A Distorted Trade Pattern Isn’t An Advantage
We were treated this week, by Chris Giles of the Financial Times, no less, to an amazingly convoluted piece of logic. To support the constantly repeated refrain that Britain has no option but to stay in the EU, because there are no other viable choices available, he asserts that we derive unmatchable trade advantages by virtue of the simple fact of our geographical proximity to the European market.
He supports this assertion by pointing to two comparisons which he apparently finds convincing. New Zealand and the Czech Republic are economies of roughly the same size, but the UK does nearly four times as much trade with the latter as with the former, he says, and he goes on to make a similar point when comparing our trade with Australia and Spain.
This demonstrates, he says, that our easy physical access to the European market makes all the difference. Leave the EU, and we would lose that irreplaceable benefit.
This argument is so full of holes that it is surprising that Mr Giles thought it worthwhile to make it. First, it would be hugely surprising if the figures did not show that kind of pattern – an increase in our trade with the EU and a comparative decline with the world outside. What, after all, was the whole exercise about, if not to concentrate our trade in Europe and divert it from elsewhere?
If more than 40 years of managed (rather than free) trade, in which a customs union on the one hand and tariff barriers on the other have quite deliberately and systematically narrowed our trading opportunities, we would surely be able to sue for false pretences if something of the kind Mr Giles celebrates had not materialised.
But that entirely predictable outcome is far from settling the question as to whether it is inevitable or even desirable, or whether it renders other outcomes beyond reach. And the UK is surely the last country to be told that trade is something best done at close quarters. No other country has enjoyed more extensive trade links or has a longer or more successful experience of the great advantages of trading on a world-wide scale.
In line with the consistent pessimism that tells us we must accept the European option, since it is the best we can expect, it is often forgotten that joining the Common Market in 1972 represented for Britain a restriction of our trading opportunities and an abandonment of a rational and long-established trading pattern that was mutually beneficial for both ourselves and our partners.
That pattern had provided the British consumer with not only the cheapest and most efficiently produced food and raw materials from around the globe, but also preferential markets for British manufactured goods overseas.
That in turn allowed a cheap food policy at home (using subsidies to farmers to bridge the gap between the costs of domestic and foreign production), and cheap food in turn meant that manufacturing costs could be kept down, thereby creating a significant competitive advantage over Britain’s otherwise more competitive manufacturing rivals.
Common Market membership brought an end to these advantages. It meant, through the Common Agricultural Policy, to whose costs Britain was and remains a major contributor, a substantial increase in food prices and therefore in domestic costs, making British manufactured goods more expensive. It also meant an end to preferential markets for those goods overseas, and opened us up instead to direct competition from more efficient manufacturing rivals in a single European marketplace.
Today, in a country like New Zealand, British cars and other manufactured goods are rarely seen. They are little lamented, since the British market for New Zealand produce is also much reduced. Can we be surprised that trade with New Zealand, Australia, and other Commonwealth countries (which now include some of the world’s fastest developing economies) has languished? Didn’t we guarantee that outcome?
But what of the other side of the coin? Have we not derived great advantage from the trade we have developed with the EU?
Well, hardly. Let us put to one side the very large annual contribution we pay to the EU (a continuing burden, as it happens, on our balance of payments). We have now run a trade deficit every year since 1982, which was just as the full impact of EU membership took effect– not just a coincidence, since the greater part of that deficit is with the other members of the EU, and much it arises in the trade in manufactured goods.
The result is that our manufacturing sector has shrivelled away, and our net investment in new manufacturing capacity is virtually nil – not really the kind of success that Mr Giles wishes to celebrate and that we are told we cannot afford to lose. And, when we are solemnly warned that our EU partners will refuse to trade with us if we insist on a different and better Europe, are they really going to turn their backs on a one-sided trade relationship that has been so much to their advantage?
Mr Giles has, however, effectively made one point. The essence of what he is saying is that we cannot survive without the current lopsided arrangements, however detrimental they are to our interests. The weakness of his argument tells us that we shouldn’t believe a word of it.
Bryan Gould
26 February 2016