Tom Kibasi is at one or other of the leftish think tanks and therefore, by definition, doesn’t know his economic arse from his elbow. This coming into stark relief when he starts to talk about the effects of Brexit. For he’s claiming that the European Union will, through general nefarity, manage to steal away all Britain’s industry. Without realising that they’ve simply not got the ability to do so.
Instead, the EU’s response to a no deal will be strategic: opening up advantage, sector by sector, calmly and patiently dismantling the UK’s leading industries over the course of a decade. They will eat the elephant one bite at a time. The problem with abandoning the rules of the international order is that you no longer enjoy their protection. A no-deal Brexit would hand the EU enormous power: it would decide how and when to introduce new frictions between the UK and the single market, giving sufficient time for firms like Airbus, Nissan or AstraZeneca to relocate production. As recent decisions have demonstrated, even seemingly fixed capital investment is more mobile than many Brexiters imagine. The EU would set out a timeline over which it would introduce compliance and rules of origin checks on the UK’s most competitive exporting sectors. It is not hard to imagine checks on automotive parts from 2021, pharmaceuticals from 2022 and aerospace from 2023, alongside constantly shifting sands of equivalence for financial services. This would allow firms an orderly departure from the UK to the single market. It will be a steady drift away from the UK, not an avalanche. Moreover, the absence of any agreement would mean lasting uncertainty that would deter future investment.
The EU has been trying to do this to world trade and world industry for decades now. Their success rate has been what?
Quite, we do all know the tech giants that Europe has produced as a result of making life difficult for the Americans, don’t we? It’s simply dribble here.
And then it gets worse:
The UK is particularly exposed in this regard: our serious lack of competitiveness is demonstrated by persistently large trade deficits. This means the UK is heavily reliant on foreign investment – the “kindness of strangers” – which would likely collapse. It is not hard to imagine a future government going cap in hand to the IMF for a bailout.
Getting the basics of the balance of payments wrong is embarrassing for anyone purporting to tell us about economics. We can’t have a balance of payments crisis. It’s simply not possible.
By definition the surplus on the capital account – that foreign investment which is the kindness of strangers – is equal and opposite to the deficit on the current account, our buying more imports than we sell exports. This isn’t arguable, it’s a definition.
The only thing that can screw this up is if we try to fix the prices at which all these things happen. That is, have a fixed exchange rate. In the absence of that the price of pounds will change in order to reach that definitional balance of payments.
So, quick question, do we have a fixed exchange rate? As we did when we did have to go to the IMF? Ah, no, we don’t, we’ve a floating exchange rate. Meaning that it’s not actually possible for us to have a balance of payments crisis. We can have a change in the price of pounds but it’s that very thing which ensures – absolutely and totally – that we can’t have a balance of payments crisis.
Do note that this isn’t some left or right thing. We’re not talking about some free market zealot like me facing off against a – hmm, IPPR, dunno, socialist? Social democratic? – different vision of how the world should be. This is basic, basic, stuff, like talking about gravity in physics, not how many dimensions do branes have?
The Brexit fantasists’ riposte is that the Europeans have as much to lose since the UK is an important export market and we run a large trade deficit with the single market. But one of the legacies of Thatcher’s deindustrialisation is that the UK lacks the industrial base to switch from foreign to domestic production. It simply no longer exists, thanks to the 1980s shock therapy of the very same disaster capitalists that now champion no-deal.
Britain’s manufacturing output is higher than it was when Thatcher left office. It’s very much higher than when she gained office.
Those same Brexiters who have marched from failure to failure with no loss of enthusiasm still bizarrely believe that the UK could pocket the £39bn divorce bill while pursuing trade deals around the world. Yet the EU would, calmly and rationally, place tariffs on UK trade until it had collected what it is owed.
Isn’t that a lovely and super idea? Tariffs are paid by those buying the goods. So, the EU does this and it’s European consumers who would be paying the British divorce bill. Why wouldn’t we like such a deal?
Tom Kibasi is director of the Institute for Public Policy Research, and founder and chair of the IPPR Commission on Economic Justice
I think it might be possible to understand lefty economics and lefty think tanks now. They’ve simply not got the first clue of actual economics which is why they keep getting it all wrong.