Japan Throws Spanner into Brexit Negotiations

I’m surfacing from my holiday to highlight a development in the Brexit negotiations which further undermines the fantasies hope of Leave proponents, in the form of a letter from the Japanese government outlining its expectations to 10 Downing Street.

One of the beliefs of the pro-Brexit camp was that the UK was such an important export market to the EU that Britain would have negotiating advantage. We’ve thought this belief was misguided, in that the UK’s own export sectors were far more vulnerable. The critically important transport industry is almost entirely in foreign hands, and its owners could migrate production to the EU over time if the UK lost access to the single market or for other reasons became a less attractive location than now. Similarly, there is no reason to believe that the dominant players in the EU, Germany and France, each of which has large, influential banks, would let UK banks get passporting rights without making very large concessions on other fronts.

As vlade pointed out, another shoe has dropped in the form of the 15 page letter of Brexit demands from the Japanese government. The UK is being exposed as having fewer degrees of freedom in these talks than its leaders assumed by virtue of its deep economic integration with other economies. As the Guardian points out:

Above all, the Japanese memo underlines that the UK is not only negotiating bilaterally with the EU commission and council of ministers, but with many other foreign firms that have invested in the UK, each of which is quite capable of upping sticks in the next phase of their investment cycle.

And it focused on the issue we’ve stressed, that the only reason foreign manufacturers were in the UK was to get access to the single market with more favorable labor regulations. Upend that equation and those firms have no reason to stay:

The warning in the covering letter to the UK government could not be clearer. It says: “Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to continental Europe if EU laws cease to be applicable in the UK after its withdrawal.”

In particular, the document emphasises Japanese firms fear for their future potential to export from Britain to third countries because of trade privileges within the EU single market around “rules of origin”.

The Japanese missive also called for the free movement of EU citizens, which is antithetical to pro-Brexit demands for curbs on immigration.

Moreover, the Japanese letter is likely to encourage other countries whose companies have a significant presence in the UK to convey their own set of Brexit requirements.

Moreover, the Japanese trade negotiators, who ran rings around their US counterparts in the 1980s and appear to have come out very well in the TPP talks (having gotten major concessions independent of the deal getting done) look to have decided to influence the talks while the UK’s position was still in flux:

The additional difficulty for May is timing. Her government is still far from united in its demands and is playing a long game by remaining studiously vague about the deal she is targeting. Bland reassurance has been May’s strategic goal so far.

The Japanese demands blow that strategy apart by being very specific. It says: “What Japanese businesses in Europe most wish to avoid is the situation in which they are unable to discern clearly the way the negotiations are going, only grasping the whole picture at the last minute. It is imperative that the outcome is free of unpleasant surprises and reducing the risks emanating from uncertainty.”

In effect Japan is trying to force the UK to show its hand, something five House of Lords EU select committees will also start to seek to achieve this week when they begin a coordinated grilling of ministers and experts across the whole Brexit field.

The Guardian report also says that the UK government was caught out by the publication of the letter in Japan last Friday, even though it had received it earlier, as part of the advance work for a meeting between May and Abe today. The Government had apparently assumed that the Japanese requests would be handled out of the public eye. Oops.

The Brexit negotiations are proving the truth of Dani Rodrik’s policy trilemma: you cannot have national sovereignity, democracy, and deep international economic integration all at the same time. And while some Brexit backers acknowledged the costs that might be incurred, far too many others (as revealed not just in the UK press but in unduly optimistic remarks in NC’s comments section) blew them off as scare talk by nay-sayers. We are now seeing that the UK leadership is unprepared, both on an operational and strategic level for handling these negotiations, much the less with managing outcomes. It’s not a pretty picture.

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  1. Fazal Majid

    you cannot have national sovereignity, democracy, and deep international economic integration all at the same time

    You can if you are big enough, i.e. the USA, China and possibly Japan. That the first two eschew democracy is a purely internal choice. European countries are too small, as are US states other than California. If even Germany can’t go alone, the U.K. never had a chance, delusional Empire nostalgics notwithstanding.

    1. tegnost

      I see the importance of national sovereignty and democracy, but I am curious why international economic integration is listed as an equal to those two things? International economic integration is a policy, while national sovereignty and democracy are methods of self determination. False equivalency attempting to validate said international economic integration, imo.

        1. Synoia

          you cannot have national sovereignity, democracy, and deep international economic integration all at the same time.

          sovereignity and democracy – as it was
          sovereignity and deep international economic integration – I cannot see how this combination can exist
          democracy, and deep international – I cannot see how this combination can exist

          This so called trifecta is a stark choice. Either deep international economic integration or democracy and sovereignty.

          It sounds clever, but I see only two choices.

          1. a.matthey

            Actually, you can have economic integration and democracy : the polity must be the size of the economic area being integrated.

            1. XFR

              And given the demographics of Planet Earth a polity that big would spell the end of white supremacy. The U.S. ruling class didn’t cotton on to that until the turn of the century–they assumed that as long as they kept the Japanese on board, they could use the “natural” wealth disparity between white and non-white nations to keep white supremacy going somehow, and deluded themselves into thinking that China was just going to be another Japan or India.

              When the penny dropped as to just how big China really was they threw democracy overboard in favor of the charming democracy-theme-park global totalitarian police state we’re living in now. Rome seems to have followed a similar course when it tried to swallow Greece and Egypt.

              It seems to be quite a nasty snare we’re in now, as the U.S. billionaire class will never willingly let go of their global Empire, nor will they let themselves be overrun by uppity Asians. So the road back to democratic government seems to be completely blocked off.

              1. Patrick

                The US Billionaire class has a collective action problem. They’ll race to the bottom, selling each other out as they go, to enrich themselves in the present at the cost of any dreams of “empire”

      1. Patel

        If the trillema is truly the case, then the point is what the hell are countries doing to overcome it?! Because the only winners here are the corporations and its executives who play the countries against each other. Maybe we need a UN-like corporation that controls these corporations on a coordinated global scale. Countries fighting on economic fronts for the benefit of corporations has never been a good idea.

    2. Yves Smith Post author

      No, not correct. The US is still largely an autarky with a comparatively small import/export sector. Multinationals are far more significant in political than economic terms due to their role in extending US influence.

      1. FromTheCheapSeats

        The Japanese are blowing smoke. There is an oversupply of autoproduction in Europe, and none of the major EU players want a Japanese factory. Renault (Carlos Ghosn) bought controlling interest in Nissan at a firesale. Fiat (Marchionne) bought Chrysler out of a bankruptcy proceeding to get sales volume in North America.

        Mr. Abe’s policies have flatlined the Japanese domestic economy. Turn on NHK television and watch frantic efforts to export Japanese cuisine to westerners. NHK is copying Deutsch Welle. I respect what the Japanese government has done for its citizens in the wake of several catastrophic natural disasters. I don’t respect Toyota.

        1. Yves Smith Post author

          You appear to be missing the point. Auto manufactures make parts and/or assemble final product in the UK almost entirely due to it being in the single market and having somewhat more favorably labor regulations. If that equation changes, they will shift production elsewhere. The UK capacity will shrink and with it, income and jobs. All you are saying is they won’t have to add capacity to factories in Europe, which will make the move even easier.

          1. From the Cheap Seats

            You don’t get it. Toyota tried to assemble parts on the continent and were rejected twice over the past ten years.

            1. Yves Smith Post author

              Link, please. I did multiple searches and found nothing of the kind.

              And you also need to demonstrate that the Toyota activities in the UK (which are the ones that would presumably be moved to the Continent) could not be handled by expansion of existing operations.

              Plus you appear not to understand that Toyota et al can locate production in Slovakia, or other Eastern European members of the EU, and sell into Europe. You are seriously trying to tell me that Slovakia would reject a Toyota plant?

              1. From the Cheap Seats

                Toyota has a joint venture with PSA Peugeot-Citroen in Slovenia. They produce a tiny car called Aygo which is also sold under Peugeot and Citroen labels.
                Toyota Europe is a NOTHING! They claim sales of 800,000 units across 56 countries, including the Middle East, Israel and Russia in that count. I have distinct memories of Toyota Europe wanting to build a Lexus factory in France or Germany in May 2006, and having to settle for production in the UK.
                For the year 2015, VW had a 21.4 pct market share, Peugeot was second near 17 pct, Toyota was at 4.4 pct and Nissan at 4.1 pct.
                Lexus sales were at a whopping 0.3pct.

                Mitsubishi had a plant in the Netherlands for more than ten years, it has been closed for several years now. The Japanese have had little success selling cars in Europe. The Toyota business plan in 1995 was to directly negotiate with US suppliers for Toyota and Lexus to avoid a 100 percent tariff imposed by the US congress on Lexus cars. Last week they chose to hide behind the skirts of the Japanese MITI group. They have NO leverage on the Brits, you are forgetting that Ford and GM are bigger players in the UK.

                1. vlade

                  Toyota employs about 3800 people in the UK, producing about 200k units/year. GM (Vauxhall) employs about 4000 people in the UK, producing about 250k units/year. Some difference in the units, not much difference in employment.

                  Ford doesn’t produce cars in the UK anymore, only engines, employs about 1800, and just slashed planned investment in the UK http://www.bbc.co.uk/news/uk-wales-37286883 and plans reduction in engine production.

        1. MH

          Exports are a bit less than 15% of US GDP, imports a bit more. The number for Germany are close to 50%. I would consider this pretty close to autarky.

  2. Steve H.

    – …having fewer degrees of freedom in these talks than its leaders assumed by virtue of its deep economic integration with other economies.

    Decrease enough degrees of freedom and you get locked-in.

    I also get some ruffled feathers after seeing the Richard Koo presentation on Japan (hat-tip TheCatSaid). That one country with immense support from a central bank starts arm-twisting a country with a less uniform approach increases the complexity and unintended consequences of the global economic integration. That doesn’t just constrain across borders, but within borders.

  3. Quiet Si

    The Brexit economic plan appears to consist of wishful thinking and a high degree of asymmetric analysis with no understanding of the motivation and strength of the counterparties (foreign governments and their big industrial establishments) they will be negotiating with. Brexiteers are living in hope (2 actually, Bob and No). Unfortunately for the uk economy they will fail.

    1. OpenThePodBayDoorsHAL

      The volume of EU trade last year with countries with *no* trade agreement in place was +/- $1.4 trillion so we shouldn’t get too apocalyptic.
      Australia is moving fast with a bilateral trade agreement with the UK, I’m sure others are keen as well, the Chinese could easily do the same. The ones who should be quaking in their boots are the EU aristo-bureaucrats, an army amongst which more than 10,000 persons make more money than the UK PM and have a very unaccountable and lavish lifestyle indeed.

      1. vlade

        Australia is, from the UK trade perspective, pretty much irrelevant. Moreover, the thing is not tariffs, but Mutual Recognition Agreements. Granted, UK/Australia could just copy past the existing EU one, and it would probably work for some time, but UK can’t sign anything until we exit EU properly. If you say “and what can stop UK signing up something with EU”, the answer is that it would antagonise EU and a win with Australia vs a loss with EU is a pyrrhic victory if there ever was one.

        Even China is a small, although growing, export market for the UK. Moreover, it’s pretty unlikely UK could export services to China – so you’d drop a very large chunk of your exports now for a potential large export maybe in the future. In other words, trading a large economic hit now (we’re talking 5+% of GDP) for an unknown potential in the future. Again, a deal with China which could in any way be seen as using UK as a back door to avoid EU regulations/etc. would make any EU negotiations even harder.

        The simple fact is, that EU is important market for UK right now. Dropping it WILL have economic consequences, no matter what other markets would be open by then – replacing 40+% of your trade doesn’t happen overnight.

        Oh, and something on services. While a lot of people argues that EU services markets is shrinking (about 44% of the exports, even less if you count net exports only), they fail to notice that once financial institutions (and I’m not talking about banks only, but also about insurance companies, asset managers, etc. etc, which are all very large industries in the UK) up the sticks and move, ALL of their exports move. And similarly, a lot of support services (accounting, consulting, lawyers) may up the sticks too, to be closer to their clients (yes, it’s important to go to a lunch with them now and then, not only for new business, but also to be able to know what’s happening in the industry).

        FIs moving out of the UK over a short period of time (say year/two) would have catastrophic impact on the UK economy – London, obviously, but the spillovers would be felt across the whole country, especially with Tories in power.

    2. Harry

      There was never a brexit economic plan. And such a plan wasnt what motivated. Britons were unaware they were already slaves and rebelled against slavery (see song). There will be a certain about of sheepish when the impotence of the uk elites is revealed. I mean why do we give these useless toss pots pensions when they serve no purpose other than implement German policy?

  4. David

    Did the Japanese negotiators really run rings around the US in 1980s, given the Plaza accords and Japan’s decline ever since as an economic power?

    They were once the second economy of the world, and they were rivalling the US in every major technology. That was twenty five years, the internet revolution has passed them by and Samsung is the new Sony. The Nikkei 225 is currently trading at 17,000.

    1. Yves Smith Post author

      I was working for Sumitomo Bank, then the heart of the most powerful Japanese keiretsu, during the bubble years, as the first Westerner hired into the Japanese hierarchy.

      You seem to forget that Japan was and still is a military protectorate of the US. Go read Clyde Prestowitz, an advisor to the Reagan Administration, who wrote in considerable detail in the 1980s how Japanese trade negotiators ate the USTR’s lunch. It was embarrassing how outmatched they were.

      The Plaza Accord took place after the dollar rose over 50% versus the yen after Volcker succeeded in curbing inflation in the US. The speed of the move produced distortions lots of place (I saw it in London in 1984, working on a Citibank study). The US auto industry lost tons of market share to the Japanese that it never got back. The Plaza Accord was to offset some of that impact and a major aim was specifically to increase US exports to Japan.

      That did not happen despite the degree of overshoot on the currency move, which led to the 1987 Louvre Accord.

      Japan was under pressure to 1. Become less export driven, which meant have more of a consumption-led economy. Pretty hard to do in a country where just about everyone lives in itty bitty apartments (this is not an exaggeration, you’d be shocked at how small and spartan a $5 million apartment in Tokyo circa 1987 was) and 2. Deregulate its banking system so as to make the world safer for the likes of Goldman Sachs.

      Japanese banks were shockingly unsophisticated. Deregulating them rapidly led quickly to insane leveraged speculation.

      And the Bank of Japan’s bright idea for promoting more consumption was to choose to stoke asset bubbles, with the idea that the resulting wealth effect would produce more domestic consumption.

      The bubble and its aftermath was what wrecked Japan. Japanese leadership, both government and private sector, was preoccupied with contending with its effects.

      Japan has always valued social cohesiveness over maximizing income. Remember that they turned away the black ships in the 1800s? So you are judging them by your standards, not theirs.

      1. RBHoughton

        I should like to add NC’s previous endorsement of the book “Princes of the Yen” as the definitive guide into what occurred in Japan post-war.

        1. DarkMatters

          For those like myself who find the cost of the book a little pricey, or who’d like a preview before investing, there’s an eponymous video you can find on you tube:
          (Comparison appreciated from anyone who’s seen the video and read the book.)

          “Everything I needed to know I learned on youtube.”
          …except for what I pick up here.

      2. Left in Wisconsin

        I came to the UAW shortly after the famous Magaziner (yes that Magaziner) analysis in 1984 that showed the Japanese auto companies had, IIRC, something like a $2000 cost advantage in manufacturing a $12000 vehicle. We pissed and moaned about exchange rates all the time, but everyone who went to Japan to see what was going on came back stunned by how productive Japanese auto workers were, and flabbergasted by how the Toyota Production System (the origins of today’s lean production) had succeeded in both lowering the cost of parts and increasing quality. We pretty much knew the jig was up then. Everything since has mostly been about managing decline humanely – i.e. trying to allow as many as possible to reach retirement age with some kind of pension.

        I guess it’s true that a doubling of the international value of the yen at the time might have made US-built cars competitive with them – American cars at half the price of J cars. But I don’t think it’s correct to attribute the Japanese manufacturing advantage at the time primarily to currency manipulation.

        And I tend to think that the situation re: China today is similar.

        1. Paul Tioxon

          Lee Iaccoca favored government health care insurance during the the Clinton years and famously said over and over again on the evening network news at the time, that cost of health insurance for all American made cars included health care, among the very best health care, for the rank and file employees of General Motors. You could do whatever financial engineering you’d prefer, but nothing would change the objective conditions that the private sector paid for health care and carried that cost and the Japanese had a government funded plan, whose cost was not carried directly on the books of auto manufacturers or any other manufacturers. To this day, all private health care benefits are costs carried by corporate America to whatever small extent they still offer these benefits. It would greatly reduce the burden not only of the private sector, but state and local governments as well, who usually carry these costs as well and even into retirement. School districts, public universities any public servant is usually compensated with a health care plan into retirement. By going to a Medicare Universal Single Payer system in the US, all of those costs would be dropped by the private sector as well as much of the public sector. It would still have some payroll buy in just as Social Security and Medicare do today, but overall, it would be much cheaper to run and less of a burden with the costs spread out over the entire population.

          1. Left in Wisconsin

            Marina Whitman was chief economist for General Motors during most of my years in Detroit and she was famous (to us, anyway) for opposing national health insurance despite the demonstrated benefits to her employer, including the fact that they spent much less on health care in Canada than they did in the U.S. That is when I first came to see that there can be a distinction between employer interests and capitalist class interests.

  5. Clive

    For Japan of all countries to be lecturing anyone about the need for free movement of people (a line in the sand for Single Market access, the Japanese will know this) is a sign of the crazy thinking that passes for geopolitical strategy these days.

    1. flora

      Yes, I agree. (i.e. Japan’s historical and current regard towards gaijin, or “foreigner”) My own take, which may well be entirely different from yours, is, starting from the quote :

      Moreover, the Japanese trade negotiators, who ran rings around their US counterparts in the 1980s and appear to have come out very well in the TPP talks (having gotten major concessions independent of the deal getting done) look to have decided to influence the talks while the UK’s position was still in flux….”

      My comment: if it goes wrong, who will the Japanese call? The 6th fleet? HRM navy? And yes I’m mindful of Engel’s theory of historical materialism. My question: does materialism override all else? In economics it may. Should economics override all else?
      Well, that’s the question.

      1. Clive

        I do agree. Despite a fair amount of bellyaching, Japan enjoys being both a U.S. protectorate that also has a huge amount of foreign policy freedom. I’d go further that, with the nod-and-a-wink approval to re-militarize it has the U.S. wrapped around its little finger. Not that I blame it at all, they have been wily negotiators.

        I’ve a suspicion that Japan — correctly — sees a Brexit’ed UK cozying up to China (after pee’ing off the EU and disobeying the royal commend from President Obama, bad voters, baa-ad, baa-ad voters, we’re running out of countries to try to make nice to) so Japan is sounding an alarm about the potential for the UK to be welcoming to China to the detriment of Japan (the UK has had surprisingly long and close links to Japan with the result being a fair amount of foreign direct investment coming in).

        Yes, to the elites, it is simply all just about the money. Which might well be the reason why the elites lost the Brexit vote.

        1. Older & Wiser

          So Brexit now means that the UK has to either
          (1) be blown away into oblivion (certainly possible) or
          (2) cozy up with China / Russia and their sphere of influence

          It also means that the UK and the US have thrown their “special relationship” under the bus.
          So Leavers must go back to the drawing board (if they ever had one) as Plan B and Plan C are needed right NOW

          The EU is breaking itself apart at the seams.
          Vladimir Putin must be salivating

        2. John Rose

          the UK has had surprisingly long and close links to Japan with the result being a fair amount of foreign direct investment coming in

          Is there any other country outside the Commonwealth but Japan that drives on the left side of the road?

          1. I Have Strange Dreams

            Bhutan, East Timor, Hong Kong, Indonesia, Ireland, Macau, Nepal, Suriname, Thailand, Turks and Caicos Islands, Virgin Islands (US), Zimbabwe. I think.

      2. vlade

        They don’t have to call anyone, except for the managers of the car making plants in Midlands with instructions to relocate.

        Yes, Japan is definitely not a free-movement country. So what? How does it affect their investment in the UK? Japan is very mindful of its businesses. It will up the sticks and move, and there’s nothing UK gov’t can do (see Tata steel running rings around the previous UK gov’t – where, ironically, EU rules on cheap steel imports from China could have saved it if UK didn’t torpedo them)

        Is there a threat in the letter? Yes. But the threat is a fact, so you can’t just wish it away.

        1. Clive

          Yes, the threats are definitely coming thick and fast. But does threatening behavior make its target more or less likely to comply? They might well work in the short term, but eventually the threatened works out that the more is given, the more is demanded. And what do threats do to relationships — make them more effective or less?

          I’m starting to get genuinely shocked at the amount of pushing and shoving that the “strong” countries (the ones with some sort of leverage over others, in other words) are dishing out on the “weaker” ones just so “everyone” can continue to “enjoy” the “benefits” of “free trade”. Germany, via its stooge the EU Commission, roughing up the Republic of Ireland over Apple’s tax deal is in the same class, giving a good kicking to the Republic for engaging in precisely the same variety of beggar-thy-neighbor mercantilism that Germany does so well.

          I’m not normally give to pessimism, but I’m keeping an eye out for someone shooting the Archduke Ferdinand.

          1. vlade

            I have said at NC before – sovereignty and freedoms are nice concepts, but are always limited by the goodwill of the strongest. People ignore this at their own peril.

            1. tegnost

              yes, it’s sovereignty and democracy (your use of freedoms is more accurate) vs. international economic integration (that pits countries against one another in a race to the bottom as financiers chase comparative advantages around the globe)
              I’ll reference a different chris from 9/6 links here and restate the point that obama’s “populists” are the people who don’t have the right to “protectionism” from those marauding hordes, the banksters and their free market of unimpeded capital flows across borders. It’s no wonder, really, that they think they run the whole show, and that sovereignty and democracy are just pretty shiny things, no different than the team colors on the football field.

  6. William C

    The thing about Brexit, as I see it, is that it may not matter to a lot of Britons what happens in the real world as the Eurosceptic press will either tell them:

    1. Everything is now wonderful, regardless of reality.

    2. If they will not believe it is all wonderful, then it is all the fault of those dreadful foreigners.

    The power and mendacity of the UK press should never be underestimated.

    A member of my family is married to a UK journalist who has worked for two world famous UK quality papers. I once had a conversation with him about the UK press and morality. He was very frank – you leave your morals at the door when you go into the office in the morning.

    1. RabidGandhi

      Frankly, just as disgusting is the other side of the British press equation, as the gloating at the Guardian shows. The great thing about the Brexit vote was that it told the ruling class “experts” to go screw. Now it turns out that said ruling class booby-trapped the roach motel they set up, and just as we saw with Syriza, the buffoons leading the parade did more to disinform the rightly indignant British population than inform them.

      Now that the booby-traps have sprung leaving 53% of Britons in the lurch, the bubble encrusted chattering class is having a day of it playing its favourite sport of denigrating the rabble. Heads they win, tails we lose.

      PS Yves, I once suspended an employee for two days (with pay) for submitting a report whilst on holiday; we might have to do the same in your case :)

      1. a.matthey

        I strongly disagree. Booby-traps are hidden. None of the consequences of Brexit were hidden. There were clears for anyone to see. They just willfully blinded themselves. And William C is right. If they go for Hard Brexit (not being part of the European Economic Area), people will suffer and blames immigrants,refugees, … a.k.a the others. The rabble deserve some mockery.

  7. gonzomarx

    the lord mayor of the city of London was out doing press about the Japanese letter and sign that it’s been taken seriously, also May has used some lawyerly wording about free movement recently.
    I think reality is beginning to bite

    1. Coulie

      Be very careful what you wish for if you are implying that Brexit might be rolled back. If Brexit does not happen Nigel Farage will return from retirement and in the next General Election UKIP will sweep the north and Labour will be dead. He will also further increase UKIP’s MEP count in the next European Election when EU outers from other EU countries are also likely to do very well. By far the most sensible outcome of Brexit negotiations would be a quick divorce and a sensible deal on free trade between the UK and the EU. The EU gets rid of a pain in the arse and the UK regains its right to do trade deals with other countries – on its own I bet the UK could do a deal with Canada a good deal faster than the 7 years it has taken the EU. What’s not to like about such an outcome, especially as the UK buys far more from the EU than vice versa and would certainly remain militarily involved through treaties and alliances.

    1. Pavel

      A flip side to this, perhaps not terribly relevant:

      –“Why do men pay prostitutes?”

      –“Because they leave.”

      I guess the take-home message from both is to be careful of alliances, amatory, financial, sexual, or otherwise…

      With regard to the actual subject at hand, it is certainly true that (as the Leavers state) the “Common Market” that the Brits lasted voted on decades ago bears no resemblance to the bureaucratic and greatly-expanded monstrosity that now exists.

  8. PlutoniumKun

    It seems that the country doing the least work to make Brexit work is in fact the UK. I don’t think there is any doubt but that all the major EU countries and major external trading nations are working feverishly to work out the issues and to ensure that if there are any benefits going, they will win them. It is in London that there seems this strange delusional paralysis. There seems to be a view (not just in government, but across the elites), that if they play for time ‘something will come up’. I have no doubt that by the time they do start to get their act together, a whole network of private deals and arrangements will have been made behind the scenes, and most of these will involve deciding who gets which chunk of the cake. Everyone sees this as a huge self inflicted wound, and they will not approach the UK as helpful allies, they will approach as sharks circling a bleeding fish.

    Just as one little example of a potential landmine which is about to explode in the face of British business, almost no attention has been given to the variety of EU directives, most notably 36/205/EC, which deals with professional qualifications across the EU. A whole swathe of UK qualifications, most notably in medicine and construction will cease to be recognised across Europe, which means that any UK company bidding for work will find that its UK workforce will simply not be recognised as having recognised qualifications. This, for example, will rule out all UK architectural practices from bidding for any public funded work in the EU (this includes private projects with public grants). This guillotine will fall the moment the A.50 Declaration is submitted. I’ve heard anecdotally that there is disbelief within many, if not most of the affected professions that it will have an impact, but they are deluded if they think this is the case. Even if public bodies choose not to enforce the directives, losing bidders will immediately take to the courts to make them do so.

    1. vlade

      I’ve been screaming from the rooftops that Mutual Recognition Agreements (which this would really fall under) are way more important that some tariffs, but tariffs are easier to understand and easy to solve, so they get the spotlight.

      1. PlutoniumKun

        Yes, you are quite right. There is a whole tangle of professional recognition agreements that will have to be renegotiated.

        The important point though, and one which I think is not yet recognised widely is that the threat of legal challenge to any contract awarded to UK companies, or even non UK companies with a lot of UK staff, will dissuade public and private bodies all over Europe (not just EU) from awarding contracts to these companies, or even inviting them to bid. This will not be a slow process, it will happen as soon as the A50 Declaration is made. It will be potentially devastating for professions such as architecture.

        1. rusti

          Could one of you indulge me and elaborate a bit more? If this is an EU “Directive” and it’s up to each member state to implement, does that mean that it might not hinge too heavily on EU membership if countries like Norway and Iceland are already covered? What sorts of projects might be subject to such lawsuits? Wikipedia says:

          Directive 89/48/EEC covers the mutual recognition of qualifications in recognised professions that require a University degree or equivalent. This directive is implemented in the UK by The European Communities (Recognition of Professional Qualifications) (First General System) Regulations 2005 and by similar regulations in other member states.

          Directive 92/51/EEC covers the mutual recognition of qualifications in professions regulated below degree level. This is implemented in the UK by The European Communities (Recognition of Professional Qualifications) (Second General System) Regulations 2002 and by similar regulations in other member states.

          The Directives referred to above have been consolidated under Directive 2005/36/EC. This was to be transposed by Member States in October 2007.

    2. Cry Shop

      Many EU standards, which then became ISO too were lifted nearly whole from the cloth of BS (British Standards), giving the British consulting/services and high-end engineering/manufacturing significant advantages, among others. All that good will in EU standards and leverage with ISO is at jeopardy or already gone. DU must be dancing a jig.

      While the EU to some may be a un-responsive, anti-democratic monolith, issues like de-accelerating climate change are not going to be solved by retreating behind borders. How will we live in this new world? Not where borders no longer exist, but where they have become, ever increasingly, the impediment to safety of our health and wealth? This is going to be one of our real challenges in the future!

      “Recognize the phrase ‘national interest’ as a synonym for ‘self-interest’ and you will find no moral obstacle that cannot be removed from the highway of ambition.” L Lapham

    3. rusti

      Thanks for the insight, as always. I was trying to follow up on this and couldn’t find anything like 36/205/EC. Is it 2005/36/EC?

      1. PlutoniumKun

        Rusti, you’re quite right about that, and thats a warning that I should never post after a glass or two of wine.

  9. Toolate

    Seems to me that a fair % of leave supporters might just find this sort of pressure as further evidence for their own position…
    Given Japan’s famously closed borders to foreigners they would be well justified too IMO

  10. Chauncey Gardiner

    Seems to me that the majority of British voters voted for national sovereignty and democracy, placing those values above economic interests, whether their own, those of the City of London and the British elite, or the EU and global elite.

    David Malone, who said he personally voted for Britain to remain in the EU, wrote an opinion piece back in early July. In that post Malone criticized a writer who, like himself, had also favored remaining in the EU, for criticizing the character and intelligence of those who voted for Brexit. As an American, I felt Malone provided some worthwhile advice in how to be regarding those who have a different public policy view than oneself.


    This is not to diminish the potential severity of the economic issues that are being presented to the UK in the wake of the Brexit vote.

  11. Yata

    If this were a fair world, the UK could hold a copy of that communique, keep that famous stiff upper lip and press on, pray Miss May isn’t a fall-on-her-sword type, weather these growing pains, and hopefully one day be able to hand that copy back to those crappy little vultures.
    Let them follow through with their threat. It would be my guess that:
    a) The cost to move production is a factor they will ulimately regret
    b) Access to a dwindling EU economy, after the migration, won’t be everything they hoped.
    c) They wouldn’t have issued that communique had this not been the case.

    1. vlade

      Undoubtedly issuing the letter cost them little, except some UK goodwill. But the cost of operating the factories in the UK (or rather exporting to EU) will increase, and it will be compared to building another car factory in say Czech Republic/Slovakia, where government will eat up some of the costs of setting it up. Moveover, the cost of the factory is mostly capital (you can have a fairly large factory with just a few hundred workers), and capital is dirt cheap right now.

      We can’t be sure Japanese (and others) will move – but ignoring it entirely is a wishful fairyland thinking.

      1. Left in Wisconsin

        Still, sunk costs are sunk costs. It costs real money to build new factories, even when that money can be borrowed at 0% – or less!

        1. vlade

          But economy tells us that sunk costs should be ignored, because they are, well, sunk :)
          Of course, people are not rational, so don’t ignore them..

          Anyways, I assume you meant capital invested, rather than sunk costs. and there the question stands slightly differently. What is the return on the invested capital in the UK vs. building a new factory somewhere in Europe? If (say) margin on every UK car would be 1000 GBP less than on a new factory build in Slovakia, it probably wouldn’t make sense, as at a maintained production of 200k units it would take 11 years to recoup. If the margin is 2k, then all of sudden it’s likely to make sense.

  12. TG

    I respect the Japanese people, but in this case their government is totally hypocritical and disgusting.

    Japan has virtually ZERO immigration. ZERO. And they demand that Britain have open borders so that Japanese subsidiaries in Britain can get cheap labor?

    I have a suggestion. Britain – and the EU – should DEMAND that Japan have free movement of labor or trade will be cut off. Yeah, let’s see how well the Japanese like cheap labor in their own homeland, right.

    1. vlade

      So what? What matters, as I wrote above, is who has the leverage. EU actually has leverage – it could put punitive tariffs (or rather easier raise a lot of NTB) and make it harder to impossible for Japan to trade on its market.
      So it’s both about leverage and the willingness to use it. Japan has leverage with the UK, and is saying it’s willing to use it. Whether it actually will be willing to use it is a different story, but it definitely does have the leverage.

  13. Propertius

    I wonder if Britain would be a in a stronger negotiating position had Mrs. Thatcher and her successors not completely hollowed out the British industrial base.

    1. St Jacques

      ;You are a mind reader Sir! Those were my thoughts too. This has revealed what a joke the UK is after 37 years of Thatcherism.

    2. vlade

      Out of interest, what UK industrial base are we talking about? Coal mining? Steel manufacture? Those were in decline, and would continue to be in decline, even if the state continued to throw tons of subsidies their way (IIRC, it was uneconomic to reopen UK’s coal mines even during the recent coal boom).

      Britain has a significant advantage in jet and car manufacturing in 1950s, which is managed to almost entirely squander in 1960/1970 (Rolls Royce jet engines being an exception).
      It has little to no electronics industry until 1980.

      I’m not arguing that Thatcher was a savior – a lot of her policies created unequalities,North Sea money could have been better spent than on the tax cuts, but the UK heavy industry was on its way out.

      1. St Jacques

        Certainly there were longstanding problems in UK industry. Not talking about coal. However the point is that the Thatcher revolution has accelerated the decline. What is the UK’s great advantage IN the EU? Cheap, unprotected labour, and a dodgy financial market for fraudsters and crims. LOL Take the UK out of the EU and the hollowness of the UK’s boast of the fifth economy in the world echoes all the way to Japan and back.

  14. jabawocky

    The obvious insanity of brexit now starts to become apparent, and its worse than I ever imagined. The EU is a complex system and the idea that it can be understood in enough detail, in a few months, to even formulate a strategy is apparently delusional.

    Then what criteria to use to optimise a strategy? a second intwined but insanely complex question, riven with the self-interest of various actors.

    Then we have the obvious inability of our leaders to grasp international policitics and trade.

    And incredibly, mind-bogglingly, still some people think its a good idea!

    1. vlade

      it’s a good idea in theory. In theory there is no difference between theory and practice. In practice there is.

      But I’d really say that in practice people didn’t vote on whether this was or wasn’t a good idea.

  15. Praedor

    Free movement of immigrants. Say what they MEAN: free movement of slave labor from one “country” to another, as needed, to drive down wages in desired “country”.

    I call bullshit on Japan as well. Where’s THEIR “free movement” of immigrants? Japan is extremely insular (and I applaud them for this…makes sure they can have FULL control of their own country and culture and not bland down to the lowest common denominator).

    In thge modern world, meaning the developed west, there is NO reason for free flow of immigrants because they are MODERN nations with educated populations that CAN do ALL the tech jobs employers claim can only be done by foreign H1B workers (ie, 3rd world desperate workers willing to work for a pittance, driving down real wages for natives, destroying the overall living standards of their new nation). Screw that.

    Companies need to be punished (via corporate tax penalties) for low-paying their labor while high-paying their parasitic executive golfers and cocktail party “leaders”.

    Here’s a simple rule for non-people corporate entities: you use the labor in the local environment AS IS and pay them proper LOCAL WAGES. You do NOT go into a 1st world country and demand they drop to 3rd world wages.

  16. Aussie

    I believe this may be getting a push by the NWO, not Japan per se, and regardless, for freedom and prosperity, the UK should give them back, “the middle finger”.

  17. Nick Dortz

    I’m a little confused. This forum seems to suggest that the British government suddenly decided to leave the EU with little thought. Whereas surely it was the ‘people’ wot done it? And blindsided the government at a stroke.

    The problem is the government has been handed a poisoned chalice, and is trying to work out what to do with it. That won’t be done in 3 months, or even 10 months. The idea that they’re ‘unprepared’ is ridiculous. Only a couple of years ago the Leave campaign was considered a lunatic fringe.

    The fact is, Brexit is a reality that has to be dealt with as professionally as possible. The problems, implications and decisions that are involved are almost too complex to comprehend. Sure the various parties may make demands, but they also need to realise that it takes time to work out legal issues and other ramifications.

    The deal is done. There is no turning back, so forums like this which assume the British negotiators are somehow being negligent in their attitude is rather unfair. IMO.

    1. Altandmain

      The answer is that the British government should have been aware that there was the possibility of a yes vote passing. At that point, they would have laughed and finger pointed the no voters.

      Instead, they were tone deaf to the concerns of their own citizens and we’re caught completely unprepared for the end result. Now they are scrambling. They had arrogantly and ignorantly assumed that people would vote to stay.

      This reeks of incompetence and frankly, greed in the case of the wealthy classes. They got greedy and ignored the concerns of their citizens. Now everyone is paying the price of their ignorance and greed.

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