Purveyors of False Optimism

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Sales of snake oil are on the rise

We are losing our discount to trade within the single market. Leaving the single market will damage Britain’s economic prospects. The question is by how much. No one can know that answer. Just as we can be too pessimistic it is also likely that we can be over optimistic. The absolute best we can hope to achieve is to stand still and be no worse off than we are now. With luck with a general increase in worldwide prosperity the UK can follow it up. “A rising tide lifts all boats,” as the saying goes. It would be naive however to believe that the UK will experience growth in excess of the rest of our world trading partners. In terms of negotiating strength if we were unable to obtain the limited changes demanded by David Cameron from the EU when Britain was part of the organisation what hope have we got that our negotiators will extract anything substantially beneficial in order to exit? The likelihood is that as a nation we shall be poorer even if it means Europe is poorer too.

Here’s why.

Leaving the European Single Market is a bit like handing back your discount card and paying full price. Whereas previously the UK enjoyed certain beneficial rights when trading with our EU partners these will now be withdrawn. The optimistic view of David Davies et al is that the EU has more to lose than we do. It is true that the UK trade deficit with the EU amounts to £61 bn. This breaks down as a surplus of £28bn in services and a deficit of £89bn in goods. This is our only bargaining chip. If Europe makes the UK poorer then all Europe becomes poorer. In some ways this makes our negotiating stance easier. With only one card to play there is not much to think about.

Conversely Europe can give concessions on trade while extracting the largest benefit for their position on everything else. If the UK wants to retain a beneficial relationship on trade then concessions will need to be made on levels of immigration, the role of European courts and financial contributions to maintain the EU structures.

By far the biggest exporter to the UK is Germany equating to approximately £25bn of our deficit. Germany is the dominant party within the EU and Germany will not want to see a fall in their economy caused by Brexit. The next highest is Spain at around £10bn, significantly less than Germany but still high enough to matter to them given the broad economic problems Spain has faced and should also mean their stance towards the UK will be mitigated by trade factors. Next come Belgium and The Netherlands at roughly £7bn. Both countries have been traditionally supportive of the UK. Next is France at £5bn. Below this the differences are small. So for 5 countries trade balances are significant and for 22 the trade balance is less of an issue but all 27 countries have a say. That means politics will play a significant role in determining the likely economic outcome of Brexit. The British population voted on a political choice not an economic one and there will be political consequences. Those consequences will have an economic effect.

Logically if the current trade arrangements are beneficial to the EU members as a whole prior to Britain leaving then after leaving these same arrangements would be equally beneficial all things being equal. Britain needs to keep its comparative advantage in Financial and Other Business Services which account for over 50% of our surplus in services just as Germany will want to maintain its surplus in manufactured goods. Even in manufacturing although Britain runs a deficit with the rest of Europe the overall export trade in goods for Britain at £134bn is higher than our export in services at £96bn. The fact is that any changes which reduce the trade in goods and services between Britain and other EU countries will be consequential for everyone but the danger is that for Britain being the 1 as opposed to the 27 the consequences will be more severe and its room for manoeuver made more difficult. Figures from Civitas suggest the impact of tariffs would be more damaging to the EU than the UK especially in overall value for motor manufacturing. (http://www.civitas.org.uk/reports_articles/potential-post-brexit-tariff-costs-for-eu-uk-trade/)

A real economic danger for Britain is the potential for the transfer of some of our existing trade to Europe principally in the manufacture of vehicles and financial services. Any transfers from these areas would make Britain poorer whilst transferring earnings to the EU and offsetting any negative impacts of imposing trade sanctions on the UK. The EU could incentivise US, Japanese and European car manufacturers who currently manufacture in the UK to move those operations to other European countries. Greece, Portugal, Spain, Italy or any number of other EU nations would jump at the chance to boost their economies by taking on these current UK operations. Likewise in banking services the EU could engineer a transfer of Euro trade out of London to other European cities such as Frankfurt, Paris or Madrid. The multinational businesses that trade in London have no intrinsic loyalty to the UK and would have every incentive to move their operations if it were economically profitable. Goldman Sachs has already stated it has contingency plans to move parts of its business if necessary.

Britain’s annual contribution to the EU is reported at approximately £13bn after rebate. Based on recent demands from EU sources Britain will have to pay between £50bn to £100bn as part of the exit negotiations. It also seems highly likely that some ongoing payment will be payable should the UK wish to be a party to continent wide security structures including European border controls, science initiatives and other programmes. In addition Britain will need to pay compensation payments internally where EU funding currently is made in areas like agriculture and the Arts. The promised savings it would be appear are likely to be substantially less than promised at the time of the referendum.

Many in the pro Brexit camp claim that any negative impact on trade with the EU can be compensated by trade with the rest of the world. The much cited claim is that the EU consists of only 27 countries but that there are over 187 countries outside the EU to trade with. Not withstanding the fact that there are currently at most only 195 countries in the world meaning there are only 167 other countries to trade with it is a fact that only a very small number of nations are of sufficient size to be major trading partners. Sudan is number 62 in the global GDP figures (according to World Bank data) which would suggest that in reality there are at most 30 significant trading partners outside the EU.

We already trade with the US, China, India, Australia and others. The likelihood is that these trade flows will stay more or less as they are in the near future. The best scenario is that we may pick up some additional trade to compensate for any losses from trading within the single market. But the fact is there is nothing to stop us trading with these nations now in any substantive way and that leaving the single market will not suddenly give rise to new trading opportunities. It is easier to trade with your near neighbours than with those geographically further away. The negotiation of more advantageous trading positions will need time and involve a two way dialogue to create mutual benefits. Such negotiations are never easy. Donald Trump espouses an “America first” mantra and the UK and others will harbour similar nationalistic desires.

Many criticised those that campaigned to remain in the EU as proponents of Project Fear and that beyond life in the EU there existed a brave new world of opportunity to “make Britain great again”. Maybe it is not Project Fear we should be concerned about but the purveyors of false optimism.