Tag Archive: European Economic Community (EEC)

The Big Brexit Risk? It’s the trade, stupid!

When I have discussions with my fellow Britons about the Britain, the European Union (EU) and Brexit, sooner or later, I hear a complaint that runs along the following lines:

“We thought we were joining for trade reasons, but it has evolved into something completely different. We did not agree to that.”

The implication of course is that in making the decision to join in the mid-1970s, the British public had somehow misled about the true nature of what was then the European Economic Community (EEC) and is now the European Union (EU). There is also a strong sense that the main reason for joining, trade and commerce, has become less important over time.

The simple answer is that all institutions, the EU included, must evolve or become irrelevant. This applies to NATO, the UN and this certainly applies to the EU. Still, there is a sense of Britons having being “sold a pig in a poke”. That somehow they got into something without knowing its true nature. This sense of Britons having got in bed with an EEC trading relationship in 1973 and waking up in 2016 with the EU, with all its imperfections, is important to the outcome of the EU referendum to be held in Britain on the 23 June 2016.

Therefore, this post delves into history to examine the debates that were held in Britain in the mid-1970s and to unpack whether joining the EU was just about trade. It also addresses the extent to which trade remains important to any decision about whether to remain in the EU or not.

Brexit Referendums I and II

To put it bluntly, the UK joined the European Economic Community (EEC) in 1973 without the British voter being asked. The Labour Party’s general election manifesto of October 1974 committed Labour to allow Britons the opportunity to decide whether Britain should remain in the Common Market on renegotiated terms or leave it entirely. In 1975, the first referendum covering the whole of Britain was held. One could say that 2 years after joining the EEC, the first Brexit referendum took place. The result was clear-cut: 67% of voters supported the campaign to stay in the EEC.

If the clear result was meant to put an end the debate about Britain in the EU, it failed. On 23 June 2016, we shall have the second Brexit debate, 43 years after joining the EEC. You can be sure that it will still not end the debate either, regardless of which way the vote goes.

A reading of what took place then shows that commerce/trade was a focus of the debate on the pros and cons of remaining in the EEC or, put another way, an evident desire to ensure that Britain´s relative economic decline compared with its EEC neighbours was put to an end. It is not unusual for a particular topic to predominate in elections and referendums. But it would not be correct to suggest that commerce/trade was the only topic of discussion at the time or indeed that the political nature of the EU project was not clear to Britons at the time. Labour figures of the day, such as Simon Jenkins, Michael Foot and Barbara Castle, as well as Enoch Powell on the Conservative side engaged in a debate about the possible effects on British sovereignty, among other issues. The deep fissures that were created in the Conservative Party (and to some degree the Labour Party) were not the result of a simply a debate on the commercial/trade pros and cons of Brexit. At the core of the heated difference of opinion was a possible loss of sovereignty and Britain´s place in the world, be it at the side of our European neighbours or facing towards the Anglophone / Commonwealth world. Today, there is an equally fractious debate where immigration is the leitmotif, connected with a discourse about health tourism, benefit tourism, access to housing, trade prospects and loss of sovereignty to Brussels.

The polling in the mid-1970s illustrated voters’ wider concerns, including defence, Britain’s voice, avoiding future wars, etc., though trade/commerce/economy was undoubtedly a major issue. By then, Britain had lost the empire and replaced it with the Commonwealth. The “special relationship” with the USA was stronger, not least because the Cold War was still raging. The Anglosphere relations in general (USA, Australia, New Zealand, Canada, etc.) was in much better shape than today.

And yet, in 1973 the British Government under the Conservative Party still decided that it was in UK’s best interests to join the EEC after a decade of persistently trying to join the club and being vetoed by the French under Charles de Gaulle on two separate occasions. This was no spur of the moment decision on the part of the British government, but a clear recognition that it was in the country’s long term interest to do so. On 5 June 1975, a clear majority (over 67% of voters) reinforced the situation by voting to remain in the EEC, rather than going it alone again.

Those decisions were made at a time when Britain was much more dominant in global trade, prior to the rise of China and India, and before the dawn of full on globalisation. If it was the right decision then, there is no obvious reason for presuming that Britain would be better off on its own today, when the world is so much more interconnected. This is especially so because regional trade aggregations are increasingly common so as to maximise negotiation power, rather than bilateral arrangements. Examples of such regional trade blocs, apart from the EU itself, include the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), perhaps soon the Free Trade Area of the Americas (FTAA), etc.

I do not subscribe to the view that a future outside the EU will be bleak for Britain. This argument is overdone by the Remain campaign and backfires because Britons do not believe it and resent those seeing to make use of the fear factor to “bounce” them into voting accordingly. Britain has an amazing economy, with dense infrastructure and packed with exceptional human capital. This is a fantastic foundation for future competitiveness. Britain is and will remain a key international economy and will continue to be a wealthy nation with quality of life and standards of living for the foreseeable future, regardless of the Brexit outcome.

So the real issue is: will Brexit help or hinder Britain´s future prosperity, since trade will play a key role in its future development.

EU and UK after Brexit: lose — lose

The EU area is the largest trade block by a considerable margin. Although trade patterns do shift over time, the simple fact is that the EU is by far the UK´s largest market: around 44% of exports went to the EU in 2014. British firms sold around £500 billion worth of goods and services to foreign buyers, according to the Office for National Statistics, and almost half (£230 billion) of those earnings came from the EU. The EU´s dominant role in the UK trade position is hardly surprising: our 27 EU trading partners are geographically close, there are no tariffs, close proximity means low transportation cost, etc. To reinforce the point, exports to the faster growing BRICS countries (Brazil, Russia, India, China, and South Africa) accounted for only 10% of exports in 2014 according to Full Fact.

Furthermore, Britain´s trade balance is directly connected with the 50 trade agreements which the EU has signed with approximately 120 countries around the world. It is hard to foresee exactly what will happen immediately upon Brexit. What is clear for starters though is that Britain will have to negotiate a new trade deal with the 27 countries of the EU. It is wishful thinking to imagine that the EU will be willing to agree a trade agreement with the UK on a comparable basis to what pertains now. Furthermore, a trade agreement similar to the one that applies to the European Economic Area (EEA) is also extremely unlikely, since this would require Britain to accept the EU’s freedom of movement of people, paying into the EU budget and other concessions which would be impossible to justify. Such concessions would cause the British public (and everyone else) to question why they were asked to vote for Brexit in the first place.

Whatever trade agreement is reached with the EU, you can be certain that it will not be as advantageous to Britain as the above two scenarios (EU or EEA). It is also certain that the trade negotiations will take years to reach a conclusion — they always do. Moreover, it is unavoidable that the costs of export will increase for British firms. Several years to negotiation means uncertainty which in turn increases risk and thus raises the costs for British firms. This third scenario cannot possibly be an advantage to the British economy and the same applies to the remainder of the EU: Brexit will be a “lose — lose” scenario. Both the EU and Britain itself will lose in the short-term. The medium to long-term effect could go either way, including a continuation of the “lose — lose” scenario. This cannot possibly be good for the UK’s economy. After all, the Britain´s trade balance has been in deficit more or less permanently since 1990. This will only make things worse since the EU accounts for 44% of the current exports.

The Anglophone Zone: hopes dashed

The Brexiteers are well aware that in the short-term both Britain and the EU will lose out. This is precisely the reason why they have emphasised that it is in the EU´s own interest to negotiate a good deal with Britain. Perhaps, but I would not hold my breath on that account. What sounds too good to be true, usually is. There will be a price to pay for Britain undermining the “European project”. There is such a thing as vindictiveness in human nature and the leaders of the EU nation states are only too human.

Whatever they may say in public, the Brexiteers are also aware of this, which is why their pin their main hopes and expectations on other countries, not least the key Anglophone ones, to step into the breech and sign-up bilateral trade agreements with Britain.

So it came as a bitter blow to them when Barack Obama came to the UK and highlighted a few points, including:

  • The priority for the USA is the EU as it covers 28 countries and 500+ million people;
  • Britain will need to go to the “back of the queue” for a trade agreement;
  • It will take years for a trade agreement to be negotiated with Britain;
  • Being part of the EU does not moderate British influence in the world, it magnifies it.

With this, the Brexiteer Emperors (Boris Johnston, Michael Gove, Iain Duncan Smith, Nigel Farage, etc.) were left without any trade clothes. They went ballistic in their attempts to discredit the President´s statement of fact, for that is exactly what it is. Any country would prioritize trade negotiation with the largest trade block in the world over a nation of 65 million people. The Brexiteers´ fragile trade hopes were dashed and predictably there was an unprecedented outpouring of vitriol, verging on racism, against the outgoing President of the USA, the country that Britain stresses it has a long-standing “special relationship” with. But obviously this does not extend to trade matters.

Should Brexit occur in June 2016, Britain would need to negotiate some or all of the EU´s 50 trade agreements with 120 countries, not counting the EU and EEA countries, if it expects to continue trading with them on a similar basis to today. Since it is impossible to negotiate all of those trade agreements in parallel, it will take decades to go through the trade negotiations just to end-up with the same situation as is currently the case within the EU. The UK does not have a Department of Trade but you rest assured that not only will one be created immediately upon Brexit, since the current trade competences lie with the EU. The institutional needs would arise in other areas where the EU currently has competences. The future Department of Trade will be large, it will be costly and it will be under tremendous pressure to get bilateral trade agreements done, and sharpish. When pressure exists to get things done quickly, bad deals are struck. Ask any salesman.

There is no evidence that either the Anglosphere (USA, India, Australia, Canada, New Zealand, South Africa, etc.) or other major countries such as China, Japan, Brazil, etc. will be willing to negotiate trade deals with Britain as quickly or as favourably as with the EU: the size and potential EU market is so much larger. Britain only constitutes 13% of the EU´s population but will be under pressure from enterprises to negotiate the new trade deals, pronto. Consequently, there is absolutely no reason for the future bilateral trade agreements to be as generous to the UK as to the regional block of EU countries.

If we accept the assumption that delays, uncertainty and risk add to the costs to doing business, then British exporting firms will experience higher costs for the years and/or decades that the negotiation process will last in replacing the existing EU trade agreements. The firms´ higher cost base will affect the level of British exports, probably negatively, though the magnitude and duration are not possible to predict without economic modelling.

The likely post-Brexit trade scenario does not look rosy for Britain… but the bad news is that it is probably the best case scenario.

A worse scenario is that the EU will not rush and/or wish to punish the UK for Brexit. The worst case scenario though is that, in addition, some of the 120+ countries covered by the EU agreements that Britain is currently part of, may close their markets to British enterprises until bilateral trade agreements are negotiated and signed. If this were to happen to any extent, British firms will automatically lose market share. In this scenario, British exporting enterprises would almost certainly suffer a major contraction until they are able to replace the (hopefully) temporarily lost markets.

It does not take genius to work out the possible consequences for British firms and thus for the British economy, in terms of the loss in competitiveness, export, employment, wages, tax revenue, public expenditure, etc. There are other interpretations though, such as by those bankrolling the Brexit campaign. Peter Hargreaves has acknowledged the insecurity that would result from Brexit and stressed that “It would be the biggest stimulus to get our butts in gear that we have ever had”“We will get out there and we will be become incredibly successful because we will be insecure again. And insecurity is fantastic.” Maybe so for a billionaire stockbroker but I am doubtful that the average Briton will see perceive insecurity in quite the same manner.

Is the Brexit trade risk worth it?

The above analysis is not based on economic modelling or other statistical analysis: it is based on the application of logic to the likely consequences of British exit from the EU and thus no longer being part of the Single Market. Voters must make a decision about whether the risk of Brexit is worth it. The facts relating to trade are not complex, even if the exact process, duration and impacts are:

  • Brexit means Britain turning its back on (in the sense of no longer being part of) the largest single trading block in the world in terms of population (500 million) and/or purchasing power;
  • British withdrawal from the EU means no longer being part of the 50+ trade agreements with 120+ countries;
  • EU countries are extremely unlikely to react immediately and offer Britain the same trade terms as the current one, which means uncertainly, risk and greater cost for British enterprises, rendering them, all other things being equal, less competitive in terms of export;
  • Britain will also have to negotiate new trade deals with non-EU countries, all of which will take years or probably decades to achieve;
  • Britain already has advantageous trade relations with the Commonwealth countries dating back to 1949, so cannot expect to greatly expand in its traditional markets;
  • The Anglosphere will not necessarily offer the UK preferential treatment. The USA has stated that Britain will “go to the back of the queue” in trade negotiations. None of the other Anglophone or any other countries has offered Britain accelerated trade agreements for the simple reason that they are complex and take a long time to negotiate to mutual satisfaction;
  • Even if the UK goes through a process of negotiating the current 50+ trade agreements with 120+ countries on its own (it lacks people and skills since it has relied on the EU to perform this role for decades), it will take years or decades to achieve and a nation of 65 million cannot negotiate trade agreements on a comparable let alone more advantageous basis than the EU;
  • Whether the Brexiteers care to admit it or not, Brexit will not be good for Britain´s trade in the short term. It will be bad for the EU too but it is not as reliant on the UK market as the UK is dependent on its market (44%of exports in 2014). On the other hand, Brexit could have catastrophic economic consequences if key countries refuse to make their markets accessible during the period until bilateral trade agreements are signed, which could last quite a while.

Is Brexit a risk worth taking in terms of the possible consequences for trade, export and potentially unemployment and wages? To paraphrase the well/known USA electoral saying, “It´s still the trade, stupid!”

© Ricardo Pinto, 2016, AngloDeutsch™ Blog, www.AngloDeutsch.EU