It's the post-Brexit economy, stupid

It’s the post-Brexit economy, stupid

One can only have the utmost sympathy for EU chief negotiator Michel Barnier as he valiantly tries to nail the latest helpings of Brexit porridge to the hard wall of economic reality. One must have admiration too for his patient, unruffled and necessarily repetitive approach. First he tells them, then he tells them he told them, then he says it all again and tells them he did that too. One of the reasons that the Brexiteer side gets so many column inches is that they are constantly pulling new rabbits out of their top hats. Barnier, on the other hand, is still saying pretty much what he said on the day of his appointment, which is not much different from what Jean-Claude Juncker said the day after the referendum.

The latest rabbit is the revolt in the Tory shires against Option A, the notion that the UK would collect tariffs on behalf of the EU and thus avoid a hard border. They think that would keep Britain far too close to the EU. The EU doesn’t think it would work at all but that’s another matter. From our point of view we just have to adopt Barnier’s approach and remind everyone once again, once again, that Option A is an economic irrelevance. Economically, it matters not a whit who collects the tariffs.

Option B, collecting tariffs by technological means which have yet to be properly imagined never mind invented, is another rabbit, but it is so far down Alice’s rabbit hole that we can safely ignore it unless or until it emerges.

The thing is that tariffs kill businesses. The process is very simple, rather like the Micawber Principle. If your profit margin is 10% and the tariff rate is zero, the result is happiness. A tariff rate of even 5%, however, puts you on a trajectory to misery.

Try for a moment to imagine a long line of tankers, shining silver in the sunlight, each one with 30,000 litres of milk. No less than 33,000 of those tankers cross the border every year; among other things they take more than a third of all the milk in Northern Ireland south for processing. Tariffs on milk range from about 40% to 56%, so it won’t matter if the tariffs are collected by an invisible robot built into the milking machine. Most of those tankers won’t be going anywhere because their profit margin –  and in fact their whole business proposition will have evaporated.

That will happen when the UK leaves the customs union. But because they will leave the single market as well, there will be more grief in the form of non-tariff barriers to trade (NTBs) and phytosanitary controls. Milk faces an obvious NTB problem if border delays cause it to go sour. And once the UK is out of the single market it is highly likely that processing plants in the south would have to introduce a regime of veterinary/phytosanitary inspection, the cost of which would have to be added to production costs.

The same will apply across the board for agri-food which completely dominates cross-border trade. We concentrate on milk for a number of reasons, mainly because it is first in line for a hit, but also because cross-border processing is so highly developed.  Most people don’t realise we produce nearly 10 billion litres of milk – no, that is not a typo – every year and probably only consume a billion or so on this little island. All the rest is exported as cheese, butter, yoghurt and vast quantities of milk powder: 75,000 tonnes of cheddar goes to England and there is NO OTHER MARKET for it.

The picture is replicated in beef: when you see 10 bullocks in a field, just remember that we can only eat one.

And then there is Option C, which would leave Northern Ireland in a sort of virtual customs union and single market. It  would ease some of the cross-border pain, but it would still lock our southern cheese and bullocks out of the English market so a lot less of those tankers would be crossing the border. But we should take it if it comes on offer again because all else is a catastrophe. The situation in agri-food is most acute but in milder form it will be replicated across much of our indigenous economy.