Brexit ideology will be bad for exports

If visions from ministers were effective in boosting UK exports we would long ago have surpassed the £1 trillion target set by George Osborne when he was chancellor.

Last year we managed total overseas sales of £616bn, according to the latest official data. With just three years to go before we were supposed to hit the magic £1 trillion figure, we need exports to grow at an average annual rate of 17 per cent. So only triple the average rate of 5 per cent achieved since the turn of the millennium.

Could it be a sign of intruding realism that the trade secretary Liam Fox has quietly dropped the £1 trillion target and replaced it not with a nominal target for exports, but a target as a share of GDP? Fox, in a speech yesterday, said he wants total UK exports to be equivalent to 35 per cent of GDP, up from the current share of around 30 per cent. That at least gives him the opportunity of hitting the mark via a big UK recession and consequent collapse in GDP even if exports sales don't actually budge.

The past eight years have been a nightmare for the Greek economy, but its exports as a share of its (collapsing) GDP have leapt from 20 per cent to 32 per cent.

But then perhaps realism hasn't yet breached the walls of the trade department because Fox is still burbling vacuously about the great trade "opportunity" presented by Brexit.

There's something supremely frustrating about hearing Fox rabbit on about the potent'exporting superpower'ial of selling more luxury goods to the Chinese when the preeminent trade challenge over the coming years for the UK is simply standing still.

Leave aside, for a moment, the question of our future trade arrangements with our dominant commercial partner, the EU. We also urgently need to "grandfather" the 50-odd existing trade deals between the EU and other countries, from Mexico, to South Korea, whose coverage the UK will fall out of after the post-Brexit transition ends at the end of 2020.

This is by no means a simple task, either politically or technically, as Peter Holmes and Michael Gasiorek of the UK Trade Policy Observatory have painstakingly explained. Some countries may seek to extract concessions from the UK as a price of rolling them over. And then there's a planet sized headache over "rules of origin", relating to finished exports made with components from third countries.

The details are too complicated to outline here but the bottom line is that successfully grandfathering these trade agreements would require the agreement not only of the UK and the third countries involved, but of the EU as well.

There was not a word on any of that in Fox's speech. Instead we got a cargo container of spurious assertions.

Fox spoke as if world trade intensity is booming. But it's not. Since the global financial crisis a decade ago trade as a share of global GDP has actually fallen from 60 per cent to 55 per cent. And then there's Donald Trump's trade war and the White House's attempts to undermine the World Trade Organisation, which Brexiteers routinely herald as the UK's safety net in the event of a no-deal Brexit.

Again, all this seems to have passed our chronically incurious trade secretary by.

So does the fact that the Office for Budget Responsibility, the government's own official forecaster, expects the UK's share of global trade to stagnate, not grow, over the coming years. We should probably just be relieved he didn't call the OBR traitors, trying to sabotage Brexit Britain.

But the fact is that only an incorrigible ideologue could survey the horizon in 2018 and see a vista of burgeoning trade opportunities.

The views of Fox on the Brexit negotiations are of little value given he's been kept well away from them by Theresa May. But, when asked about them yesterday, he offered this warning: "If the European Union decides that it wants to put...the ideological purity of the bureaucracy of Brussels ahead of the wellbeing of the people of Europe, it will send a very big signal to the rest of the world about exactly where Europe is heading." But the fetish for ideological purity belongs not to Brussels, but to the Brexiteers.

And that, alas, shows the direction they're dragging us.

What Liam Fox and the Brexiteers get wrong on exports

Not long ago there was an official Government target for UK exports.

“We want to double our nation’s exports to £1 trillion this decade,” the former Chancellor, George Osborne, proclaimed in his 2012 Budget speech. Many said at the time that it was a foolishly unrealistic target. But ministers insisted it really could be done. Comparing it to Maoist pledges of a great leap in steel production was unduly cynical, we were told. So, five years on, are we nearly there yet? Not exactly.

Alongside Philip Hammond’s Autumn Budget last week, the Office for Budget Responsibility released its latest UK exports forecasts. The total value of overseas sales in 2017 is projected to be only £549bn, up just 16 per cent on the £473bn in 2012. And the forecast for 2020, the date when we were supposed to hit the magic £1 trillion number? £575bn. So a miss by a mere £425bn. Not exactly the kind of sum one finds down the back of the sofa.

It’s a safe bet that Osborne would blame the 2016 vote for Brexit, which he strenuously argued against, and the decision by Theresa May to yank us out of the EU single market and customs union in 2019 for this failure (although the reality is that we were well adrift long before the referendum vote).

But what about Liam Fox, the International Trade Secretary? This leading Brexiteer can hardly blame leaving the EU for Britain’s export underperformance relative to those 2012 targets, set by a government of which he was a senior member.

In February, Fox told a parliamentary committee that disappointing global growth was the reason we would not get there. Yet global growth is now picking up rather strongly, just as Britain slows down sharply due to the negative impact of higher inflation and an apparent investment freeze by many nervous UK firms.

True, British export values are up 15 per cent since the referendum vote. But this is actually pretty disappointing given the tailwind of a record plunge in the value of sterling, which instantly makes our goods and services more competitive overseas.

Brexit itself can’t possibly be the problem for its champions, so other culprits have been identified by Liam Fox. “I can agree as many trade agreements as I like, but if British business doesn’t want to export, then that doesn’t do us any good,” he said in an interview last week.

This was essentially a more sanitised version of his comments last September, when he was caught on tape accusing British exporters of letting the country down by being too “fat and lazy”.

“We’ve got to change the culture in our country,” he ranted. “People have got to stop thinking about exporting as an opportunity and start thinking about it as a duty – companies who could be contributing to our national prosperity but choose not to because it might be too difficult or too time-consuming or because they can’t play golf on a Friday afternoon.”

Leaving aside the aching hypocrisy, the flawed economic worldview such comments betray is notable. Fox seems to see strong export-growth as something that relies, fundamentally, on vigour and patriotism from firms. In fact, the evidence suggests it requires a dense framework of state support from above and below.

Dig around for the roots of the exporting prowess of Germany’s famed small and medium-capacity “Mittelstand” companies and one finds an active state-owned local banking system. It’s a system in which bankers actually encourage their corporate customers to venture into overseas markets, happily extending credit for the purpose.

It’s a far cry from here, where small firms’ trust in their banks is chronically low. Nothing that the Government is fiddling around with – on new export-credit guarantees and the like for firms – comes close to trying to emulate this German ecosystem of truly community-embedded, corporate-relationship banking.

The state trade support from above comes in the form of harmonised regulation. The evidence shows that joining the EU in the 1970s gave the UK’s exports a substantial boost. Part of this was the end of tariffs. But a larger ingredient was the harmonisation of product regulation and the licensing rules of what would eventually become the single market. Such licensing is especially important for services, which is the reason why pulling out of the single market promises to be so damaging for our service exporters.

These are the benefits of EU membership that the Brexiteers, with their 19th-century mental image of trade as merely the shipping of finished manufactures and raw commodities, refuse to acknowledge. In the 21st century, regulation is not the enemy of free trade; rather it helps create the market. As Sir Ivan Rogers, our former top Brussels diplomat, put it: “Contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities.”

Sir Ivan’s candour was not welcomed by ministers and he resigned in January. Perhaps what they wanted to hear was that, thanks to Brexit, hitting the elusive £1 trillion export target will be a piece of cake.

This article was originally published in The Independent on 26/11/17