With the referendum deciding whether the UK will stay in the European Union fast approaching, the debate is heating up in London. The latest sparring match between the two sides is revolved whether the UK needs the European Union to survive economically or whether Brussels is an unnecessary deadweight that hangs heavy around British industries. In an interview with the Financial Times, the Director-General of the World Trade Organization, Roberto Azevedo, has put the cost of Britain leaving the EU at £14.5 billion as a result of new import and export tariffs that would be erected upon leaving the European Free Trade Area. Furthermore, he argues that the UK would be setting itself up for years of arduous trade negotiations with WTO members with whom it currently enjoys preferential agreements through its EU membership. A bleak prospect indeed that should discourage those foolhardy enough to want to leave the common bloc – but a myopic one as well.
The problem with most economic forecasts insisting that the UK is gambling away its prosperity by even asking the “what if?” question is that they read as if Britain would still be beholden to the EU and the trading strictures it has put in place. The whole idea behind Brexit is precisely that the UK would no longer be curtailed by Brussels in forming its economic policies, and that Britain unbound would be free to eschew those regulations which hurt its competitiveness and circumscribe how and with whom it does business. Looked at the situation through this prism, as Patrick Minford, Professor of Applied Economics at Cardiff Business School has done, an altogether brighter picture emerges. According to his analysis, within 10 years of leaving the EU, the UK’s GDP would rise by 4% and consumer prices fall by 8%
So how does he come to such a starkly different conclusion to that of the WTO and others? By calling out a few of the red herring arguments put forward by the “remain” side to scare the electorate into voting against their best interests. The big one is that after leaving the EU the UK would have to sign a free trade agreement with the block, as well as all the other members of the WTO with whom it previously had trade deals as a member of the EU. The argument runs that failure to do this will see the resurrection of tariffs on trade between the UK and Europe, driving prices up for consumers. It is true that outside the EU the UK’s exports to Europe would be subject to the Common Customs Tariffs, but these largely apply to manufactured and agricultural goods, which only account for 11% of UK exports, and not services, which account for fully 80% of UK exports. Which is to say, that where it really matters, the UK would still have barrier-free access to the European market. Also, the UK regaining its ability to set tariffs will mean it no longer has to cleave to the protectionist barriers that the EU puts in place to insulate its ailing industries, and which keep prices unnaturally high.
Steel is a prime example. Much has been made of Chinese “dumping” of excessively cheap steel on the European market, but that is only half the story; the fact of the matter is that the European and British steel industries have long ago lost their competitive advantage and by keeping them on life-support behind protective tariffs we are doing a disservice to the broader economy. As politically sensitive as it may, there are good reasons why the Redcar steelworks in the UK has closed and the Tata plant is threatened with the same – they are haemorrhaging money. Redcar has been a loss maker since 2010 resulting in its owner, SSI, incurring debts of £1.4 billion. The Tata plant is losing £1 million a day. The social cost of closing these plants is, to be sure, devastating for the local communities involved, but the cost of keeping them running is measured in higher automotive, construction and aviation costs for SMEs and consumers.
Aluminium is another example. After stringent Brussels regulations forced the last British aluminium smelter to close down entirely in 2012, the UK was forced to rely on imports to supplant the lost production capacity. However, much like the steel industry, the EU maintains tariffs on primary aluminium imports, ostensibly in order to protect European producers. However, today the EU aluminium industry produces less than a third of all primary aluminium consumed domestically, and the majority is imported from outside the Union with an applied tariff of 3% for non-alloyed aluminium – thus significantly upping the price for British consumers and undermining the industries competitiveness. Liberated from Brussels’ regulatory drive, British SMEs and consumers would be able to import aluminium at lower prices and would see their bottom lines growing.
Outside the EU, the UK will be able to drop these punitive tariffs leading to a general fall in prices. Some of the windfall from this can be used to invest in new, viable industries in the areas affected by plant closures. It’s the same story with agriculture: once free of the EU and its deleterious agricultural policy, UK food prices can adjust to their natural level. Again, any compensation packages required to help producers transition to more profitable enterprises would be more than adequately covered by the £10 billion a year the UK would save by no longer having to contribute to the EU budget.
Another argument put forward by the Remain camp is that the UK would be slapped with punitive tariffs by the EU as a form of retribution for having left from Brussels’ bosom. However, that is another red herring – even if the eternally-divided European Union might want to, in truth they can only do so within WTO limits which average at 2.4%; the UK contribution to the EU budget is the equivalent of a 7% tariff – so still, a net gain for those clamoring for London’s independence.
Whatever the merits of EU membership, reports of the UK’s economic demise upon leaving it are greatly exaggerated.
*Nicholas Kaufmann is a public affairs consultant based in Brussels.