On tarriffs and lobbies

One of the more successful lines our family business has developed in recent years is a small import-export service for an eco-cleaning product manufactured in, of all places, North Carolina, called Rockin’ Green. We (well, Joy) spotted the product, did some marketing around it and now sell it to stores in the UK, as well as to a number of retailers in mainland Europe.

So the Brexit debate was of practical as well as philosophical interest in our household – and the news a couple of week ago that that the UK government may decide to pull out of the EU Customs Union as a first step in Brexit talks an early worry. At the moment selling to those European markets is no more difficult for us than sending Rockin Green to Bristol or Hebden Bridge. We pack it up, arrange the transport, do the minimal paperwork required – and off it goes. Exit from the Customs Union would change all that.

The Customs Union got lots of coverage in the referendum without being mentioned much by name. It’s the part of the EU that involves the elimination of tariffs and quotas on trade between member states, and the imposition of a common external tariff on imports from the rest of the world. That external tariff is about 5% on average, though a much higher 13% on agricultural products. The CU is a different entity to the single market, which goes far further in harmonising regulations and competition policies to ensure the totemic four freedoms of movement across the EU bloc, in workers, capital, goods and services. You can’t be in the single market without being in the Customs Union, but coming out of the CU is a pre-requisite to doing trade deals with other nations – hence the apparent urgency.

So which would be better for us – in or out of the CU? We do pay a tariff on the Rockin Green imports we bring into the country. It’s not much – less than the average at about 2%. Maybe UK trade negotiators could get a deal with the US that would eliminate that duty, so a reduction in our costs of importing from the US would more than offset the EU tariff we would have to pay?

Maybe – but the most likely scenario I can see is that we end up in a position not much different to today, but only after a very disruptive and costly period of uncertainty.

In the Brexit talks businesses far bigger than ours – both within the UK and the EU – will be lobbying governments to keep zero tariffs to maintain their respective export markets. During the debate a common argument from Brexit campaigners was that “we import more from them than they do from us”, so the UK is in a stronger position. Leaving aside the dubious logic of making a virtue out of a dire trade deficit, I can’t see this. The relevant argument seems to be about the relative importance of export markets. For businesses based in EU states the UK market is relatively unimportant – it’s just one country amongst the 28. For UK business the loss aversion must be greater since it means losing access to 27 national export markets.

If a deal can’t be reached and tariffs are put in place with Europe, the compensating factor could be the rest of the world. We could reduce tariffs on RoW imports and get corresponding reductions in tariffs on our exports. At this point protectionist voices will be raised on either side, and we will see which wing of Brexit – protectionist or global liberal – will have most sway. But given the extent of trade with the EU is still much bigger than with the RoW, the chances of a compromise over Customs Union access still looks the more likely to me.

The Customs Union, though, is the smaller part of the picture. One of the reasons our mini export trade is so straightforward is that we only have to show the product is regulated for use in one nation. Outside of the single market we would have to go through the regulatory bureaucracy of EU environmental and other standards before any trading could even begin to happen.  This was the real economic case for Remain. Harmonising regulations and standards makes it easier to sell across borders – and that, through trade, leads to the learning that comes from being open to what others are doing. Ours is only a tiny business. Multiply it up thousands of times and you get some idea of the stakes being played for and the risk that has been taken.

One argument against harmonisation could be that it leads to a loss of local distinctiveness in products. I can just about see the case that some manufactures are becoming difficult to distinguish between each other, though that hardly seems an over-riding consideration. And it’s not as if the EU wasn’t alert to this in important areas – protection for culture being one example and the designations for regional food products that feature in the RSA/HLF Heritage Index another.

The better argument I can see is that “harmonising regulations” in reality becomes lower environmental and consumer protection than would happen if the nation states were left to themselves. Brussels is full of corporate lobbyists, who can concentrate their efforts on one city instead of having to spread themselves across lots of nation state bureaucracies (see previous blog). As a small business which faces the threat of some very big corporate powers (we often talk about nea as a political project and not a business at all) we’re deeply conscious of this too.

Will we suffer more corporate lobbying at the nation state or EU level? According to some accounts, the EU actually imported its policy on regulating lobbying from the US. A paper from the University if Montreal-McGill in 2010 recorded that, whereas the first measures in the US aimed at regulating lobbying activities date back to 1946, in the European Union, they were not put in place until fifty years later, in 1996. European Commissioner Sam Kallas said in 2007 that the “EU learnt a lot from the US” and one Euro MP suggested the EU had literally taken “a page out of the US lobbying book”. Presumably this was because there was little or nothing in the national rule-books to draw on. Which means we will be starting with a blank piece of paper in the UK, post-Brexit.

The Corporate Europe Observatory – which used to run the annual ‘Worst EU Lobbying Awards” – once denounced European lobbying rules as still “absurdly weak” and called for Europe to go even further in following the US model. Even though that Stateside experience hardly looks encouraging, either. Research by Christine Mahoney reported on Politico, claims that 89% of corporations and 53% of trade associations succeed in their lobbying efforts in the US, while the majority of those fighting for the wider public good, fail. Only 40% of citizen groups and 37% of foundations succeed. Mahoney puts this down to legislators in the US being beholden to the wealthy interests that will underwrite their next re-election bid. In the EU, the success rates are much more even:  57% for trade associations and 61% for lobbying firms, but citizen groups (56%) and foundations (67%) win at equal rates. “Policymakers in the EU do not need industry’s euros, so we do not see the same level of pandering to their interests”, says Mahoney.

The question is, which of these two patterns of success and failure – European or US – will UK law-making most closely match, now that we’ve taken control? That’s of more than philosophical interest to us too.

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