With the nation, or most of it, briefly united this week by the funeral of Queen Elizabeth II, British Prime Minister Liz Truss can now proceed with her program of redistributing the country by scooping money for the wealthy and deregulating everything. that moves.
The Truss administration, which is swiftly moving forward with yesterday’s sadly state-induced energy bailout for businesses, has said tomorrow’s mini-budget will include an extension of the freeports program for 2021. The free ports, already rightly derided by trade economists as more likely to create disruption than wealth, will be replaced by broader “investment zones” where more nuisance barriers to growth are removed.
Intriguingly, part of the briefing included the idea of weakening environmental protections within those golden fortresses. Along with bits of performative post-Brexit deregulation, such as lifting the cap on banker bonuses, and the usual bracing rhetoric about free trade, this is presumably meant to add up to a morality game about internationally competitive burgeoning global Britain.
In reality, the international characters in the drama are unconvincing. The EU features little in this theatrical tale, except as a pantomime villain pushing to uphold the Northern Ireland protocol, which the UK is enacting legislation to set aside. But the elephant from across the Channel will nonetheless roam backstage and restrict the actors.
First, if the program of “full-fat free ports” (Truss’ expression) really includes a weaker environment or even labor legislation, which has a material impact on international competitiveness, the Trade and Cooperation Agreement (TCA) between the EU and the Post-Brexit UK able to impose “Rebalancing” actions on Brussels and revoke trade privileges.
On the other hand, the short to medium term well-being of UK households and businesses will depend heavily on the energy shock, where EU governments have a major role to play. The bailouts will mitigate, but not eliminate, the impact of rising gas costs: Since the government has set no cap on consumer energy prices, bills will still rise in the winter and there could be outright shortages.
The issuance of new oil and gas drilling licenses by Truss, along with looser fracking rules, will not yield a significant increase in domestic fuel production for years to come. More imminently, the crisis has revealed what few policymakers had focused on – that the UK, after allowing its own gas storage capacity to deteriorate, has essentially used the EU as an offshore gas depot by pumping gas into it and pouring it into the winter to buy back. Britain is rushing to reopen its own “Rough” gas storage facility in the North Sea, but that will likely be too late for this year.
Thus, the well-being of British households in the coming months will depend on gas supplies in the EU, particularly in the Netherlands and Germany, which are large enough that suppliers are confident to pump it back. Germany is making much more progress in increasing its gas storage and LNG processing capacity than many expected, but the extent of any surplus is still unclear. In that context, it is probably a bad idea to alienate the EU by fighting over Northern Ireland.
The rest of the UK’s trade policy has little to add to the growth story and also reflects the extent to which the economy remains entangled in the EU. Truss admitted this week what traders warned years ago is that Washington’s current antipathy to all trade deals means there is no prospect of a bilateral agreement with the US in the near future. The UK is talking a good game about boosting digital trade, having signed a deal on the subject with Singapore. But it will have to proceed with caution if it is to maintain the EU’s adequacy finding, allowing 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 mostly fictitious freedom. As the issue of gas supply shows, it is difficult to be closely involved in a large neighbor economy for decades without creating dependencies that only become apparent during times of stress. As the years go by, more are likely to emerge.
The rhetoric of Britain’s global rhetoric will no doubt continue. But as this week will show, the UK has struggled to find a technically possible, politically acceptable and economically meaningful way for trade policy to boost growth.
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