Bad Brexit Deal Better Than No Deal? Mathematical Idiocy!

Authored by Mike Shedlock via MishTalk.com,

At the top of the list of absurd Brexit advice is the notion that a bad deal is better than no deal.

But that’s what Andrew Duff at the European Policy Center says.

Drop the Clichés

The British side should stop pretending that ‘no deal is better than a bad deal’. It is not. In fact, there’s really nothing worse than no deal. So it’s not a clever tactic for the UK to start off negotiations by repeating a cliché that at best nobody believes and at worst sounds mildly threatening.

Mathematical Idiocy!

The position of Duff is mathematical idiocy. The EU demands as much as €60 billion in exit fees, adherence to four principles (that the EU itself does not follow), fishing rights, etc.

Giving into those demands, or most of them, is like leaving for no reason at all.

Clearly, no deal is better.

Duff is nothing more than a staunch “Remainer” who refuses to accept reality.

€60 Billion in Exit Fees

Eurointelligence takes to task the notion that €60 Billion is remotely close to a starting point for negotiations.

Werner Mussler offers the most detailed account of the financial issues we have seen so far. The €60bn have several components, the largest being a back-of-the-envelope calculation on the EU’s open positions, also known as “reste à liquider“, spending commitments made in the past that have to be paid in the future. They stood at €217bn as of end-2015, and are likely to grow to €240bn by end-2018. Britain’s part would be about €29bn. In reality, that position would be lower since many of these funds are never called.

The second large position regards pension payments to EU employers – not just British – as the EU does not distinguish between UK and other nationals. Locking in a British net contribution for the lifetime of these payments seems ludicrous to us, but it is fair, of course, that the UK pays at least for the pensions of EU employees who are British nationals. If the EU insists on the UK paying for the pension of non-UK nationals post-Brexit, there can be no Brexit agreement. Mussler concludes that the €60bn is a purely political number.

We found ourselves in rare agreement with Holger Stelzner, the FAZ’s conservative economics editor, who asks what kind of community the EU is that wants to penalize a member state for exiting. He also notes that there is no legal basis for the €60bn claim.

Surrender

Duff would pay the full bill on the absurd grounds that a “bad deal is better than no deal”. The UK may as well hoist the white flag and sue for peace in Duff’s absurd model.

Theresa May Has Things Correct

“Not partial membership of the EU, associate membership of the EU, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave. No deal for Britain is better than a bad deal for Britain.” Theresa May, 17 January 2017

Odds of No Deal

May’s position makes perfect sense mathematically. Nonetheless, Bloomberg writer Simon Kennedy repeats the nonsense A Bad Brexit Deal May Be Better Than No Deal After All.

Walking away with no regime for 230 billion pounds ($287 billion) of annual exports to the bloc and the 3.3 million Europeans in the U.K would be “perfectly OK,” says Foreign Secretary Boris Johnson. Not “frightening” at all, says Brexit czar David Davis.

But analysts are painting an entirely different picture of an outcome they view as increasingly plausible: An official in May’s government puts the chance of the talk collapsing at about 30 percent. EU negotiator Michel Barnier this week said the bloc should ready to deal with the “serious consequences” of a breakdown, such as longer queues at borders to how to handle transportation of nuclear materials.

Fearmongering

Kennedy drones on and on about all the ways the UK would lose. Here are just two examples.

For manufacturers, World Trade Organization tariffs averaging about 5 percent — and twice that for cars produced by the likes of Ford Motor Co. — would be immediately imposed on trade with the EU, the market for 44 percent of Britain’s overseas sales. Farmers could face duties of around 40 percent and most industries would suffer higher import costs if Britain imposed its own tariffs on trade from the EU.

Jordan Rochester, a London-based strategist at Nomura International Plc, predicts the pound would slump towards $1.15, extending its post-referendum slump to almost a quarter.

Not once did Kennedy note what the UK might lose.

Let’s assume (I suspect falsely) the pound slumps to $1.15 from $1.25. That’s would take 8% off WTO tariffs averaging 5%. The UK would hardly get hammered in such a scenario, at least from an export standpoint.

In contrast, add another 8% to EU exports to the UK. Who is the big loser here?

Nonetheless, I suspect the odds of no deal are higher than most believe. Stubborn EU nannycrats will be to blame should that happen.

Merkel Hardens Stance

The Express reports Merkel TOUGHENS Brexit stance amid concerns over EU’s future as May prepares for talks.

In an interview with the Financial Times, finance minister Wolfgang Schäuble said: “We have no interest in punishing the UK, but we also have no interest in putting European integration in danger over the UK.

With Germany preparing for general elections in the autumn, fears over populist campaigns in other parts of the world – including Donald Trump’s election win, Geert Wilders’ narrow loss in the recent Dutch election and the increasing prominence of Marine Le Pen in France – has led to a surge in support for pro-EU campaigns.

The Germany finance ministry claims: “Any Article 50 agreement will have to include the UK’s assurances that it will honor the financial commitments it undertook as an EU member state.”

Norbert Spinrath, Brexit spokesman for Mr. Schulz’s Social Democrats, warned: “We expect the British to do the honorable thing. If they don’t, the EU can take them to the international courts.”

No Deal Better

Telegraph writer Edgar Miller gets it correct: Don’t worry about Brexit negotiations, no deal is better than what we have now with the EU

In response to Theresa May’s view that “no deal is better than a bad deal”, Donald Tusk – subsequently joined by Pascal Lamy and Jean-Claude Juncker – made it clear they believe such a scenario would, in fact, be bad for the UK.

While some of this rhetoric can be seen as the first plays of a negotiating strategy, the answer to this challenge is crucial for the UK Government to understand. The answer, based on our detailed analysis at Economists for Free Trade, is actually not as complicated as many will have you believe. Our work shows that not only is the WTO option better than a bad deal, it can actually be better than the deal we have at the moment.

First, however, we must deal with the myths surrounding what is misleadingly called the “WTO option”. It’s a misleading term because every option for the UK in its new trading arrangement will be a “WTO option”, given that the UK will take up its full (founding) membership of the WTO and will trade under its rules once we leave the Single Market.

In fact, there is no other way we can leave, regardless of whether we have done a deal with the EU or not. The WTO will be merely the referee in our trading relationships, as it already is with other trading nations of the world such as the US, Japan, India, and so on.

We can reduce tariffs across the board (including to zero) or, for example, reduce tariffs on selected goods that we do not produce in the UK. Most importantly, if we do not reach a free trade agreement with the EU, it will be the choice of the UK to decide what level of tariffs it sets against the EU and – consequently – the rest of the world. It is that one single decision that will decide whether the UK will prosper or not in this new trading environment.

So what happens if we remove tariffs against the EU (and the rest of the world), even if the EU (and the rest of the world) does not reciprocate? In summary, a standard world trade model shows unilaterally removing tariffs creates a long-term GDP gain of 4 per cent, a fall of 8 per cent in consumer prices, and an increase in Treasury revenue of more than 7 percent, compared to the status quo.

About half of this gain comes from eliminating our tariffs on goods imported from non-EU countries, abolishing our relatively few non-trade-barriers, and eliminating the CAP and its associated levies. The other part of the gain are tariffs on manufactured goods with the EU that average about 3.5 percent on our exports to the EU; about 4.8 percent on their exports to us. If we do not implement our 4.8 per cent tariffs on the EU, then we achieve the full 4 percent gain.

Clearly, this will be a better situation than we have today – a massive gain for the consumer – even though the EU may have raised tariffs against us, no other country may have reciprocated our zero tariffs, and we will have “fallen off the cliff” into the dreaded WTO.

Of course, it is also possible to pursue free trade through a series of free trade agreements with the rest of the world. Under this approach, the UK would not unilaterally eliminate import barriers but would attempt to achieve the same objective via negotiating such agreements.

Finally, producers need not suffer in order that consumers benefit. Our research shows that manufacturing – aided by Sterling’s lower exchange rate (likely to last for several years) – can prosper without protection. Even without the benefit of a lower currency, a modicum of productivity improvement coupled with new opportunities to re-source supply chains at better value from both the UK and the rest of the world will allow manufacturers to compete successfully.

Thus, the decision is not complicated, the WTO is not be dreaded, and there are clear economic benefits to the UK of embracing free trade, irrespective of how negotiations with the EU turn out. No deal really is better than the status quo and Mr. Tusk and his colleagues would do well to remember that during the next two years.

Edgar Miller makes perfect sense.

As I have stated many times, the first nation that truly embraces free trade will be a winner regardless of what any other nation does.

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It is a very rare treat to encounter a genuine free trade advocate.

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