Transcript Vlogs on the Brexit Debate

Vlogs on the Brexit Debate
T.Huw Edwards
Loughborough University
March 2016
Vlogs on the Brexit Debate
2. ‘Fog In Channel’, or the
importance of taking geography
seriously.
‘Fog In Channel, Continent cut off.’
Did the Times ever use this headline? Supposedly in 1957.
‘Fortress Europe’: the Customs
Union View of the EU.
The EU still has some characteristics of a customs union. There is free trade
between members – so barriers within Europe have been broken down. But
there is a Common External Tariff. [NOTE: the EU has lots of other features, so
viewing it just as a CU is probably a mistake. But anyway…here we go…]
‘Fortress Europe’: the Customs
Union View of the EU.
• In the early years (1950s-70s) this issue
dominated discussion of whether Britain should
join the European Economic Community.
• A positive historical aspect of Customs Unions
is that Germany industrialised in the late 19th
Century under the Zollverein. Petty borders
between German states were removed, and
replaced by a common external tariff. The
economy industrialised fast, as infant industries
grew.
‘Fortress Europe’: the Customs
Union View of the EU.
• A Customs Union does two things:
• 1. Trade Creation. Trade within the CU
grows, as barriers are removed. In the
case of the early EEC, trade between
Germany, France, Italy and the Benelux
countries grew very fast.
• 2. Trade diversion. Without a CU,
countries would trade abroad more.
Trade Diversion
• French Butter costs £1 to produce and
ship to UK.
• NZ Butter costs £0.80 to produce and
ship. But a tariff of £0.30 is applied. Now
the UK switches to French butter, at an
extra cost of £0.20 per unit.
•
Trade and costs
• Trade creation reduces the cost of living,
by allowing people to purchase goods
more cheaply from abroad.
• Trade diversion pushes up the cost of
living.
The European Free Trade Area
• Before joining the EEC, Britain, Scandinavia,
Switzerland, Austria etc belonged to an outer zone:
EFTA. This allowed us to set our own external tariffs
(less trade diversion, particularly on agriculture). There
was still removal of tariffs between members and the
EEC, but all kinds of rules and limitations had to be
applied (‘rules of origin’) to stop EFTA members acting
as rebadging stations for goods produced outside the
EEC to be sold within the EEC.
• This meant that we had less trade diversion, but also
less trade creation.
• Most of the early economic studies showed the trade
creation benefits from joining in 1973 outweighed the
trade diversion costs (though perhaps not by a lot).
The European Free Trade Area
• Many economists would have preferred
Europe to have developed as a deeper
FTA (i.e. a free trade area but with added
cooperation). But this option was not on
the cards. In part, the agricultural
protection was necessary to ensure early
French and Italian participation.
Which Side of the Wall Do I Pitch
My Tent?
• Let us start by assuming the alternative to EU
membership is ‘no deal’. In other words, our
exporters would now have to face 1. tariff
barriers to export to the EU and 2. non-tariff
barriers (such as product and testing
requirements).
• We will also assume that the EU makes no
concession to the UK, and the UK makes no
concession to the EU. [Actually it is likely that
the two would be linked].
• So we are looking at a ‘hard Brexit’.
Would a ‘hard Brexit’ matter?
• Note that Brexiteers are usually very
vague about whether they are talking
about a ‘hard Brexit’ (no deal with EU) or a
‘soft Brexit’ (which might change little for
the UK except loss of influence, like
Switzerland today).
• But some Brexiteers (Lord Lawson, Patrick
Minford) are bullish even about a ‘hard
Brexit’. Why?
Would a ‘hard Brexit’ matter?
• A hard Brexit means Britain can reduce tariffs on
imports from non-EU countries (good for UK).
• But it means we face barriers on our exports to the
EU countries.(Bad for UK – but how bad?).
• 2 views:
• 1. Unilateralist ‘Free Traders’ believe it doesn’t
matter much. We could sell our goods elsewhere
(USA? China? Japan?) without cutting export
prices much.
• 2. Many Trade Constructivists believe it could be
very bad for the UK.
‘Hard Brexit’: the unilateralist view.
• We can save money by buying some
goods more cheaply from outside the EU.
• We can export easily to other parts of the
World. Individual firms and workers may
be hurt, but can be compensated.
• Why? Because they are modelling Britain
as a ‘small, open economy’ (the A-Level
Economics model of trade!).
‘Little Britain’?
• Smallish but not negligible.
• In 2014 Britain was the 5th largest
economy, accounting for 4% of World
GDP. [World Bank]
• But even smallish countries face
downward sloping demand curves for their
exports, for 2 reasons.
‘Little Britain’?
• Our export demand slopes downwards
because countries produce differentiated
goods.
• This is backed by a lot of econometric
analysis.
• For example, British cars or shirts are
seen as different to Italian cars or shirts.
‘Little Britain’?
• Our export demand slopes downwards
because countries produce differentiated
goods.
• The elasticity of substitution in trade (the
sensitivity of trade shares to prices) is
estimated at between 5 and 10.
• To double our exports to non-EU countries
would require the following falls in our
export prices, even if we were a tiny
country:
Second reason: Geography
Trade is approximately GDP of A
times GDP of B divided by
distance.
This is because
Trade costs
Rise with distance.
How much market potential do nonEU markets have?
Belgium and China Compared based on GDP.
14000
12000
10000
8000
Based on GDP
6000
4000
2000
0
Belgium
China
How much market potential do nonEU markets have?
• Making a crude correction for distance,
China has not much more trade potential
than Belgium. This is a better proxy for
Britain’s relative exports.
How much market potential do nonEU markets have?
• China does export more to the West than
gravity might indicate. This is because it
has pursued a very low exchange rate
policy, to counteract its remoteness.
• Does Britain want to follow a very low
exchange rate policy to export more to
remoter countries? This could push prices
in the UK UP, not down.
Further potential arguments.
• The Rest of the World is growing faster.
But the EU still accounts for about half our
trade (imports and exports), and will
dominate for the foreseeable future.
Further potential arguments.
• ‘The UK exports services. Services are
different.’
• This argument is deeply flawed, but needs
investigating separately.
To summarise.
• Britain may be small in terms of World
GDP, but would still have to lower its
export prices considerably if it faced a
‘hard Brexit’.
• Even small countries have downward
sloping export demand curves.
• Europe weighs much more heavily in
terms of trade potential with the UK than
further away countries.