Richard North, 19/04/2016  

The essence of the Treasury case for losses incurred from Brexit is that the UK economy suffers varying levels of GDP drop as a result of our changing trade arrangements.

Crucially, in respect of the "Norway option", after 15 years, the Treasury estimates that the UK would be between 3.4 and 4.3 percent of GDP better off inside the EU than the EEA. In 2015 terms, the GDP impact of leaving the EU for the EEA would equate to a long-term loss of £2,600 a year for each household in the UK.

However, notwithstanding the many false assumptions, there is a central flaw in this argument which completely invalidates the entire exercise. The Treasury is completely ignoring any compensatory effects arising from Brexit. Yet, the very essence of a flexible economy is that it reacts to changing circumstances, and exploits new opportunities arising from them.

A classic example is the response of New Zealand to losing its biggest customer – the UK – when it joined the EEC in 1972. In the late 1930s Britain took more than 80 percent of New Zealand exports. By 1960 it took 53 percent, which reduced to 36 percent in 1970, and five percent in 2007.

The overall effect in the longer-term can be seen in this graph (reproduced above). The very least one can say of the bigger picture is that the effects of the trade realignment are swamped by the larger influences of the global economy, to the extent that it is impossible to estimate the long-term effect.

On balance, though, the general view is that the change was beneficial to New Zealand. From relying on high-volume, low-margin community sales to the UK, exporters – mainly in the agricultural sector – were forced to diversify and seek higher margins to compensate for lower volumes.

This is a process which is continuing to this day, and is responsible for the buoyant NZ economy, despite the downturn in demand from European customers. Particular growth in high-value markets has been experienced in North Asia, and more growth is expected with the agreement of TPP.

The crucial point here, however, is one of balance. For anything to be worthy of the title claim "analysis", it has to look at the upside as well as the down-side. As with impact assessments for legislation, for instance, where one sees costs of implementation and benefits, what matters is the overall outcome.

In leaving the EU, one can expect a gradual realignment of trade – that, for many, is one of the main economic reasons for leaving the EU in the first place, breaking free of its economic sclerosis. Not even to attempt an estimate of potential gains, therefore, is to produce a fatally unbalanced work which has no analytical value whatsoever.

Give the wide range of possibilities, though, the only valid outcome of an honest analysis could be a range of figures. One might expect that to span the positive to the negative, dependent on policy decisions and variables which may or may not be amenable to change.

Here, there is another major lacuna, in that the Treasury exercise makes no attempts to identify these issues, or put a price on them. It does, for instance, tell us that "membership of the EEA" would give the most access to the Single Market, but – since the EEA Agreement does not cover commercial fisheries or agriculture, it argues that we would see the re-introduction of tariffs in these sectors.

What is ignored here is that the EEA Agreement is very flexible. There are provisions for country-specific protocols to bring certain within the scope of the agreement. Thus we see in Protocol 3 a list of certain agricultural products for which there are special arrangements. There is nothing, therefore, to prevent agreement on a UK-specific protocol allowing tariff-free trade on fishery and agricultural products with the EU Members States, on exactly the same lines as currently enjoyed.

Yet another issue raised is the potential cost of rules of origin (ROO), where the Treasury makes great lay of the problems, in this passage:
1.26 For example, ‘rules of origin’ specifically require exporters to obtain proof of origin certificates from their national customs authority to certify the domestic content of their exports when trade is underpinned by an FTA. The economic cost of these is significant. Without the customs union, businesses trading within the EU would have to submit customs declarations, pay Value Added Tax on their products as they cross a border, and accept delays while waiting for them to clear inspections. The OECD has estimated that crossing the border, documentation and other delays can increase the transaction costs of trade by up to 24% of the value of traded goods.

1.27 The impact of these administrative costs would be particularly pronounced for time sensitive industries like fresh food or those participating in complex pan-EU supply chains such as the aerospace and automotive industry. For example, separate evidence from time-sensitive industries in countries acceding to the EU suggests that every 1 hour of customs delay adds 0.8 percentage points to the ad valorem trade-cost rate and leads to 5% less trade.
Here what is being ignored is the Commission's own website. It tells us that, from 2017, the current system of certification of origin carried out by the third country authorities will be replaced by statements of origin made out directly by exporters registered via an electronic system.  The idea of border checks belongs with the Ark.

Furthermore, for the EEA, the system has been enormously simplified, while there are also substantial concessions to Efta states. Few products are now caught by the rules and, where there are long-standing supply arrangements, traders can benefit from the "long-term supplier's declaration".

What thus comes across from the Treasury work is an attempt to find and elaborate all manner of problems that could arise, whether real or not, ladling them into the document to make leaving the EU look as gloomy as possible. This is a tawdry piece of work that lacks credibility and should be ignored. It has no value at all.

In reality, the chances of the UK benefiting over the longer term are probably higher than any chances of us losing. The EU is a backwards-looking organisation which is consistently failing to adapt to the modern world - hardly surprising when the concept of the customs union on which it is based stems from the 19th Century.

Simply the act of leaving is a forward-looking move, while the challenge of breaking back into the real world can only be good for a modern economy. The EU can keep their customs union. We want to play in the 21st Century. 

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