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In Conversation with … Ruth Lea, Chairman, Economists for Britain

 

 

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Better Off Out – Whatever happens at the next General Election, the question of Britain’s relationship with the EU will not go away. And if the Conservatives win, then negotiations followed by an in-out referendum, will be on the cards. Where would that leave Britain in terms of international trade?

Ruth Lea – The inexorable decline of the EU’s share of the global economy is well-known. Indeed European Commission President Jean-Claude Juncker recently noted that, by the middle of the century, Europeans will represent just 7% of the world’s population. And he said “…we are the smallest continent. Our relative part of the global GDP will shrink. Not one single European country will be a member of the G7 in 25 years from now. We will disappear in terms of our economic weight.”1 Whilst some may challenge the details, the general gist is surely right.

It is increasingly apparent that Britain needs a radically different economic relationship with the EU to fully benefit from the changing global economy. We need to be free to negotiate our own trade deals with favoured partner countries, which membership of the EU’s Customs Union prohibits. And we need to be free to amend and/or repeal business regulations as circumstances change, which membership of the EU’s Single Market prohibits. In the changing world of the 21st century, nimbleness will be rewarded, whilst regulatory sclerosis will be punished. Suffice to say, the EU is an extraordinarily cumbersome institution when it comes to both negotiating trade treaties and/or amending legislation. If said negotiations do not achieve radical reform, then the UK has nothing to fear from leaving the EU.

 

BM – There is currently a great deal of speculation about what would be the best option for Britain if “Brexit”. Would it be the WTO, Swiss, Turkish, Norwegian or any other?

RL – Possibly, but may I suggest we should really be concentrating on what we know would definitely happen and being clear as to what would also be desirable.

The first point to make is that the UK’s default position would be trade under WTO rules, unless specific trade treaties had been negotiated. The UK would resume the full rights and responsibilities in all matters covered by the WTO Agreements including tariffs and other trade related matters.

Trade can flourish under WTO rules. Take, for example, China. China joined the WTO in December 2001 and does not, as yet, have any special trade agreement with the EU. And yet Sino-UK trade has boomed. In the decade 2003-2013, the UK’s exports of goods and services increased nearly 5-fold to China, but increased by only 47% to the EU and 74% globally. And UK imports from China rose nearly 4-fold, but grew by only 52% from the EU and by 69% globally.2

UK-Chinese trade was, therefore, significantly more buoyant than UK-EU trade despite the alleged allure of the Single Market and the Customs Union. This underlines the fact that trade is overwhelmingly driven by commercial opportunities associated with economic growth. It is, in addition, obvious that no country has to be in the EU to trade with the EU. China is not “locked out” of the Single Market! Moreover, China has to deal with the EU’s

product regulations and customs procedures when exporting to us. And, conversely, we have to deal with China’s product regulations and customs procedures when exporting to them. These are the facts of commercial life.

If Brexit the UK would, of course, face the EU’s Common External Tariff (CET). According to a House of Commons Library Note the average weighted tariff is now about 1%, though there are tariffs of nearly 10% on cars, for example.3 In addition, there are no tariffs on services and about 40% of total UK goods and services exports were services in 2013.

BM – Can we improve on the WTO option?

RL – While trade can flourish under the WTO rules, the UK would be in a perfect position to negotiate preferential agreements with favoured partners. We are a large and prosperous market and tend to run significant trade surpluses with key partners – not least of all with the EU, in general, and with Germany, in particular. I cannot envisage any German exporter, for example, wanting any disruption to or diminution in their trade with the UK. The notion that we would not have the “clout” to negotiate is simply bizarre. Moreover, it would surely be easier to negotiate agreements bilaterally compared with the EU28, where competing country interests and sensitivities can dilute, disrupt and delay the negotiations.

Negotiations for preferential agreements should, therefore, be pursued with, firstly, the EU itself, secondly, countries such as Korea which have bilateral agreements with the EU (which we would lose on Brexit) and, thirdly, countries including the USA, where the trade negotiations are struggling, and Australia, where there are no negotiations at all.

 

BM – There is much talk about EFTA, where might that fit in?

RL – I think that the UK should consider re-joining European Free Trade Association (EFTA). Not merely would we then have preferential access to the EFTA countries’ markets, we would also have potential access to EFTA’s very impressive network of trade agreements between EFTA and third countries.

BM – Are there any elephant traps the UK would need to avoid on Brexit?

RL – There are two to avoid. The first is the “Turkish option” within the EU’s Customs Union. As already implied under this option we would still be unable to negotiate our own trade deals, a big drawback.

The second is the “Norway option”, within the European Economic Area (EEA), based on the Single Market and its “four freedoms” goods, services, capital and labour. (Incidentally, if we left the EU we would also leave the EEA as we are currently members of the EEA by virtue of our EU membership.) As already implied under this option we would still be unable to amend and/or repeal business-damaging Single Market regulations, the costs of which arguably outweigh the benefits.4 The other major disadvantage of the EEA is that the UK would still be unable to develop its own migration policy, preferably one based on non-discrimination between EU and non-EU citizens.

 

References

 

EUObserver, “Juncker: ‘time to deepen European integration’”, 17 March 2015.

ONS, “United Kingdom Balance of Payments: the Pink Book”, 2014 edition. The export figures relate to both goods and services.

House of Commons Library, “The economic impact of EU membership on the UK”, Standard Note SN/EP/6730, September 2013.

Business for Britain, “Britain and the European Union: what business thinks”, November 2013, concluded that by 46% to 37% businesses thought that the costs of Single Market regulations outweighed the benefits.

 

This article first appeared in the Brexit eMagazine published by Better Off Out. If you would like to receive future issues of this eMagazine, please email rupert@tfa.net

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