TRADE

OK, so just a warning; this is by far and away the longest section of this website, so strap on a nappy, make yourself a nice cuppa (using EU regulation tea bags only please) and settle down in a comfy chair.

Whilst immigration appears to be the main concern for voters trade is clearly the issue that matters most to the nation's finances.

'The stronger our economy becomes the greater our ability to deal with any other issue that has a potential financial implication'.

Put very simply, the stronger our trade position the more money we earn as a nation, the stronger our economy becomes and the greater our ability to deal with any other issue that has a potential financial implication. In this respect trade is King (or Queen if you would prefer).

As we’ve already seen some of the trade arrangements that could be open to us are in any event linked to the insistence of open borders. An EEA based arrangement (Norway for example) only allows us access to the Single Market if we allow free movement of people. This arrangement also requires a funding contribution and conformity to EU regulation. On this basis if Britain were to leave the EU it is an unlikely route; it still has open borders, it still requires the payment of fees (although at a lower rate) and is still bound by EU law – in fact all the elements that constitute BREXIT campaigner’s reasons for leaving.

Much has been said about us striking our own deal that would be specific to the UK, and although in principle this could be possible, it’s maybe unlikely we could ever agree terms that would make it mutually beneficial; the EU has already said that they would not allow Britain to ‘cherry pick’ from the 4 freedoms of the EU (The free movement of goods and services, the free movement of people and workers and the free movement of capital) to broker their own arrangement. It’s all or nothing.

This naturally brings us to the question of how important the Single Market is to us. Without evaluating this we cannot make a judgement regarding balancing benefits against any associated costs.

The Single Market
The internal market in the EU (The Single Market) is intended to be conducive to increased competition and specialisation whilst also offering larger economies of scale and also allowing goods and factors of production to move to the area where they are most valued. This improves the efficiency and the allocation of resources. It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU. Around 50% of Britain’s trade in goods and services are accounted for by access to this market so it has been of great value to us in the past, but the real question is to its value in the future.

This is where opinions now divide. BREXIT campaigners insist that if you look at our trade within the market it shows a decline in value, but as always with such comments you need to look deeper than the sound bite. (CIVITAS report entitled ‘Where’s the Insider Advantage’). (1)

In this report the market has been evaluated by comparing two distinct periods; one examining the first 19 years before the market was created, the other for the 19 years after. Britain does better in the first 19 years - which actually would have been even more positive were it not for economic problems of the 70's when the shit hit the fan with such force that Arthur Scragill's hair never recovered. This therefore, goes some way to supporting the BREXIT view; well until you look at it more closely. Firstly, each set of data covers very different historical periods and as such one cannot readily assess the impact of external events and the structure of the UK and its economy during these times effectively; so it’s not a reasonable comparison anyway.

The information of most importance is an analysis of what UK trade might have been without joining the Single Market. This is not straightforward, but this has been done and most of the analysis suggests that EU membership increases trade between EU member countries relative to trade according to other rules; and this was not by a marginal amount. The figures suggest that trade in goods increased 73 per cent and trade in services 16 per cent between EU member states compared with a free trade area, (while there are no tariffs in a free-trade agreement, less harmonised relationships throw up other barriers). On this basis, even if you don’t believe the figure and add in a reduction to the percentage to account for possible errors, there’s no question the effect would still be positive. (2)

This argument (using the CIVITAS report) has been extrapolated into one you may have seen doing the rounds on social media and the press that was brought into the debate by Boris Johnson (as you’ll see later Bojo is making a name for himself as the biggest liar in this debate bar none). He claims that the report shows without question why the EU is of no value to us; the contention is that if countries outside the EU can export into the Single Market without the associated costs why would we stay in?

Well firstly, the figures give no indication of what the full costs are against what the value is. In other words you may earn $1 billion dollars from trade but what was the cost of administration and the legal and domestic infrastructure required to generate that capital; when all’s said and done the amount of money you have left to spend is all that matters (this of course may either be positive or negative for each country concerned when compared to our own cost, but no-one knows!)

Secondly, and most importantly, it’s not rocket science to understand that an emerging country at the start of their trading arrangement is more likely to see a huge increase in exports compared to one that already has established relationships in the same region. But in any event the main point is this; it doesn’t so much matter where Britain is on the list compared to what the income is. Yes, our percentage increase puts us towards the bottom of the list (for the reason I’ve already explained) but the amount of income we’ve generated from our relationship within the Market is above anyone else’s there; and that includes America and China. Vietnam’s increase over the period was 544% but the value was $0.4 billion (hardly enough to keep them in Bún for a day) whereas Britain’s was 81% but valued at $30 Billion. Which would you rather have? (3)

Vietnam’s increase over the period was 544% but the value was $0.4 billion (hardly enough to keep them in Bún for a day) whereas Britain’s was 81% but valued at $30 Billion. Which would you rather have?

The BREXIT campaign argument therefore does not stack up; it does not, with any credibility, show us that there is no ‘insider benefit’ at all - but what it does do is lead us to examine whether or not we could generate the same level of income (or even increase it) whilst benefiting from lower costs upon leaving the EU.

Trading outside the EU
The same report from CIVITAS does have some more important data we can look at. Again, one latched onto by BREXIT, is that it shows a slight decline in trade with member states within the EU and a large increase in trade with independent EU countries. It’s also true that our trade with other countries outside of Europe has grown. But whilst this does show a trend that we could maybe capitalize on after exit it belies the fact that there is a significant gap; the EU is still by far and away our most important trading partner, and whilst our other global sales are important they are the icing on the cake rather than the meat and gravy.

Supermarket sweep
To use an analogy; it’s like supermarket shopping. My wife and I go to Sainsbury’s for the vast majority of our shopping, not because we necessarily have a preference between the major supermarkets but mostly because it’s only a 5 min drive away, the prices are reasonable and we can get pretty much everything we need under one roof. The parking can however, be a problem and on certain days of the week it’s often stacked full of slow moving geriatrics who also insist on paying with vouchers at the checkout whilst talking far too much to the cashiers; but it doesn’t happen that often and in any event we can plan around it.

Sainsbury’s is the EU. Now, because of our love of continental cuisine we sometimes also need to shop at a series of specialist delicatessens to get the other stuff we need. This is more difficult to plan as each of these deli’s are not gathered together in the same town, parking is therefore even more difficult, the travel costs us money and the prices, although better value like for like, go up and down based on the currency exchange (I blame the EU) - not to mention of course I rarely understand a word the owners are saying; the delis represent the countries outside of the EU.

Can we not get the same stuff at Sainsbury’s? Mostly, yes, but it’s proportionally much more expensive and in any event we think it’s important to support independent suppliers (supermarket buyers can be bastardy to their suppliers…), plus it’s a nice afternoon out - assuming we don’t argue about which route we take and aren’t hit by one of those EU immigrants driving an old Datsun Cherry who doesn’t understand what a roundabout is.

So Sainsbury’s gets the lion share of our business and despite increasing our trade with our favourite delis year on year there is still a big difference in how we attribute the value of one over the other; and as far as I can see that’ll always be the case. We’ll always shop at Sainsbury’s and whilst the delis might offer us better value they are not without geographical and travel problems/costs and they could of course go out of business tomorrow.

'The Single Market is very important to us and, by value, is now the biggest trading market in the world with access to over 500 million people and valued in excess of $17 trillion'.

A better EU trading arrangement
There is no doubt then that the Single Market is very important to us and, by value, is now the biggest trading market in the world with access to over 500 million people and valued in excess of $17 trillion. (4)

If this is the case why can’t we just exit the EU and maintain our trade whilst reducing the red tape and costs? We can, but it’s not as easy as that; if it were we wouldn’t be having this debate.

To continue to trade with EU member states we would have to organize a free trade agreement with each country, or the WTO (assuming we couldn’t broker a more beneficial deal during the 2 year exiting phase – which could be problematical). This is, by no means, as easy as BREXIT are leading you to believe; it’s not like we can take the sweaty Sales Manager of EU Ltd out to a titty bar, get him pissed and get him to sign on the dotted line. Each deal would have to be negotiated separately and in most cases would have to be approved by each member state’s parliament and the EU parliament. What do you think the cost of that would be and how long do you think it would take? Even assuming these countries and the EU council itself were receptive to our requests?

But having said all that, a free trade deal isn’t necessarily insurmountable because as far as goods are concerned we already comply with current regulations and there are no tariffs in force at present. How quickly that could be done is open to question as it would depend on the political appetite in the rest Europe (more on this later). Neil Williams, chief UK economist at Hermes, says, 'Even a ‘soft exit’ deal ‘would probably need several years just to end up close to ‘square one’.

However, it’s an entirely different matter for the services sector, which accounts for roughly 80 per cent of the UK’s economy. These negotiations would be much harder because most existing trade deals explicitly exclude services and the deals with the EU that do include services also require free movement of people and common regulations. Even assuming some sort of free trade deal could be brokered, there would be other non-tariff barriers that could be expected to add costs for business. In other words, reducing costs by exiting may well increase costs and red tape in other areas.

In addition, there is no question that over time the EU is likely to change its regulations. If Britain withdraws from the drive for common regulations, Britain’s regulations could diverge from those of the EU. If that happens, UK companies wishing to export to the EU will need to comply with both UK domestic legislation and EU rules — for example, around things such as product safety; more cost and red tape.

So, yes, whilst a free-floating arrangement could technically be achievable for Britain which could unilaterally and fully open its markets to the US, Japan, Australia and the EU in order to take advantage of more dynamic gains, it’s claerly not without problems. Further, it is unlikely to actually eclipse what we already get from the EU.

Then we have FDI; one of the largest sources of dynamic gains is foreign direct investment (FDI). Britain is the largest recipient of FDI in the EU because it offers a perfect bridgehead for European markets: connected to the free trade zone, but with a labour force that speaks English and low taxes and regulatory costs. Leaving the EU (whilst FDI is not essentially dependent on our membership) would still endanger this investment, because we wouldn't be able to control what kind of tariffs and other restrictions the EU might choose to impose on us. Needless to say this is another important issue to take into account.(5)

We need them more than they need us

The argument that the EU needs us because we have a deficit assumes the only good thing about trade is exports. But imports are beneficial too. If EU exports to the UK were artificially restricted, our consumers would be harmed. Since 2010, the amount of goods we’ve imported from the EU has jumped from 51.4 per cent of everything imported to 54.3 per cent. For services, it’s a similar picture: a rise from 48.5 per cent to 49.6 per cent in the last five years. And when you take both goods and services together, you see that the percentage of goods imported from the EU compared to the rest of the world has risen from 50.7 percent in 2010 to 53.1 percent in 2015.

'The UK’s total exports to the EU are equivalent to 13 per cent of our GDP, but the equivalent figure for the EU is just 3 per cent, meaning that we need them more than they need us'.

The UK’s total exports to the EU are equivalent to 13 per cent of our GDP, but the equivalent figure for the EU is just 3 per cent, meaning that we need them more than they need us. This suggests the balance of negotiating power could be the other way around. In terms of trade with the rest of the world, the BREXIT campaigners argue Britain alone could do better deals than the EU post-BREXIT because protectionist interests on the Continent would no longer get in the way. Remain say the UK benefits hugely from having the EU negotiating on behalf of our exporters and that we will struggle to get a hearing without the bloc’s heft on the world stage. (6)

As with almost everything about this debate, there is more than one side to the argument. Yes, Britain might be selling less to Europe than we did in 2000. But the most recent percentages show just how important the European Union still is as an overall market for Britain. (7), (8)

The Eurozone
There has been much written about the Eurozone affecting Britain's trade and in particular about the possible bail out of Eurozone members using Britain’s cash. So we need to put this straight. The Eurozone is the name given to the countries within the EU that have adopted the Euro as their currency; Britain is therefore not a member. As such there are concerns over the conflict of interest that may arise regarding agreements made within the EU concerning the Euro and how this may adversely affect non-Eurozone members.

However, whereas it has the potential to affect non-Eurozone members, as Full Facts points out, the reality is that the EU’s own regulations already have a number of legal frameworks in place to prevent this. (9) But in addition, David Cameron has also instigated additional conditions (that will come into force following the referendum assuming Britain votes to stay in the EU) that offer further protection.

BREXIT (Bojo again…) have naturally ignored these facts and their headline reads: ‘Britain’s contribution to the EU will have to increase because the EU is living beyond its means and the European Parliament has asked for more money to spend on dealing with the migrant crisis. The UK will also be liable for additional payments to bail out Eurozone countries.'

But it’s not true:The UK has a veto on the overall size of the EU budget and it's already been agreed that non-Eurozone countries won't have to pay for future Eurozone bailouts. So let’s put that one to bed. (10)

WTO
If we cannot create a beneficial free trade arrangement with the EU for ourselves then we would have to rely on the World Trade Organization. And yet again this would cause us problems: firstly, because the WTO works better for goods than services which could lead to problems in the finance sector, one of the powerhouses of the British economy. As an example; EU countries might see our departure as an opportunity to grab some of our crown jewels. The two main prizes would be: the City, where it could be sliced up and enticed to Frankfurt, Paris, Amsterdam or Dublin; and FDI, where some of the large flows of foreign investment that, as we’ve seen, currently come to Britain because it enables businesses to access the entire EU market.

Secondly, the WTO is not without its own problems. For years the Geneva-based institution (which has 161 other members) has been struggling to complete a new trade round but has repeatedly been foiled in its efforts as its member countries are busy pursuing their own interests; the countries we would need to broker a deal with. In addition the level of negotiation regarding Britain’s exit from the EU is unprecedented.

I therefore want to finish this section with WTO’s Director, Roberto Azevedo words ringing in your ears and impressed on your retinas (25/05/2016): (9)

‘Britain would have to strike a deal on everything from the thousands of tariff lines covering its entire trade portfolio to quotas on agricultural exports, subsidies to British farmers and the access to other markets that banks and other UK services companies now enjoy. Pretty much all of the UK’s trade with the world would somehow have to be negotiated’. WTO’s Director, Roberto Azevedo

Summary
In case you haven’t realised it the whole debate on whether or not we should stay in, or exit, the EU on the basis of trade is a fiendishly difficult one to research and answer; the conflicting evidence for this area of the debate is overwhelming. On this basis what I have tried to do is to take a common sense approach to each area of concern and break it down the best way I know how. If you’re an ‘inny’ you’ll have lapped it up, if on the other hand you’re a confirmed ‘outty’ I have no doubt you’ll be wanting to throw your computer against the wall by now. The reason for the latter is that I’m sure if I added a forum to this website (I’m not that stupid) it would be filled with evidence contradicting everything I’ve said. I would of course, in turn, doubt the veracity of your evidence and backwards and forwards we would go; this is why most forum's are a waste of time.

There are valid arguments both ways but for me the opinions for staying in are just far more compelling - and it’s not that I’m averse to risk, far from it, I’m one of the biggest risk takers you’ll ever meet; but there is a difference between risk for the sake of it and ‘calculated’ risk (and especially so when it’s politically motivated).

There is no way to evaluate what the calculated risks on exit are for the very obvious reason that they are all based on assumptions that haven’t happened – but more than that, they are based on assumptions that in the whole history of the EU are unprecedented. Any model therefore using Norway or Canada or Switzerland as an example (or whoever) are therefore totally irrelevant because they were never in the EU in the first place and no country as ever experienced the true effect of what leaving the EU would mean.

For those of you sitting on the fence (it’s becoming increasingly uncomfortable up there no doubt) I would say this:

There is not a single European or Global leader that thinks Britain leaving the EU is a good idea. Whereas they all looked on in slight bewilderment at the Scottish referendum that’s not what’s happening now. Our decision here is not only of National concern, because it will affect every single one of us, it’s also of Global concern - no-one understands why we would ever countenance leaving the EU; least of all the Europeans themselves.

If BREXIT campaigners had a cohesive argument as to the reasons for exit and the prospect of what Britain’s trade and Immigration deals would look like after leaving, my view would be different. But they don’t; all they have are projections based on something that hasn’t’ happened yet and moreover are based on something that hasn’t happened at any time, ever, since the EU was founded.

'In other words; if BREXIT campaigners themselves don’t know what they want to achieve how can they possibly achieve it?'

But perhaps the most compelling point (that no-one really seems to be talking about) is that the views offered up by the BREXIT campaigners are conflicting; on the one side you have a view that is centred on stopping immigration, which has a natural tendency to make lucrative trade arrangements more difficult to negotiate and is based on creating barriers - and on the other you have those that want Britain to throw open the doors to Global trade without boundaries which, if you research this, means that even excluding EU migration it has to allow the freer movement of workers and citizens.

In other words; if BREXIT campaigners themselves don’t know what they want to achieve how can they possibly achieve it?

Sources:
1 - http://www.civitas.org.uk/content/files/insideradvantage.pdf
2 - http://www.ft.com/cms/s/0/1688d0e4-15ef-11e6-b197-a4af20d5575e.html#axzz4Az1iy7vA
3 - http://www.bbc.co.uk/news/uk-politics-eu-referendum-36463831
4 - http://uk.businessinsider.com/charts-eu-economy-is-bigger-than-the-us-2015-6?r=US&IR=T
5 - http://www.economicsuk.com/blog/002154.html
6 - http://www.independent.co.uk/news/business/news/will-brexit-damage-trade-eu-referendum-vote-leave-a7062201.html
7 - http://infacts.org/uk-needs-eu-more-than-it-needs-us/
8 - http://blogs.spectator.co.uk/2016/05/britain-is-buying-less-from-europe-but-the-latest-trade-stats-show-just-how-important-the-eu-still-is/
9 - http://www.bbc.co.uk/news/uk-politics-eu-referendum-36462016
10 - http://www.ft.com/cms/s/0/745d0ea2-222d-11e6-9d4d-c11776a5124d.html#axzz4Az1iy7vA

question everything

TRADE