Brexit: a broader perspective (2)

Posted by Paul Samael on Monday, May 23, 2016 Under: Random thoughts

Having looked at the security position in my last post, I'm now going to look at whether the EU is good for trade.  The remain side says it is (and prophesies economic doom if we leave), whereas the leave campaign say we’d do better for ourselves outside the EU (and prophesies economic doom if we stay).  Both sides have been overstating their case whilst lobbing statistics at each other - so in this post I’m going to try to keep the numbers to a minimum and focus more on practical examples.  Because even if you don’t trust the numbers coming out from either side, I think you can still form a judgement on trade based on what difference the Single Market makes to a business wanting to export to the EU.

The EU and trade

Let’s say you want to export Scotch Whisky.  If you wanted to export to countries in Asia (outside the EU, obviously), you would currently face the following barriers:
  • Tariffs: Import tariffs of anything from around 10% (e.g. China) to 150% (e.g. India, Indonesia).  Tariffs of 150% will massively increase the price at which you – or your distributors - can sell in India or Indonesia.  This means you are unlikely to be able to sell that much in those markets (whereas in China, sales have boomed since the tariff - which used to be very high - was lowered).
  • Export-related paperwork:   You will also need to comply with various bureaucratic requirements, such as completing an export declaration like this one. The cost of this can be hard to quantify and varies depending on the country to which you are exporting, but it is undoubtedly an extra hassle – and deters some businesses from exporting to certain countries. 
If you want to sell into an EU country, neither of these applies – because the Single Market is a no tariffs area (for trade between Member States e.g. UK to Germany) and a customs union. So overall, selling your whisky into the EU is likely to be a lot less hassle than exporting to a country like India.  This is one reason why many foreign companies e.g. car manufacturers have set up plants in the UK – because it means they too can benefit from the UK’s market access (see this article).

Another general problem with trade is that countries can erect other forms of obstacles, known as “non-tariff barriers” or NTBs in the jargon.  For example, in Germany, all beers used to have to comply with a “purity law” stipulating how the beer was produced.  If you didn’t make it the German way, you couldn’t call it “beer”.  Fairly obviously, that made it quite difficult for non-German brewers to market their products in Germany.   An EU court ruling led to the law being modified to remove what was in effect a measure protecting German brewers against foreign competition and reducing choice for consumers.  NTBs are generally more difficult to remove because they take many forms, whereas import tariffs are much more obvious and therefore easier to target - but the EU has been quite successful in getting rid of discriminatory NTBs (at least in relation to goods – less so in relation to services).

What’s the trade argument in favour of Brexit?

The main argument of the pro-Brexit camp in response to all this seems to be that the Single Market is overrated and that leaving the EU would allow the UK to strike trade deals with other countries more quickly than the EU is able to do;  the resulting gains, it is said, would more than offset any short term losses from leaving the EU.  Brexit campaigners also correctly point out that smaller countries such as Iceland or Switzerland have managed to do trade deals with China.  However, those deals are more favourable to China than they are to Iceland or Switzerland – not surprisingly, because China is a much, much bigger market than they are.  The main point of belonging to a larger bloc like the EU is that with a market of 500 million consumers, you are in a position to get a much better deal on trade – for example, you can to push much harder for reductions in tariffs such as the ones mentioned earlier and for the removal of other “non-tariff” barriers to trade.

Doesn’t the EU take ages to negotiate trade deals?

It has been suggested that the EU has a poor record on negotiating trade deals but there is not much evidence that, on average, other large countries or trading blocs are able to do deals much faster than the EU – see this research from Open Europe, a think tank which has broadly euro-sceptical views (although it is also sceptical about the merits and feasibility of Brexit).  The main reason that trade deals take time to negotiate is because they are long and complex, dealing with hundreds of different products and services – so it would take some time to put alternative arrangements in place, especially whilst the UK government was preoccupied with negotiating our exit from the EU.

Is trade with the EU really such a big deal these days?

Brexit campaigners also say that our trade with the EU is decreasing – so it’s no longer such a big deal.  They are right that the percentage of trade with the EU has gone down recently.  But it is still well over 40%, worth over £200 billion a year (see this article, from impartial fact checking site full facts).  That is certainly not a trivial amount, nor is it likely to become a trivial amount in the foreseeable future (because most countries have significant amounts of trade with their nearest neighbours).  If we were to leave, businesses which export to other EU countries would be likely to face additional costs and would have to either put up their prices or accept lower profits.  Estimates suggest that the cost in relation to tariffs alone would be in the low billions, assuming there is no trade deal with the EU on Brexit.

But surely we would be able to negotiate a good trade deal with the EU on exit?

Such adverse effects could of course be avoided if we managed to negotiate a good trade deal with the EU – which is what the pro-Brexit camp insists we would be able to do, based on the amount that French and German companies export to the UK (the logic being that they would have a strong interest in not damaging that trade).  There is some substance to this last point and for that reason, some form of trade deal ought to be doable.  However, the price of such a deal for the UK may be hard to stomach.  For example, in return for its trade deals with the EU, Switzerland has had to accept a significant amount of EU regulation without having any formal say over it at all.

There is also the hard political reality that the EU is under some strain at some present and is likely to feel even more insecure as a result of Brexit – leading to a serious shortage of goodwill towards the UK (see the results of this Open Europe "war-game" of Brexit negotiations) .  Other EU countries, particularly France and Germany, have a great deal invested in the EU as a project and do not want to see it collapse.  They and other member states are likely to be particularly concerned that, by giving the UK a good deal, other countries could be encouraged to leave – further weakening the EU.  Faced with what they perceive to be an existential threat, the remaining EU members are more likely to close ranks - and refuse to give the UK a deal which is any better than those already on offer to the likes of say, Canada (even if that involves subjecting some of their own exporters to increased costs).  Canada’s deal isn’t too bad, but in terms of removing barriers to trade, it wouldn’t give us the same benefits we have now and our services industry would be considerably worse off – and looking at it purely in trade terms, it is hard to describe it as a change for the better and therefore an advantage of leaving.

What about UK businesses that don’t export?

This post has all been about trade with other countries -  and as Brexit campaigners point out, most UK businesses do not export (although this one, superficially compelling, statistic doesn’t tell the whole story).  So in my next post, I will be looking at the impact of EU membership on the domestic economy.  Brexit supporters also argue that the EU ties us up in red tape – and that the benefits from removing all that unnecessary regulation would easily outweigh any short term hits that the economy would take from leaving.  So I will also be looking at the evidence for whether they’re likely to be right about that (although as pointed out above, if we want a trade deal with the EU, we may have to continue to accept quite a lot of existing EU regulation – which will hamper any efforts to deregulate).

In : Random thoughts 

Tags: brexit trade eu european union 
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Paul Samael Welcome to my blog, "Publishing Waste" which will either (a) chronicle my heroic efforts to self-publish my own fiction; or (b) demonstrate beyond a scintilla of doubt the utter futility of (a). And along the way, I will also be doing some reviews of other people's books and occasionally blogging about other stuff.
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