How the
costs to the UK of leaving the EU are over-estimated i.e.:
UK
Treasury forecast: 7.7% reduction in GDP
Academic
forecasts:
6%
increase in GDP
Cass
professor gives evidence to the Treasury and International Trade Select
Committees First published Monday, 21st May, 2018 • by
City Press Office (General enquiries)
Professor David Blake – from
Cass Business School – appeared before the House of Commons International
Trade and Treasury Select Committees to give evidence on the
UK’s future trading relationship with the European Union.
The
Treasury Committee and the International Trade Committee are jointly examining
some of the economic and policy implications of the UK’s approach to
international trade, in the context of the UK leaving the European Union and
both the Single Market and the Customs Union.
The
Treasury’s model predicts a 7.7 per cent
reduction in GDP in the event of ‘no deal’ in which the UK retained
the existing EU Common External Tariffs with the rest of the world, while the EU
imposed these same tariffs and non-tariff barriers (NTBs) on trade with the UK.
Of the 7.7 per cent reduction in GDP, 1 per cent is due to the new tariffs on
trade with the EU and 6.8 per cent is due to the imposition of NTBs. The model
also predicts that the maximum facilitation (max-fac) solution preferred by
Boris Johnson for avoiding a hard border in Northern Ireland would wipe
1.8 per cent off GDP.
As written
evidence, Professor Blake submitted a report called ‘How
bright are the prospects for UK trade and prosperity post-Brexit?’ This
shows that not only has the Treasury overestimated the costs to the UK of
leaving the EU, it does not take into account the regulatory burdens of staying
in the Single Market or the benefits from reducing tariffs by leaving the
Customs Union.
Professor
Blake strongly rejects the Treasury’s predictions for the costs of leaving the
EU and here he expands further on his submission.
Costs of leaving the EU
“I reject the Treasury’s predictions of costs for
leaving the EU. Firstly, NTBs are illegal under
World Trade Organisation (WTO) rules which forbid any form of discrimination
on standards between home and foreign products or between the foreign products
of different countries. So almost 90% of the projected reduction in GDP is due
to the imposition of illegal NTBs. This will not happen.”.
“Secondly, even if there will be new and
unavoidable frictional costs, the Treasury has grossly overestimated them. Of
the projected 6.8 per cent reduction in GDP due to the imposition of NTBs, 1 per
cent arises from frictional border costs. Yet if the same border costs as in the
EU’s trade deal with Switzerland are applied to the UK, these amount to just
0.12 per cent of GDP, eight times lower.
Costs of staying in the Single Market
“The Single Market is concerned with standardising regulations in the EU.
According to Professor Jacques Pelkmans (‘The
Economics of Single Market Regulation’, 2012) who also gave evidence at this
session, regulation is the EU’s core business. Most EU Single Market regulation
is risk regulation, covering issues such as safety, health, environment, and
consumer protection. While accepting the need for ‘good’ regulation and less
‘red tape’, Professor Pelkmans also accepts that regulations can be used to
raise rivals’ costs and create barriers to competition from third countries.
“Since the primary purpose of trade is to make consumers better off,
Professor Pelkmans concedes that the Single Market has not been fully successful
to date due to: local incumbents having market power, discriminatory local
regulations, subsidies, transaction costs like languages, and home bias. The
evidence for this is that price convergence has been low (the same good should
sell at the same price in different parts of the Single Market, but there are
still significant price differences) and most firms do not participate in the
Single Market.
“Federik Erixon and Rosita Georgieva (‘What
is wrong with the Single Market?’, 2016) argue that: ‘The more Europe’s
economy grows dependent on services and the digital sector, the less Single
Market there will be in Europe. Given the vast complexity of regulations in
Europe, and the increasing layers of bureaucracy they entail, it is difficult to
see how improvements could be made without a vast overhaul of the structure of
regulations and the design of the Single Market. As reforms are moving closer to
areas like digital services, energy, and advanced business services, it is
evident that the improvements that can be made in Europe’s integration is less
about classic Single Market reforms and more about building adequate market
institutions and advance structural reform’.
“It is clear from evidence such as this – from strong supporters of the
Single Market concept – that the Single Market does not really exist, especially
in services. Given that the future of the UK economy is services – 80 per cent
of UK GDP is in services, yet only 5 per cent of UK DGP is exported to the EU as
services – we should not be worried about leaving the Single Market. The
regulatory burden of remaining in the Single Market is equivalent to
2 per cent of GDP. We can reduce this cost by preparing to simplify
regulations, while keeping them ‘good’; simplify product/service standards so
they do not impede competition; and building digital services, energy, and
advanced business services for the global economy where all future growth is.
Reducing tariffs by leaving the Customs Union
“It is crucial that the UK is free to set is own tariffs outside the Customs
Union. However, EU (tariff and non-tariff) barriers on trade in food and
manufactures raise their prices by 20 per cent. If these barriers were reduced
from 20 per cent to 10 per cent, UK would be better off and GDP would
rise by 4 per cent.
“However, the various current proposals for ‘customs partnerships’ and
‘customs agreements’ essentially mean that we are stuck in the Customs Union
with these high trade barriers.
“While we do need a good trade deal with the EU, the one currently on offer
is not good enough. This is a standard free trade agreement with only limited
provisions for trade in services. Services would be provided ‘under host state
rules’, meaning complying with different rules in different member states. This
would be disruptive for certain sectors – financial services and broadcasting –
which currently operate in the EU under domestic rules.
“The UK, by contrast, should seek a much more ambitious agreement in services
either based on mutual recognition which would allow reciprocal access or based
on the acceptance that the regulatory regimes are sufficiently equivalent or
aligned. In particular, trade in financial services should be covered by ‘the
principle of mutual recognition and reciprocal regulatory equivalence’.
“Another key concern is the EU’s ‘level playing
field’ demand. The EU has made it clear that, while it might be willing to
consider a ‘balanced, ambitious and wide-ranging free trade agreement’, this is
only ‘insofar as there are sufficient guarantees for a level playing field’. In
particular, the EU wants an agreement to cover ‘competition and state aid, tax,
social, environment and regulatory measures and practices’, preventing the UK
from competing ‘unfairly’ against the EU.
“In other words, the EU does not want the UK to
escape from the protectionist ‘European model’. This is worse than a standard
‘no compete’ clause when a senior employee leaves a company. The EU wants to put
the UK on permanent gardening leave. It would effectively prevent the UK from
achieving regulatory autonomy or from pursuing an independent trade policy – and
needs to be rejected.
Academic: prospects for UK trade and
prosperity are bright post-Brexit
”We need to ignore both the Treasury’s
scaremongering and attempts by the EU and its supporters in the UK to keep us in
the EU in all but name. The UK’s prospects for trade and prosperity after
Brexit will be inversely related to the size of the tariffs on international
trade that the UK itself sets. The lower the tariff barriers, the brighter the
prospects will be. By leaving both the Single Market with its regulatory
excesses and the Customs Union with its high tariffs on imported goods,
UK GDP would increase by 6 per cent
– in marked contrast to the Treasury’s dire and exaggerated predictions
of a 7.7 per cent reduction in GDP.”
NB Philip Hammond,
Chancellor of the Exchequer, studied
Philosophy, Politics and Economics
(PPE) at
University College, Oxford.
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