It has been outlined before that the aim of this site is to explore arguments around the forthcoming EU referendum, helping people to make a decision based on complete information.
So far, the campaign had been dominated by “official” information from the government’s position labelled as ‘Project Fear’. Exports will be hit. Britons will suffer a reduction in income. In previous articles, it is hoped that where information has been incomplete has been highlighted, particularly on the car market and in Osborne’s treasury dossier.
For a change it is welcome to see a coherent piece put together by some of Britain’s leading economists. Some of the language may seem technical but the document is appropriately referenced.
Central to the debate is Professor Patrick Minford, a free market economist, reiterating much of his presentation to the Treasury Select Committee on 3rd November 2015.
The debate has been focused by the IN side on where export trade with EU countries may be hit. The Osborne model led us to consider what alternative trade deal models could be followed, namely Canada, Norway and the World Trade Organisation (WTO).
Arguably, we have been led into thinking of a world with tariffs and Britain carrying a begging bowl to secure new deals from a position of weakness. Looking back at the car market may highlight why Britain can negotiate from a position of strength.
Minford takes a bolder position entirely.
In an attempt to bring the argument back to basics, perhaps we should remind ourselves why a high proportion of our trade has been with the EU. In 1973, we joined the ‘Common Market’. At the time, what is now the EU accounted for 25% of our trade. By 2013, that balance had been increased to over 50%.
It is also worth reminding ourselves of perspectives. What we call a “free trade area” from within can be referred to as a “customs union” from outside. During his tour around the time of the Maastricht Treaty, the deputy Governor of the Bank of Japan frequently used the term “Fortress Europe”.
In our summary of the car market, we were sucked in to focus on why a trade deal would be likely with the EU. If tariffs were imposed on our exports, we could impose reciprocal tariffs. The car producers in Europe would still want to sell into our market, as would wine producers across the continent. Our trade deficit with the EU benefits them more than us.
Minford takes the argument to a different focus. Fortress Europe’s imposition of tariffs with the rest of the world maintains higher prices for goods in Europe than in the rest of the world. A free market approach would allow us to pay world prices for commodities. Consumers are instantly better off. Companies in the EU also have to charge lower prices to UK consumers.
If this does not at first appear to make sense, we can take a simple example. Where we now buy our BMWs from Germany, we can now look at alternative sources, from their factories in the USA, Brazil or India which produce at lower prices.
Minford takes his argument further, into supply side implications for policy and outcomes, which gives us the opportunity for something of a refresher on elementary Economics.
A market is essentially where buyers and sellers meet. Demand from buyers is determined by a variety of factors, notably price, price of other goods, incomes and tastes. Supply is based on profit, in turn the difference between revenues from consumers and costs of inputs. For some goods, environmental factors, technological progress and government intervention also apply.
In general terms, the higher the price, the less will be demanded, conversely, the more suppliers are prepared to supply. Economists love their graphs. We are used to seeing the following:
In a normal market, if the price is set too high, what is supplied will not be sold. If the price is too low, the supplier will see that goods sell too quickly. The market will find its balance or equilibrium, on our graph at a price of p1 and output of q1.
If Minford is right and world prices for commodities are lower (without tariffs) than EU prices, British suppliers will be able to make more profit at any given price. This has the effect of shifting supply, diagrammatically, to the right:
We can see that our market produces more, resulting in a lower price, or at least with no inflationary pressure.
The same basic principle applies to a whole economy. If we can reduce costs by increasing productivity, whether that is in pure costs, technological progress or by any other means, we can experience economic growth without unnecessary increases in price. For Price, in a whole economy we can think of the Retail Price Index (RPI). For Quantity we can think of Gross Domestic Product (GDP).
In a nutshell, the essence of supply side policies in a free market leads to lower prices, higher output and incomes and potentially higher employment to meet that increased output. If Britain is capable of more supply, we will attract inward investment.
Minford, being one of the Economics masters of his generation, of course takes the argument further. As a country, we may have to look at alternative markets. Given that Britain’s export growth has been higher with the rest of the world than with the EU in recent years, this is perhaps a natural evolution.
Remember that earlier figure, the EU accounted for 25% of our trade before entering the Common Market and over 50% more recently. From our car article, we can see that the between 1988 and 2014, value of car exports has grown by £3.9billion but with the rest of the world by £15 billion. Britain is already adjusting to global opportunity.
What we have covered in this article is a broad overview of what one of the leading Brexit economists has argued. As for precise numbers, that is down to the economic modelling techniques which will be saved for another day. Suffice it to say that the conclusion diverges with that of Osborne.
We have already looked at the EU model for what a reformed IN looks like. Does this tell us what OUT looks like?
The simple answer is no, not yet. Article 50 provides for a transitional period. We do not know if the EU would slash their own trade arteries by refusing to deal. In all probability, we will also have a general election before formalities are completed.
What OUT looks like therefore depends on which prospective government makes the case that British voters most closely identify with. Will it be a trade deal with the EU, will it be as a global free trade nation or will it be anywhere in between?
Surely, the point is, OUT looks like what Britons choose out to look like, in the hands of a democracy where British people choose rather than industrial satellites of Germany and the Mediterranean agricultural economies who divert trade from poorer developing countries?
Where the current government may appear negligent is in narrowing the argument to total negativity. There appears to be no vision of a positive alternative. There is apparently no contingency plan. Neither is there any sort of recognition of what the future holds if we stay in.
Perhaps our Foreign Secretary’s intervention in reaching an agreement with Cuba signals that Britain can deal with the outside world after all.
In our quest for relevant information on which to base a decision, the sources are there, it is for the public to decide.