammer out these terms during the two-year period outlined in Article 50 of the Lisbon Treaty for exit negotiations.

There would be complex and sensitive negotiations on Britain’s own regulation in which we would be required to continue to accept many EU norms and standards.

As a result, we would have left the EU in order to assert our national sovereignty only to find that, as a condition of access, we did not have so much independence from EU regulation after all. 

This would pose a dilemma to the British government and resolving it in the negotiation of a deal would take a considerable time. Maybe we could strike a deal to preserve existing market access while such a larger deal is agreed, but I would not take it for granted.  

At very least, I suspect the existing ‘passporting’ arrangements for Britain’s financial services would be hard to agree in the Article 50 time-frame or in the context of an otherwise light FTA.

Complete tariff removal is not guaranteed in an FTA and even a low tariff can change the calculus of a supply chain in a highly cost-sensitive global economy. 3% on the cost of a supply chain input can be material. And for the large volume of trade that we hope would continue, that could be a considerable sum of money.

For every UK company that trades with the EU – and there are over 200,000 – this should be a worry, as it would be for every inward investor that sets up in the UK to manufacture for onward sale into the European market.

Suddenly, the terms and advantages of doing so would look very different.

But such a deal would have to cover far more than just tariffs. It would need to address the spectrum of European rules and standards and this is heady stuff.

We would be negotiating with the European Commission but the outcome would then require the support of every member state and of the European Parliament.

I accept the size of our market gives us some leverage but this shouldn’t be exaggerated.

When you consider the array of different commercial interests in play across the member states, the argument that Europe would want or have no choice but to rush to do a deal with us really starts to come unstuck.

Much more of our exports go to the EU than vice versa. Half of the goods we export go to the EU – just 7% of the EU’s came to the UK. So the years of uncertainty would have a much greater impact on us than on the rest of the EU.

We may run a trade deficit with the rest of the EU as a whole, but we don’t run a large one with each country and not with each sector – or with the European Parliament for that matter. And it is at this level that things count in a negotiation and where trade politics enter the frame. 

For every politician who saw the pragmatic case for dealing with the UK, there would be another who had little doubt that the UK must not be given a quick or easy ride. 

Some might even want to show that a country that votes to leave the EU has to pay an economic price for the privilege of so-called independence.

The key point is that for every European economic interest with a keen stake in the British market there would be another with a competitive advantage in rolling back that British access just a bit, especially in sectors like farming and, of course, financial services, where there will be both Member States and MEPs trying to advance the interests of Frankfurt or Paris at the expense of London.

Continental auto manufacturers, another example, would quickly see the opportunity for them of making British producers face new tariff costs. They would need to make a commercial judgement vis-a-vis the UK market. But we should not assume that France, Italy or Spain will vote to allow Vauxhall, Nissan, Honda, Toyota and other UK-based producers tariff free access to the European market when their industries suffer from over-capacity.

Yes, the German large car makers want free access to Britain but they do not call all the shots.

I know from experience that in any trade negotiation defensive interests speak loudest and they are not always overcome. It is only partly a joke to say that trade deals are launched by liberals but signed by protectionists.  

And the most important point is that whatever we agreed it could only be a rolling back of what we currently enjoy in market access within the Single Market. 

Look at it this way, why should those we have just divorced give us back the keys to the marital home as if nothing has changed? 

The only way you can pretend this would not be the case is if you look at the part of the trade picture, the bit that looks good for us. But we are not negotiating with ourselves.

It is implausible, for example, to think that we could get most of what we want on services, the biggest sector of the UK economy, where it is not tariffs but regulatory barriers that count.

I cannot see the circumstances in which the ECB, post Brexit, would allow London to continue being the centre for clearing euro-denominated trades completely outside their regulatory scope.

Take the recently agreed EU- Canada FTA, which many say we should seek to emulate. It is state of the art for both sides, has taken over 7 years to negotiate.

Switzerland, despite its close relationship with the EU, also has its financial services excluded.
It does not give Canada passporting rights into the Single Market in financial services. If that applied to a UK FTA with the EU, imagine the consequences for the City of London and the knock-on effect on the UK economy as a whole.

Outside of the single market, we would lose the biggest dynamic advantage of our EU membership. This is that we operate the same behind-the-border regulation which evolves with Europe’s, as part of a single system agreed by us because we have equal seats at the top table and this applies to the whole spectrum of our goods and services including financial services.

That comes to an end the moment we leave and no FTA would alter that fact.

With an FTA, every new European rule would be another potential trade barrier for UK exporters, or another cost in duplication, or another compliance headache.

Unless we automatically transposed those rules – without a say in them -  the two markets would almost inevitably drift apart, without the Single Market’s centripetal force to keep them together.

Without the guarantee of long-term regulatory convergence, market access is always living on borrowed time.

So I hope that puts something of a dent in the lazy assumption that we would step out of the Single Market and quickly back into an FTA without major damage to British interests.

The rules are the rules and while I accept no country has left the EU before this will not give us a special favoured status, in my view, that would make us the exception.
 
The trouble is that it is only part of the problem.

In trade terms, leaving the EU means more than just leaving the Single Market. We leave the entire common commercial policy, that is Europe’s existing global trade deals and arrangements.  This, too, has far reaching consequences.   

The EU is a gateway for global market access. Outside it we lose the preferential trading benefits from its trade agreements with over 50 other countries.

It is possible that some will transfer the existing agreement to us without much fuss but others will not feel that what the UK is offering makes it worth their while. They will make their own calculus.

Overnight, following our departure, those literally hundreds of thousands of zeroed tariffs and improved conditions of market access previously negotiated by the EU in markets like Korea, Canada, Mexico, Colombia, Central America, Singapore, Vietnam, the Euromed basin and the African, Caribbean and Pacific countries and others would be withdrawn and replaced with the costlier, non-preferential, non-privileged market access provided to all ordinary WTO members.

In some cases, that could mean new tariffs of ten, twenty percent or sometimes even more on key UK exports such as cars, machine goods, whisky and textiles.

This could inflict serious damage on the competitiveness of these and other sectors. Our exports to these countries would be at risk of falling like a stone, investment and jobs would be lost at home and the UK economy significantly set back.

But wait, because it gets better.

The UK would also potentially have to raise its own tariffs on imports from these markets.

Because, having left the EU trade framework and before the UK had replaced it through negotiations of our own, we could not continue to offer the same preferential treatment to goods entering Britain under the original EU agreements.

This is because we would be breaking WTO rules which require, outside preferential agreements, treating all fellow WTO members the same, without discrimination.

So one of the first acts of a UK outside of the EU would actually be to increase border protection because we are no longer covered by EU agreements, raising the cost of imported goods and consumer prices.

This strikes me as ironic given the Brexit view that outside the EU we would be more open to the world.
We would of course potentially lose out the same way with all of the markets with which the EU is currently negotiating future FTAs, including the US, Japan, India, south east Asia, Brazil and Argentina, as well as Australia and New Zealand.

While in these cases UK exporters and importers may not find the tariffs they pay changing, they would see European competitors benefiting from improved terms denied to them because we were no longer in the EU.

As new investment and trade flows opened up elsewhere, with Britain an onlooker rather than participant, British businesses and consumers would be the ones being penalised.

And that brings me to the final of my three big doubts about trade and Brexit.
We repeatedly hear that the UK, freed of the EU’s conduct of trade policy, would be liberated to strike ‘ambitious’ deals with all comers.

No more compromising the UK’s free trade credentials for the sake of European special pleading and protectionism – you know the sort of thing.

But this is where dogma collides most damagingly with reality for the Brexit case, exposing its proponents’ lack of real world trade experience and makes their argument so substantially flawed.

Trade negotiations consist of a series of hard-bargained for trade-offs.

This would be true for the UK outside the EU. We would need bargaining chips in order to negotiate benefits in exchange and we are already a relatively open economy.

We might win concessions from Tokyo with a willingness to scrap the remaining protection for UK-based car production but our non-Japanese auto manufacturers may have something to say about that.
Or from Beijing by agreeing to relax our approach to investment in sensitive and strategic sectors in return for access in China but as we have seen with the China nuclear deal this would not be uncontroversial.

Or from the US by agreeing to remove protection of the UK dairy sector for US agribusinesses – something that our farmers would have views on - or open up markets for public procurement in - just for the sake of argument - the NHS to US private healthcare companies.

I am not advocating this. I am just making the point that these ‘ambitious’ deals of the Eurosceptic Brexit imagination are an illusion.

We have our own defensive interests, and they are generally well reflected currently in the EU position.
If we wanted to go it alone, we would need things to trade into a negotiation and we would end up having to sacrifice sensitive positions in order to have any chance of securing new deals.

Except outside the EU, the UK would be in an even worse position, because to state the obvious we are a much smaller market than the EU.

So those countries that would be ‘queuing up’ to sign FTAs with us, as the Brexiters imagine, would wonder whether we were really a higher priority than other bigger or faster growing markets.

That is why the United States Trade Representative has made clear they are not in the business of bilateral deals with Britain.

It makes a big difference when you are alone as opposed to being part of a 500 million consumer market on which to base your negotiation and make a substantial enough offer to tempt the other side.
Let me be very clear with you.

There is not some gilded UK-China FTA waiting in the wings that we are being denied because we are part of the EU. And anyone who thinks there is needs to take a look at the substance of the Switzerland-China FTA, for instance, and see how poorly that worked out and who got the better deal.

China got tariff free access across the board, for all its huge volume of exports.  Immediately.  Switzerland for about four –fifths of its exports.  In fifteen years.

In trade negotiation, size matters.  

More to the point, any benefits that we might gain from negotiating new international agreements would only start after we had restored all of the current benefits of the existing EU agreements. 
Trade deals are harder and harder to negotiate. 

We are talking decades in the case of the agreements we would need to replace, not years. And we would not necessarily win the same terms.

And in the sectors in which we are most competitive and where we would be seeking most opportunities – financial services, investment access, advanced manufacturing – our negotiating partners would be just as cautious in granting us concessions as with the EU while we would have less to put on the table to get what we want.

Yes, we could try to negotiate duplicate agreements with Korea and others.  I don't know how many of you have had the pleasure of negotiating with the Koreans, but I have.  They are charming – but utterly tough. 

We would have to persuade them to offer the same terms as they offered the EU – but with less leverage.

And there is a practical problem here too. After our years in the EU, the UK has no real trade negotiating capacity – it would first have to be rebuilt.

If we left, the UK would be ill equipped to re-build the status quo let alone forge new agreements which some imagine are within our grasp.

So let me sum up. Those who advocate Brexit often see trade policy as one of the greatest constraints of our EU membership.

I hope I have demonstrated today that being part of a powerful trade bloc is an advantage not a straitjacket and especially one with such a long track record of success.

The EU is probably the world’s leading rule setter in international trade and this is a significant strength for Britain.

For you to have such a large European market in which to grow our businesses and then, through effective trade policy, go out and become bigger in the world is a major source of economic competitiveness, growth and efficiency for Britain.

As Trade Commissioner I saw British interests secured globally and protected every day by the weight of the EU and its market. 

You can be as ambitious as you like in trade policy but without leverage, without scale, you are not even at the table. And in commercial negotiations worth billions, if you are not at the table you are often on the menu.

We must not fall into the trap of confusing Britain’s genuine cultural and soft power influence with weight at the trade negotiating table.

How often do I remember the Norwegian foreign minister grabbing my arm as I went into trade negotiations asking me to represent his country’s interests because Norway did not have a seat at the negotiating table.

It would be thoroughly reckless for Britain to sacrifice the settled network of trade advantages and preferences we have built up over decades, just for the thrill of a dare devil race round the international circuit in our own Aston Martin, as Boris aspires to.

We must remain focused on our long-term interests if we are genuinely concerned with getting the best deal for UK companies in the EU and the global market.

Those who put the counter argument do so with flair but between now and June they need to offer more than emotional assertion and appeals to ‘national pride’.

We should listen to those on the continent about how open they would be to a UK-EU FTA that offers our current market access without condition.

We should hear from international partners about whether they would prefer to trade with the UK as part of the EU’s Single Market or alone.

And we should hear a very clear economic blueprint from the Leave campaigns which convinces the country that jobs, trade, investment are not at risk.

As things stand, if we genuinely want to continue embedding UK companies in global supply and value chains, and if we are genuinely serious about continuing to build the UK as a trading base for Europe’s single market, there is no rational or realistic way that Brexit offers a better set of global trade arrangements than those we have already.

Brexiters are trying to sell people a fantasy of what life outside of the EU would look like, without any evidence to back up their assertions. 

With the fate of future generations and our country’s place in the world on the ballot paper it is deeply irresponsible to pretend otherwise.

Delivered at ICAEW event

© ICAEW - Institute of Chartered Accountants in England and Wales