DONALD TUSK says that the EU negotiations must “encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping”.
Matthias Machnig, the German deputy economy minister warns that “a race to the bottom in tax and regulation matters would make trade relations difficult”.
Clearly, we have entered a period of political posturing as the tactics for negotiating Brexit take hold; but what about the economics of such remarks? The EU is clearly committed to its common regulatory framework; and wants to block deliberate attempts to gain competitive advantage through removing regulations or cutting taxes.
Political economists are wary of “level-playing fields”; and “races to the bottom”. To create the first needs state intervention, to prevent the latter also needs state intervention. The problem with state intervention is that it usually hides the special interests that have lobbied for that intervention to the detriment of the consumer through higher prices and less product diversity that creates growth.
In contrast, liberal economists can point to a host of studies that show that minimal regulation and low tax rates maximise growth and consumer welfare; particularly in nations where government budgets have expanded above forty percent of GDP. All of the EU countries are in this bracket.
All consumers should examine this idea of a regulatory race to the bottom, along with fiscal, social and environmental dumping, and that little weasel phrase “inter alia” which suggests that the EU would like to be deeply engaged in trade wherever it deems fit as its bureaucratic missions expand.
Let’s examine this with respect to an important area of Scottish trade; in quality food and specifically beef. Ms Sturgeon considers that this is one of the key areas where Scotland will lose out through Brexit.
EU trade in beef is administered through something called the Hilton beef tariff quota. That this agreement involves both a tariff and a quota is important. The market for beef has essentially been carved up in tonnes of beef suffering different tariffs on imports from Argentina, Australia, Brazil, Canada, New Zealand, Paraguay, Uruguay, the USA and the EU itself. Within this regime, when an allocated quota is exceeded, tariffs change and essentially become punitive.
The real world background is that urban Europe cannot feed itself from within the EU. Europe has good grasslands, but the use of those for meat competes with grain and olives, fruit and wine; there are a lot of Europeans. Scotland’s wet but mild climate grows good grass in the South, and even in the North the extensive empty lower lands can produce fine revenue earning small black cattle. Comparative advantage applies - for quality grass-grown but expensive beef produced in a sparsely populated place that may not be the best place to grow beef, but where not a lot else can be grown. Tayside, Aberdeenshire, Perth and Fife of course have a good alternative in wheat, barley and some soft fruit.
There’s going to be a lot of haggling over beef in the next two years. Beef is an important tradeable asset globally, so for the EU to impose controls it always has to get approval from a consensus of WTO members for any changes. This has stalled the creation of any agreement during its expansion to 28 countries. The agreement for the expansion of 1995 was not certified until 2010 —taking 15 years to add just three new countries – through which the Hilton quota was increased from 34,300 to 37,800 tonnes. The revisions for the 2004, 2007 and 2013 EU enlargements remain uncompleted. Adjustments in global trade in agriculture are always slow.
So this regulatory race is more of a desperately slow crawl. Now let’s look at some of the state interventions in the so called “single market” where fiscal, social and environmental dumping (plus some hidden “inter alia” factors) are frowned upon.
A good place to start is the Rural Payments Inspection Division (RPID) of the Scottish Government. Rural payments are of course the feedstock of rural human welfare though financial support. You are going to have to bear with me on what comes next, but please do.
RPID deals with agricultural and forestry schemes, animal identification and traceability (cattle, sheep and goats, and pigs), bees, cereals, plus eggs and poultry. In reality, its mission has expanded well beyond husbandry and welfare to the Land Management Contract Scheme, Less Favoured Area Support Scheme, Potatoes and Basic Payment Scheme. It has also taken over the responsibility of carrying out a number of environmental agency inspections concerning Controlled Activities Regulations (CAR) and Diffuse Pollution, disposal waste sheep dip inspections and Silage, Slurry and Agricultural Fuel oil regulation inspections, and various parts of the Scotland Rural Development Programme.
Crucially, RPID also has a hand in something called “Cross Compliance”. These are a mandatory set of requirements and standards that land managers have to meet in order to receive support scheme payments. They support EU legislative requirements relating to public health, animal and plant health, environmental protection and animal welfare standards developed to address soil erosion, soil organic matter, soil structure, ensuring a minimum level of maintenance, avoiding the deterioration of habitats and protection and management of water.
Essentially, the paying piper is playing the tune here; EU regulation has swamped localised management. It is no surprise that across the EU nations, there are more bureaucrats administering farming than farmers. No wonder a lot of farmers are less than enthusiastic about the EU.
What has happened here is that a precautionary principle over financial control of subsidies, animal health welfare, landscape environmentalism, and “inter alia” other things has taken over the market for food farming. The regulatory race to the bottom has been replaced by a regulatory race for perfection; something that is unachievable because rural land management is different everywhere with variable local issues and localised real world events. I once met an Alpine farmer from Garmisch who burst into tears telling us how the cows from his high altitude community now had to be shipped to a slaughter house a hundred miles away, only to be brought back to his shop where he turned them into meat products for local sale. He said it was cruel to the animals, costly to him, and he had no idea as to hygiene. Before, he had known each animal and its owner personally, now he had no idea if the meat being sent back was safe or even the same meat that he had sent for slaughter.
If Ms Sturgeon had any sense she should be demanding the EU butt out and leave Scotland to organise its own clean, animal welfare focussed farming; organised locally. It would certainly make our farm products less expensive, helping Scotland’s less well off. The precaution of selling a good product is in the interest of farmer producing it and the chef cooking it. Of course all markets can see occasional mischief from some players, but are we really saying that those producing beef are in need of the huge amount of oversight above? The costs far outweigh the net benefits.
And think of the commercial gain. Scotland’s beef has worldwide renown. The brand is trusted and can command a premium. We live in a world where the 4.5 billion people who live in Asia are eating more meat and have more money to spend each year.
We should be thinking like a business on this. In Castle Douglas you can get a steak for £4; in Beijing you can pay £100 for the same thing. There’s a margin there if we can do that trade; Scottish farmers could earn themselves a good portion of that margin by trading freely, and not kowtowing to the EU. Scotland has many products like this, whisky being the greatest. Let trade be free and grow and Ms Sturgeon could raise a lot more money for the vulnerable she professes to champion; rather than the rich landowners she pays today as an agency for Brussels and the big corporates who skew supply chains to their benefit, killing off the innovators of new products.
Beef is a cipher for all freely trading marketplaces. Level playing fields made level through state regulation always become captured by bureaucrats and special interests; free trade levels markets in a different way, by allowing those with production advantages to serve those who want quality and different products. The wealth and capital so created outweighs any amount of subsidy a controlled market can offer. It also creates the work and industry that improve the lives of all workers and consumers.