There is no need to feel pessimistic about this country. It is only the upper echelons who are licked. For them the answer to Dean Acheson’s suggestion that Britain had lost an Empire and hadn’t discovered a new role is, ‘Yes, we’ve discovered a new role: we were an empire and now we will be a colony.’
Tony Benn, Arguments for Socialism (Jonathan Cape, 1979)
Heineken Export, ran a lager advert slogan a few years ago, was ‘the world’s favourite import’.
I fear that this particular attempt to promote fizzy yellow beer from the Netherlands may have stretched the facts more than a little. But it did contain an important truth, often overlooked in economic discussion: every export is someone else’s import, just as every credit is someone else’s debit. There is – there has to be – someone on the other side of every deal.
This is a principle to keep in mind when considering the likely economic consequences of a majority for Leave in the forthcoming in/out referendum on Britain’s European Union membership. Here is another: provided there is free trade and an absence of external enemies, there are no economies of scale in terms of political organisation, no compelling economic or security reasons, why, for example, New Zealand should feel obliged to merge with Australia, or why Hawaii should be constrained to remain within the United States, whatever other reasons there may be.
Finally, a third principle holds that, in a market economy, nations do not ‘do business together’, beyond some very limited state-to-state traffic in arms or other sensitive items, such as nuclear reactors or spacecraft. Private sector actors – individuals, partnerships and companies – may buy and sell across national frontiers, but they do so on their own account, not as representatives of their respective governments.
Where do these three principles take us in relation to the possible economic fall-out from Leave? The first would guide us to the Pink Book, the annual official compendium for the balance of payments compiled by the Office for National Statistics – not to be confused with either the Blue Book (the annual national accounts for items such as gross domestic product), or the Red Book (the actual meat of the annual Budget, rather than the flimflam from the chancellor about making Britain great again).
The 2015 Pink Book puts a figure of £92.8 billion on Britain’s current account deficit with the rest of the world in terms of trade in goods, trade in services, income (mainly investment income) and transfers, which are defined as a payment for which nothing is bought – sending money out of the UK to relations abroad would count as a transfer, as would Britain’s contributions to the running costs of the United Nations.
Within that alarming figure – more than 5 per cent of GDP – there are big geographical variations. With the United States, Britain runs a £25.7 billion current account surplus and with the Americas as a whole a surplus of £28.4 billion. With Africa, the deficit is £4.4 billion and with Asia it is £11.7 billion. Our dealings with Australasia and Oceania result in a £7.4 billion surplus.
All those numbers are quite manageable, regardless of whether a plus or minus sign appears in front of them. The same cannot be said for the position with regard to the other twenty-seven members of the EU, with whom the UK runs a current account deficit of £107 billion. This comprises a £78 billion deficit on trade in goods, a £17 billion surplus on trade in services, a £34 billion deficit in primary income and an £11 billion deficit on transfers. (The bulk of this last figure is accounted for by the UK’s net contribution to the EU – i.e. after all the latter’s spending here has been accounted for – of £9.8 billion.)
From these figures, you may reasonably suppose that Britain is the rest of the EU’s favourite importer. Year in, year out, EU businesses sell vastly more to British consumers than British businesses sell to continental customers. For every exporter an importer, and the figures make clear that a large number of those importers are British.
Of course, no one is forcing anyone to buy all this stuff – or even to sell it. Our second principle reminds us that it is people and companies that, in the main, do business with each other, domestically and internationally. Should our fellow EU members chose to behave as if this is not the case, and decide that a non-EU Britain ought not to be admitted to the single market, it will be interesting to see how they will explain to their exporters that henceforth these firms will lose a lucrative chunk of business.
Incidentally, the figures shed interesting light on two other much-touted claims about Britain’s dependence on EU membership.
The first relates to the City, whose financial practitioners, we are told, would face calamity were they to be shut out of the continent. While it is true that a large part of that surplus on trade in services relates to financial services, the deficit in primary income is similarly reflective of the fact that foreigners have made better investment decisions here than we have made in the rest of the EU – wasn’t this supposed to be one of those things we are good at?
The second relates to the claim that half, or two-thirds, or some similarly impressive proportion of our trade is with the rest of the EU. Once, it may have been. Now the figure is 43 per cent.
Suggestions that the rest of the EU would seek to expel us from continental markets – regardless of the damage that would wreak on their own exporters – takes us to our third principle. Given we are entitled to free-ish trade through membership of the World Trade Organisation (WTO), would the other EU members be allowed to blockade themselves against the intolerable threat of making good profits selling billions of pounds’ worth of goods to the British? No, is the short answer. Although the EU would not be obliged to grant tariff-free access to its markets: Britain would be entitled only to the standard reduced tariff available to all WTO members, which is currently set at an average of 3.8 per cent of an import’s value at importation, down from 6.3 per cent in 1995.
An alternative scenario would be the sort of arrangement enjoyed by Norway, which has tariff-free access to the EU (albeit not in relation to agricultural and fisheries produce). Here is the European Commission’s view of its proudly independent Nordic neighbour: ‘Norway belongs to the leading group of the richest countries in the world measured by GDP per capita … Norway is the EU’s fifth most important import partner for trade in goods … and the seventh export market for the EU.’
Not a complete basket case, then?
The Norwegian model, as we are endlessly reminded, would involve submission to various single-market rules. Well, yes. That is, quite understandably, the price of access to the single market – as against being outside the common external tariff, like Canada, the US and other major trading partners. But at least there would be a choice to be made; one, furthermore, that could be changed in future.
Now, perfectly free trade has yet to be established worldwide – just as world peace has yet to break out. But we are not talking about perfection, rather a rough approximation of the position described in our third principle: that the global economy is the result of firms doing business with other firms, not governments dealing with fellow governments.
The EU belongs, however, to the era of power blocs, of east versus west, of treaties and pacts, when medium-sized countries set up joint military commands and joint ‘external’ tariffs with the outside world – a time when the future belonged to the superpowers. Within such a mindset, it makes perfect sense to talk as if the continent’s exporters have no real need of importers, certainly not British ones; to believe that it is nations that ‘do business’ with each other rather than private-sector actors, and that – pace Australia, Canada, New Zealand, Switzerland, Canada and many others – no medium-sized country can manage its own economic affairs any more.
All of the above, of course, is predicated on the innate desirability of free trade. A – perhaps the – refrain from the Leave camp is that ‘we were told we were joining a free trade area’ in the 1970s, the last time Britain held a vote on the matter.
Back then, the forces of economic nationalism were rather more robust than they are today – in the Labour Party, the trade unions, the nascent Green movement and elsewhere. That European Community membership allowed goods to pour unchecked into the UK was seen by these forces as one of the key reasons for getting out. Labour’s Alternative Economic Strategy, with its import controls, could not be implemented within the confines of Community membership.
Today, the modern mercantilists on the Leave side are keeping a near-invisible profile. Economic nationalism can seem a cause without any rebels. In part, this is simple prudence: one thing guaranteed to stampede undecided business opinion into the Remain camp would be a ‘protectionism’ scare. (Why this should be so is unclear, given that, as the above figures show, British business could do with some protection). Another explanation for their silence is a fear of muddying the waters, with the public already confused by the rival versions of life after Brexit on offer.
Above all, perhaps, it is the sheer strength of the intellectual currents running in favour of trade liberalisation, with the trillions of dollars of extra global growth claimed for every trade agreement touted about with the same abandon and the same lack of any real evidence as the ‘three million jobs’ that, we are constantly told, would be put at risk were Britain to leave the EU.
Aiding and abetting all this has been the changing composition of the leadership of the British left, decreasingly connected with ordinary working people and increasingly reluctant to impede the free flow of goods, money and cheap labour from which its own social class has benefitted more than most. Forgotten is the stricture of Jean Jaurès, leader of France’s socialists from 1902 to 1914, that free trade subordinates the various interests of different groups within each nation to the interests of the holders of wealth internationally.
On a more practical level, the reappearance of tariffs would generate some of the revenue that, latest figures suggest, the Exchequer sorely needs, quite apart from making British goods more competitive in the home market.
It could be that protectionism is a route down which the public would not choose to go. The point, however, is to have that choice. The Remain camp is the latest in a long line of pro-EU lobby groups that suggests that because choices have consequences they are not worth having. For all the thigh-slapping, matey talk along the lines of ‘Heaven knows, the EU’s not perfect!’, the world view underlying Remain is that the costs and constraints of EU membership are not up for discussion while the adverse consequences of Leave, regardless of the form a post-Leave Britain might take, are overwhelming. A classic case of what Milton Friedman described as ‘the tyranny of the status quo’.
Post-Brexit, Britain could be protectionist or free trading – or both, at different times in different circumstances. It could lavish state aid on industry, or let lame ducks go to the wall. Again, these policy choices could vary over the years but they would all have in common the fact that they were national decisions, rather than supranational compromises.
As for Britain’s supposed pariah status should Leave win the day, the same people said exactly the same thing about not joining the euro, and what happened? An exchange rate opened up between sterling and the single currency and has bobbed around in the conventional manner ever since.
In the world outside the EU bubble, exchange rates are normal. So are national trade policies, industrial strategies, farm-support programmes and frontier controls. There has been no greater achievement of Remain and its predecessors than the depiction of Leave-inclined people as strange or aberrant.
The economics of Leave are the economics of normality.