So what's a Customs Union when it's at home, eh?

Journalists who have suddenly discovered the term customs union and who seem to think it differs from the single market have taken to asking politicians whether we can remain in one but not the other.

For those who may be confused:

(1) A Free Trade Area is a number of countries which sell each other goods without imposing tariffs, quotas or other restrictions on such transactions.

(2) A Customs Union combines a Free Trade Area with a Common External Tariff, effectively discriminating in favour of other members and against non-members.

(3) The EU Single Market combines both of the above with a common regulatory and standards regime enforced by the European Court of Justice.

Not only is there no advantage to system (2) over system (1), it is disadvantageous because it prevents members doing separate, advantageous deals with non-members.

The reason for having (2) tends to be the price you have to pay to get (1), since various individual members may want protection against specific non-members or their products. Rather than a complicated mishmash of bilateral deals you end up with the same external tariff against all outsiders.

Therefore the question at issue is not 'Can we manage to stay in the Customs Union?' but 'Might we be forced to stay in the Customs Union as the price of keeping free trade with The EU?'

True, The EU is at present our largest trading partner, but it is also a sclerotic low-growth market with a moribund single currency permanently on the point of collapse, to which threat the only reply to date has been more and more debilitating austerity.

On top of this the single market regulations stifle innovation and investment in cutting-edge technologies which is the true remedy to stagnation.

The only thing we should want from The EU is free trade (in services as well as goods.) Having the government pay to get this (out of taxpayers' money) is futile; you might as well let the taxpayers pay tariffs directly.

Being cut off from the ability to strike deals with non-members defeats the whole objective of leaving the EU. It guarantees a worse position than we had before Brexit.

But as I've pointed out before, we already have free trade with the EU. We are not going to start a tariff war, since it's not in our interest. It's not in their interest either but they might still do it out of pique. Nobody would accuse the Present EU administration of acting sensibly. If and when they do raise tariffs, we decide how to respond.

Note to all those demanding a plan - You just read the only sensible plan. Until the EU decides what, if any, tariffs it will impose, NOTHING WHATSOEVER needs to be done or indeed can be done in response.

Scotland's Future

Imagine that you are a banker. (If you are not already a banker this may be hard, but please try.) On a certain day you have appointments with each of a newly divorced couple, both of whom require loans to help them on their separate ways. The divorce has been acrimonious and reported in the press. Partner A has repeatedly threatened to accept no responsibility for the debts incurred on their joint account, not even those incurred in making purchases on his own behalf. He has now changed his mind. Partner B has gone on settling all debts as usual. Bearing in mind that, as a banker, your first responsibility is the security of your own funds, to which of the couple will you be more inclined to lend?

Amongst all the sound and fury surrounding the launch of the White Paper 'Scotland's Future', one figure has received surprisingly little attention. It is projected that in the first year of independence the Scottish Government will require to borrow £4.4 billion.

This is the same Scottish Government that:

1. has repeatedly threatened not to accept a share of the UK national debt,
2. denies Scotland's responsibility for the actions of a Scottish Chancellor in raising the UK national debt in order to bail out failing Scottish banks,
3. is already spending beyond its means,
4. has promised yet more spending in pursuit of a fairer society,
5. is about to destroy Trident-related jobs by the thousand,
6. is committed to a currency union and thus will not be able to set its own monetary policy.

Are you still imagining that you are a banker? You are not of course a Scottish banker, since the major Scottish banks are no longer Scottish owned. You are a foreigner and this Scottish Government is asking you for £4.4 billion. This year.  Alternatively you could lend to the RUK government which also needs a loan.

Bearing in mind that, as a banker, your first responsibility is the security of your own funds, what will you do?

Scotland's Currency in a Customs Union

In an earlier article I suggested that a currency union does not make market forces go away, it simply diverts them into other channels. It so happens that a customs union is already diverting these market forces into other channels, so there is a shortage of alternative channels left available.

A customs union means that partner economies have no tariff barriers between themselves but have a common external tariff towards non-members, thus in principle creating a single domestic market. Let us assume that Scotland is admitted to (or remains a member of) the EU and that the rest of the UK remains in the EU after 2017. The EU is a customs union.

Whilst the EU single market is not perfect, the RUK and Scottish markets have long been one. Not only are goods and services traded freely between the countries of the UK but workers and capital also move freely.

A larger domestic market enables firms to produce on a larger scale and so make efficiency savings. The result is faster economic progress than the member economies could have achieved separately. However for poorer areas, membership of a customs union comes with a downside. If they can, most people will want to sell goods and labour in places where they receive more for them. This means that for trade between richer and poorer economies to continue in the long term, one or more of three possible adjustments must be made.

1. The simplest adjustment is for the less developed economy to run a balance of payments deficit with the more developed. The more developed extends credit to the less developed, effectively transferring funds to finance the continued purchase of its own exports. But a customs union has a single market. Scotland currently has no more meaningful a balance of payments with RUK than Yorkshire has with Lancashire.
2. The second possible adjustment is for the poorer country to devalue its currency relative to that of the richer. This makes the poorer country’s exports cheaper and more attractive in the richer country, whilst the latter’s exports become prohibitively expensive in the former. But within a currency union, Scotland’s pound could not be devalued against RUK’s, nor could Scotland's Euro be devalued against Germany's any more than Greece's Euro can be.
3. The third possible adjustment is for employment and national income in the less developed economy to fall to a level consistent with its relative inefficiency. Because this depresses the internal economy rather than adjusting the economy's external relationships, it is far more painful and ideally should be a last resort, allowing the two external adjustments to take as much of the strain caused by the imbalance as possible. Unfortunately inside a combined customs and currency union this third adjustment is not the last resort, it is the only resort.

Taken as a whole, the Scottish economy is somewhat less developed than that of England. This is an observation, not a criticism. It is structurally less diverse and hence more vulnerable to swings in the markets for its major industries, a phenomenon exacerbated by a disproportionately large (and currently weak) financial sector and the temporary as well as highly volatile effects of North Sea oil.

The discrepancy between the Scottish and English economies is of course as nothing compared to that between the Greek and German economies. Yet Scotland still needs to take note of what has happened to Greece inside a customs and currency union.

Currently within the UK, the old industrial areas are poorer than the south-east of England, but economies of scale created by our currency and customs unions raise national income sufficiently for compensatory transfers from richer to poorer areas to be politically acceptable. It would be difficult to make such transfers to Scotland after independence.

In summary, I am not sanguine about any of the currency options facing an independent Scotland. Nevertheless, in the event of independence, one of the options must be selected. My judgement would be that a Scottish currency is the least of the evils, but that it requires preparation to start yesterday and much statesmanship from Scottish ministers.