EU Referendum in the UK : (2) Free trade and economic benefits

For EU : The EU facilitates free trade and free movement of money, goods and services across Europe.  The UK would have a much worse deal on these issues post-Brexit and suffer huge damage to its economy.

Against EU : Because of the huge volume of exports to the UK from many EU countries, there is every reason to believe that the UK would continue to have free trade and movement of money, goods and services across Europe post-Brexit, just like Norway, Switzerland and Iceland do.  The UK’s economy would continue to thrive, perhaps even more so.

As a result of EU policy, there is a single market across all EU countries with no tariffs on imports or exports and so there is no doubt that trading barriers have come down hugely as a result of the work of the EU.  This enables European access to UK manufacturers in particular, though access to services is not as free because of long-standing traditions of professional regulation on a national level, e.g. of the legal and accountancy professions.

The UK runs a huge trade deficit (we import much more than we export) with EU countries, especially France, Spain, Italy and Germany, mainly because our economy relies much more heavily on services than theirs.  Conversely, we run a healthy trade surplus with the rest of the world, particularly, US, Can. Aus. and NZ though there is no reason to suggest that this surplus will grow purely by leaving the EU.  Brexit supporters emphasise the fact that the UK’s overall trade with the EU is declining year-on-year (currently around 40% of all exports).

However, the UK probably does gain in some respects from the open EU market as our status as an English-speaking country with global connections, good access to finance, and a stable legal and administrative system means that the UK is an attractive place for multinationals to locate their European operations.  Major political change is always a headache for business, and big business in the UK is mostly in favour of EU membership; this should worry us as they have the resources to relocate. 

On the other hand, many smaller manufacturers complain that the EU generates a huge amount of red tape, which is even more unnecessary if you consider that most small businesses in the UK have mostly UK customers.  They also say that the practical reality is that British companies don’t stand a chance of winning big contracts in other EU countries and beating off local rivals, whereas the reverse is much more likely.  Support for Brexit in the business world mostly comes from smaller businesses, with some big-name exceptions like James Dyson (vacuum cleaners) who started small.

Outside the EU, we would want a free trade deal with the EU.  Interestingly, Switzerland, Norway and Iceland have free trade by virtue of their membership of EFTA.  EFTA and the EU make up the European Economic Area, which the EU runs.   EFTA members contribute to the EU’s costs of running the EEA and EU supporters say that we would therefore not save much of our current contribution if we left, and also lose any influence over the making of the rules of the EEA.  EU supporters also say that it is hard to imagine that, after Brexit, we would get as favourable a deal as we do now, and that other EU countries would probably seek to punish us for abandoning them. 

On the other hand, Brexit supporters say that it is hard to imagine that the UK would negotiate a worse deal with the EU than the small EFTA countries, given our huge amount of imports from the big EU countries. They also say that our influence over EU trade policy is limited in practice because we often take a different view from other nations because of our different economic and political objectives, but are usually overruled.  They say that leaving the EU will mean that we regain our place at the World Trade Organisation where most international trading rules are negotiated, and are in fact later implemented via the EU. The EU currently acts for all EU nations at the WTO.

Without the benefit of a crystal ball, it’s very hard to say what the overall effect on trade will be of leaving the EU.  Estimates from the respected reformist UK-based EU think-tank “Open Europe” are that our economy will shrink or grow by up to 2% either way – stay or leave - and probably by no more than 1%. 

Verdict

I prefer to concentrate on the more neutral figures from Open Europe than the more exaggerated claims of growth and savings touted by the current political campaigns, which are impossible to make sense of. If the Open Europe figures are right, then it gives us a greater ability to base our vote on longer-term political issues.

The pound has lost about 10% of its value against the dollar in recent weeks and we can expect a barrage of claims in this campaign that leaving will cause us economic disaster. I think the reality is that market traders will exploit the political uncertainty in the short-term but that in the long-term, deals will be done to ensure that the current free trade continues, at least to significant extent, for mutual benefit. 

In practice, Europe will still be a very important place to do business after Brexit but will also be a less favourable place because of a loss in goodwill. If we do leave the EU, we need to expect that other EU nations will do us no favours, and be ready to accept some short-term economic pain in the form of more expensive imports and some reduction in exports to the EU; we would also need to be serious about developing our economy in the direction of the rest of the world.  This would be a huge political task requiring great vision, competence and persistence on the part of our politicians.

Next week: The democratic “deficit”

Against EU : The EU is undemocratic in that the people of the UK do not want Brussels to control numerous policy areas and don’t understand how this happens;  also the European Commission and European Court of Justice are not appointed, yet have huge power to initiate and drive through new law and policy in ways which we cannot predict or challenge effectively.  As a result, the UK government is gradually becoming a body which only implements laws made in Brussels, and we are becoming more alienated from politics.

For EU : The EU is democratic in that its powers come from treaties which have been signed by the governments of all member states, and most important decisions continue to be made unanimously by all heads of state, including the UK Prime Minister.  Decision making power is shared by the European Parliament, whose MEPs are directly elected, and by the European Commission which can be sacked by the European Parliament.