With the nation, or most of it, briefly united this week by the funeral of Queen Elizabeth II, the UK prime minister Liz Truss can now get on with her programme of dividing the country again by shovelling money at the well-off and deregulating everything that moves.
Moving swiftly on from yesterday’s unfortunately statist energy rescue for businesses, Truss’s government has said that tomorrow’s mini-Budget will include an extension to the 2021 freeports programme. Already correctly derided by trade economists as more likely to create distortions than prosperity, the freeports — which have special planning, tax and customs privileges — will be superseded by wider “investment zones” where more inconvenient barriers to growth are removed.
Intriguingly, some of the briefing has included the idea of weakening environmental protection inside those golden citadels. Together with bits of performative post-Brexit deregulation, such as lifting the cap on bankers’ bonuses, and the usual bracing rhetoric about free trade, this is presumably intended to add up to a morality play about internationally competitive high-growth global Britain.
In reality, the international characters in the drama are unconvincing. The EU makes little appearance in this theatrical narrative except as a pantomime villain who insists on maintaining the Northern Ireland protocol, which the UK is legislating to override. But the elephant from across the Channel will nonetheless be galumphing around backstage constraining what the actors can do.
For one, if the programme of “full-fat freeports” (Truss’s phrase) really does involve weaker environment or even labour law, which materially affects international competitiveness, the post-Brexit EU-UK Trade and Cooperation Agreement (TCA) allows Brussels to impose “rebalancing” actions and withdraw trade privileges.
For another, the wellbeing of UK households and businesses in the short to medium term is going to depend heavily on the energy shock, where EU governments have a big role to play. The bailout programmes will soften the impact of rising gas costs but not remove it: since the government has not imposed on a cap on energy prices for consumers, bills will still go up in the winter and there may be outright shortages.
Truss’s issuance of new drilling licences for oil and gas, together with looser rules on fracking, are not going to produce any meaningful increase in domestic fuel output for years. More imminently, the crisis has revealed what few policymakers had focused on — that having allowed its own gas storage capacity to degrade, the UK has essentially used the EU as an offshore gas depot by pumping gas there and buying it back during the winter. Britain is rushing to reopen its own “Rough” gas storage facility in the North Sea, but that will probably come too late for this year.
The wellbeing of British households in coming months is thus dependent on gas stocks in the EU, particularly the Netherlands and Germany, being sufficiently plentiful that suppliers are confident in pumping it back. Germany is making a lot more progress in increasing gas storage and LNG handling capacity than many expected, but the extent of any surplus is still unclear. In that context, it’s probably a bad idea to alienate the EU by picking a fight over Northern Ireland.
The rest of the UK’s trade policy doesn’t have much to add to the growth story, and also reflects the extent to which the economy remains enmeshed with the EU. Truss this week admitted what trade folk warned years ago, that Washington’s current antipathy to any and all trade deals means there is no prospect of a US bilateral agreement in the foreseeable future. The UK is talking a good game about encouraging digital trade, having signed a deal on that subject with Singapore. But it will need to proceed cautiously if it wants to retain the EU’s adequacy finding which allows personal data to be transferred back and forth with continental Europe.
The government is discovering that Brexit has given it little freedom to create a meaningful international side to its unimpressive growth strategy. Unless it decides to go for a radical unilateral reduction in trade barriers in something like agriculture, the UK’s liberation from the EU’s trade regime has given it mainly notional freedom. As the gas supply issue shows, it’s hard to spend decades in close engagement with a large neighbour economy without creating dependencies which might only become evident at times of stress. More are likely to emerge as the years progress.
The buccaneering global Britain rhetoric will no doubt continue. But as this week will show, the UK has struggled to find any technically possible, politically palatable and economically meaningful way for trade policy to boost growth.
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Source: Financial Times