A much-needed refresher on Free Trade and how it cuts prices for consumers

 

 

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The latest iteration of the Brexit argument has us focusing on three things: Sovereignty, Immigration and Trade. On Sovereignty, the votes in Parliament next week will determine whether we are to become an independent sovereign nation in our laws and justice system, or otherwise succumb to what the unelected part of Parliament, and the bureaucrats in Brussels, seems to heartily desire – that we become a vassal state. Every possible pressure should be exerted on Members of Parliament to reject, outright, every single one of the Lords’ amendments. On Immigration, there are wonderful signs that Home Secretary Sajid Javid will be able to break free from the Remainers’ absurd Little Englander policies and come up with the Immigration strategy that the large majority of voters – from both sides of the argument – seem united in wanting:

(1) visas for all high-skill immigrants who can help boost the economy (thereby supporting further employment for all);

(2) visas for those needed for essential services, such as the NHS;
(3) visas for students (a huge source of foreign currency for this country, and especially now that we find almost all of them return to their country of origin when their studies are complete – which may or may not be a good thing, but anyway means they don’t become a drag on our resources);
(4) ensuring that immigrants pay their way for their use of our public services (compulsory private health insurance for five years for any immigrant earning over £50,000, anyone?);
(5) equality of access to visas for everyone around the world – and especially from the Commonwealth – rather than priority to EU citizens; but
(6) strict limits on unskilled labour, whose large incoming numbers over the past two decades have depressed wages across the UK, and have been a major drain on our public resources. This leaves Trade as the cause du jour.

The most absurd and outlandish assertions are being noised around regarding the Customs Union, the Single Market and the Irish border. Each day that passes, the quality of debate becomes more depressing. The usual Labour/Lords cacophony of gibberish regarding the Single Market and Customs Union continues to cloud the issue. And now, even alleged Brexit supporters are coming up with deluded arguments for remaining in the Single Market, with all that entails. Open Europe had, during the referendum – possibly out of an excess of loyalty to David Cameron at the time – refused to come out in favour of Leave, but was more recently, under Henry Newman, adopting a more pro-Brexit approach.

Yet it has now, heavily promoted by Remain-inclined media as a Brexit-backing organisation, come up with what it apparently thinks is a clever proposal for the UK to stay in the Single Market for Goods, while staying outside it for Services. (Ironically, an article yesterday from the outstanding Michael Burrage comprehensively demolished the idea that there was any proper kind of Single Market in Services anyway; as he says, the Single Market in services “barely exists”. What precise idea did Open Europe have of what benefits could be achieved, either way, by staying or not staying in the Single Market in Services? They appear not to have developed much their views on that.) The Open Europe proposal came across as singularly incoherent, and was, consequently, misrepresented to some degree by the various media – each in its own way, according to whether Remainer or Brexiteer.

It is in fact a proposal that we leave the Customs Union, while remaining in the Single Market – for goods, but not for services. The argument for this is that if we do not follow the Single Market rules, we will not be able to export our goods efficiently into the EU supply chains, with which the UK is – as we all agree – deeply integrated. The proposal ignores the simple point that around the entire world, every country exporting to the EU has to obey Single Market rules for the products it sells to the EU.

That’s what the Single Market is about. Goods that are not compliant, whatever the source, may not be imported into the EU. Every non-EU country in the world (80% of the global economy) has to obey this rule for their exports to the EU (just as they do to any other country), and the UK, once we have left the EU, will be no different, just as now. Of course, at the time we leave, UK products – by definition – will be fully compliant with Single Market standards. The essential difference is that once we leave the EU, goods made in the UK (or indeed anywhere), sold in the UK and consumed in the UK need not be compliant with Single Market rules.

This will be enormously liberating for the UK. It will allow us to be more innovative and more focused on what UK consumers want. Those new innovative products can be sold not just in the UK, but all around the world (apart from the EU). It will allow goods made elsewhere in the world to be sold in the UK that are not compliant with any Single Market rules that were designed only to create protectionist barriers for EU manufacturers, and that the UK decides are not needed. With the benefits of a large home market and British entrepreneurial genius, UK manufacturers will be at last liberated from the corporatist fell hand of Brussels. It is amazing that so many fail to understand the basic principles of Free Trade.

Let’s get it straight: the Customs Union and Single Market allow us to buy goods tariff-free from the EU, a trading bloc which is only around 20% of global GDP. At the same time, they make the cost of goods from the other 80% more expensive, because of the tariff and non tariff barriers that they create for goods from the rest of the world.

But – here’s the kicker – this doesn’t mean, as Remainers allege (indeed, credulously believe) that goods from the EU are cheaper for us here in the UK. Research from Economists for Free Trade shows that goods sold within the EU are, on average, 20% more expensive than market prices outside of the EU – with many even higher than that. The (predictable) reason for this is as follows. The EU’s protectionist barriers (of which the carefully constructed Single Market regulations are just as important as the Customs Union tariffs) negate any potential beneficial price impact of tariff-free trade within the EU, because they allow German manufacturers and French producers to bump up the price of the goods they sell to us – so long as their goods are sheltered behind the EU’s tariff walls. If we had Free Trade with the rest of the world, the Germans and the French would be forced to reduce the prices of their goods to us, because they would have to compete fairly on price and features with global competitors, without the benefit of their tariff wall and Internal Market non-tariff barriers. We, the entire population of the UK, would, once free of the protectionist Customs Union barriers, end up with cheaper everything – not just cheaper goods from the rest of the world, but also cheaper goods from the EU.

This is Free Trade 101. How would this work in practice? Over time, every Renault, BMW, Mercedes, Porsche – any car at all that is made in the EU (that is currently sheltered behind a protective tariff ) – would be less expensive to the British consumer, once we managed to get Free Trade deals going with Japan and Korea because the EU car manufacturers would then be forced to compete on a level playing field on price – as well as a level playing field on standards, if we are out of the Single Market.

It would mean every non-UK fruit and vegetable that is grown in the EU will be cheaper to us, once we do Free Trade deals with other fruit- and veg-producing countries around the world. Yes, oranges from Seville will be cheaper, regardless of whether we have a Free Trade deal with the EU, or if we trade with the EU under WTO rules, because if they don’t drop their price, UK consumers will be able, free of tariff and non-tariff blocks on trade, to buy from elsewhere. It is the existence of the UK’s ability to trade freely that will reduce prices, not the existence of an EU Customs Union or a Single Market. Customs Unions with protectionist tariff and non-tariff barriers lead to raised, not lowered, prices. The Customs Union and Single Market are touted by ignorant Remoaners and EU boosters as “Free Trade”.

They’re the opposite: a protectionist barrier against the rest of the world that keeps prices high, both for goods produced by EU members, and for goods sold into the EU by non-EU members. The EU is less than 20% of global trade and is shrinking rapidly as a portion of that pie. Yes, as my economist friends at Oxford University clamour, China is protectionist, India is protectionist, it will be tough sledding to get a good deal with them. (But that doesn’t mean that no deal will be done.

Juliet Samuel in yesterday’s Telegraph gave an interesting take on how Trump’s current activities might, over time, help with that.) But there are many countries clamouring to do trade deals with us beyond China and India. The Commonwealth, which contains many Free Trade-oriented countries, not just India, is overall about the same size in GDP as the EU.

Latin America is a vast and rapidly growing market of Free Trade-oriented countries. Korea, Japan, South East Asia – trade deals with them will not be simple but will reap enormous benefits. British leadership, once we actually sit at the WTO table, will be enormously influential in pushing Free Trade around the world. This is where our future lies if we are to escape the dead hand of corporatist, quasi-socialist, low-growth EU market policies. This is how, in the future, UK consumers will get the goods they want cheaper and better. Trade deals with non-EU countries will force Germany, France and other EU countries to sell us goods that are price competitive with the rest of the world, rather than artificially jacked up.

Of course, we love Germany being prosperous; we’re happy for French farmers to lead lives of luxury; we just have no desire to have them doing that at the expense of the consumers of our country.

Removing ourselves entirely from the Customs Union and the Single Market – in whatever way we have to – is essential for our future prosperity. I implore Open Europe, and others, who seem recently to have gained a “little learning” of Free Trade, to drink rather more deeply of that spring before they present themselves as trade pundits. In the meantime, the UK can do without their unhelpful and simplistic proposals.

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