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Should Britain Leave the EU?
Dedicated to the memory of Sir Julian Hodge (1904–2004)
Should Britain Leave
the EU?
An Economic Analysis of a Troubled
Relationship, Second Edition
Patrick Minford
Professor of Economics, Cardiff Business School, Cardiff
University, UK
with
Sakshi Gupta
Economist, CRISIL, India
Vo Phuong Mai Le
Lecturer, Cardiff Business School, Cardiff University, UK
Vidya Mahambare
Associate Professor of Economics, Great Lakes Institute of
Management, Chennai, India
Yongdeng Xu
Researcher, Cardiff Business School, Cardiff University, UK
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
5 Agriculture 101
6 Manufacturing 120
7 Services 141
Bibliography 173
Index 185
Patrick Minford, Sakshi Gupta, Vo P.M. Le, Vidya Mahambare and Yongdeng Xu - 9781785360329
Downloaded from Elgar Online at 06/24/2016 03:52:01AM
via free access
Figures
3.1 Euro per US dollar, 1980–2001 45
3.2 UK trade-weighted index, 1980–2001 46
3.3 UK trade-weighted index, 1990–2014 47
3.4 Euro per dollar, 1990–2014 47
4.1 Level and composition of producer support for agriculture
in OECD countries 67
4A.1 The calculation procedure: example for cars and other road
equipment 83
5.1 EU agriculture: basic statistics for 2012 102
5.2 Export share of UK agricultural imports and exports and
EU share of UK agricultural imports and exports 105
5.3 Member states’ share in EU financing and spending
(% share in EU), 2013 113
6.1 Industry as a percentage of GDP 121
6.2 UK manufacturing sector percentage growth or
contraction in real value added, 1994–2009 123
6.3 Percentage of employees in manufacturing with science and
engineering degrees at first-stage university level, 2006 124
6.4 Service inputs into the manufacturing sector relative to
manufacturing gross output for the EU-27, 1995–2011 124
6.5 EU anti-dumping measures in force by region, 2008–12 132
6.6 EU anti-dumping measures imposed by products,
2008–2012 133
7.1 Share of service value added in total exports, 2009 146
7.2 Share of commercial services trade as a percentage of total
world service trade, 2013 147
7.3 UK service exports (excluding travel, transport and
banking) (£ million), 2012 149
7.4 Services Trade Restrictiveness Index by sector 156
7.5 STRI average, minimum and maximum across sectors 157
7.6 Impact of reform on trade in service sector (percentage
change in exports and imports from 0.05 percentage
point’s reduction in STRI) 164
vi
Tables
1.1 A survey of costs from EU membership 9
2.1 The effects on UK output and unemployment of EU-style
social measures 28
2.2 OECD measures of labour market intervention scale from
0 (least restrictions) to 6 (most restrictions) 30
2.3 Product market regulation: OECD measures 31
2.4 Business regulation index, Economic Freedom of the
World, 2012 32
4.1 Survey indicators of service barriers (scale 0–6 from least to
most restrictive) 69
4.2 Estimates of tariff-equivalents on manufactured goods due
to all trade barriers (%) 69
4.3 Effects of UK tariff of 10% on agriculture and
manufacturing: % changes from base 74
4.4 Effects of UK1EU tariff of 10% on agriculture and
manufacturing: % changes from base 75
4A.1 PPPs 84
4A.2 Domestic margins 85
4A.3 Producer prices 86
4A.4 Export margins 87
4A.5 Export prices 88
4A.6 Transport margins 89
4A.7 World prices 90
4A.8 Weighted average protection rates for the EU and the US 91
5.1 Basic agricultural statistics for the EU, 2012 104
5.2 MFN tariffs across countries on agricultural products 106
5.3 International comparisons of government policies aimed at
protecting agriculture 108
5.4 Producer support estimates of support to agriculture
(US$ billion) 110
6.1 High technology exports as a percentage of total
manufactured exports 126
6.2 Imports and tariff peaks, 2013 (%) 129
6.3 Trade restrictiveness indices: manufacturing, 2009 (%) 135
vii
viii Should Britain leave the EU?
3
4 Should Britain leave the EU?
also lobby for this. It is thus easy to argue that the case for staying in is a
‘business’ one even though a moment’s reflection reminds us that business
opinion is not the same thing as the economic interests of UK citizens.
The viewpoint of this book is that of the economist. The book reviews
the costs and benefits to UK citizens of the EU, much as the Manchester
liberals Cobden and Bright reviewed the costs and benefits of the Corn
Laws in the early nineteenth century; then too a large and powerful busi-
ness (agricultural) lobby opposed repeal.
This book focuses mainly on the role of trade, the central function of the
EU; while this is not we think the major source of costs to the UK, it has
been widely misunderstood as an advantage of EU membership because it
gives us ‘access’ to the EU market and to markets with which the EU nego-
tiates trade agreements. This is a fallacy: the book is principally devoted
to explaining that this is the case because international trade is about the
price at which you can sell your exports and buy your imports. We then
go on to explain how the EU is a customs union devoted to raising the
prices at which we can buy imports and selectively raising the prices of our
exports and that this protectionist strategy, like virtually all such strategies,
reduces our welfare.
Because there are so many other facets of EU membership we also devote
space to these. We consider regulation to be an obvious source of intrusion
that many have seen is costly. With the euro-zone bringing about a surge in
new controls from Brussels and reminding us that ‘ever-closer union’ must
imply that the UK eventually joins the euro, we have added some material
on the effects of this. Since the euro-zone crisis it has become apparent that
‘bail-out’ is a central feature of the euro-zone and indeed of the EU, which
has forced countries outside the euro such as ourselves to help out too; we
have updated our review of the possibilities of the UK being involved in
transfers to the rest of the EU in the future. A further topic that we have
devoted some space to is immigration, now a central part of the UK politi-
cal debate and closely linked to the free entry of people from the rest of
the EU. Finally, much concern has been expressed about what the world
trading environment would be like for a free trading UK outside the EU;
we have added sections looking carefully at this. Other than these central
issues, we have generally updated the factual background and the review of
other work in this edition.
The book is organized into two main parts. The first is devoted to sum-
marizing the economic issues involved in EU membership. Some of these
are not to do with trade: regulation, the euro, possible bail-out demands,
and of course the basic membership fees. Much has been written on these
issues and we attempt to build on this and give our own summary account
of costs and benefits, using models we have developed that give us some
Introduction 5
ability to calculate these. Then we consider trade and the ways in which
our EU membership diverts us from free trade to our ultimate cost. Many,
as pointed out above, believe that at least in this respect the EU is a fine
institution, contributing to opening up trade barriers around the world.
Thus some have argued we should leave the EU, ‘except in trade’. But this
is a quite wrong assessment and was originally the cause for writing this
book. We devote the fourth chapter to determining a broad estimate of the
costs the EU’s wide protectionist agenda has imposed on UK (and indeed
EU) citizens.
In the second part of the book we devote three full chapters to the full
story of what the EU has done in the areas of trade in agriculture, manu-
facturing and services. These chapters set out in considerable detail both
the facts and available analyses of how trade and trade protection has
developed, especially in the EU, and how much this distorts trading pat-
terns around the world.
The rest of this chapter is effectively both an introduction to the book
and an extended ‘executive summary’ of it.
longer-term perspective. We already saw how one such opt-out, from the
Social Chapter, was ceded by the Blair Labour Government, no doubt as
part of some imagined trade-off with benefits to be obtained from Brussels
or merely as a way of ushering in ‘socialism by the back door’. This event
illustrates how easily the UK could be sucked into more and more EU
intervention by remaining a member of the EU under the present treaty;
whether it happens by EU pressure or by willing complicity on the part
of UK politicians whose agenda of the moment it might suit (but who
may later regret the cumulative effect of their actions), there is a ratchet
effect at work in this EU relationship as defined in the Lisbon Treaty.
That treaty never surrenders any powers the EU has acquired (the ‘acquis
communautaire’) and hence any surrender from the UK side accumulates
its losses of control; each time we surrender, our politicians say ‘ah well,
it is easier to give in and to stay in than to try to change the beast’ and
thus it is we find ourselves some forty years since entry into ‘the Common
Market’ in an all-pervading ‘European Union’ relationship we never seri-
ously dreamt of, let alone intended.
What is needed instead is a new bilateral treaty which defines a limited
relationship, limited in its current and future scope to definite areas of
mutual benefit – let us call it a ‘resetting’ of our relationship with the
EU or ‘Breset’. As we will see, this will include cooperation in trade and
regulation, preserving the best of what we now have of these, while jetti-
soning the excessive protection and over-regulation (notably in the labour
market) and the threats of their future extension which we abhor. Being
‘out’ of the EU will then imply a far more flexible relationship with the EU
in which good shared regulation and trade relationships will be preserved.
The fears expressed by many about being ‘out’ will be seen to be groundless
in this perspective.
We will develop the details of this new relationship in what follows. But
here we sketch the basic idea. At the core of our relationship with the rest
of the EU lies the Single Market, which is intended to prevent country
regulation from acting as a trade barrier, and free trade access throughout
the EU’s geographical area. Though this does not extend much to serv-
ices, our key UK sector, it greatly affects our manufacturing industry. As
we will see later, the problem with this lies in its high level of protection-
ism through the EU’s Customs Union policies which keep out or restrict
imports of non-EU products: it is not only in its well-known Common
Agricultural Policy that the EU is protectionist. Somehow therefore we
need to extricate ourselves as a major trading nation from the EU’s protec-
tionism while preserving the benefits of the Single Market and free trade
within the EU. This can be done. In the first place, where the UK feels
that product regulations are helpful to industrial integration, they can be
Introduction 7
left alone and protected in a new treaty. Secondly, where trade barriers are
concerned, it is possible for the UK to maintain free bilateral trade with the
EU, while also removing trade barriers against other countries, in indus-
tries where there is a high degree of integration between the UK and the
rest of the EU. This is possible because the way that the EU mainly levies
its protection is via trade agreements on access and pricing; so effectively
in these highly integrated industries (such as the volume car industry) the
UK would continue to price its products in the rest of the EU as it now
does. Even though imported products from the rest of the world would
drive UK prices down to world levels, these lower prices would not filter
through into the rest of the EU.
The idea of a new UK–EU treaty would therefore be to preserve the
existing relationships that achieve virtuous integration. But at the same
time the UK would not implement regulations that damaged the economy
as a whole. The idea that trade is held up by differences in regulation that
have a distant relationship to the trading industry (such as general labour
market regulations) is not accepted in WTO judgements or in the theory
of trade; differences between countries’ institutions are a valid source of
cost differences, and contribute to competition. So UK regulations will in
general be based on UK judgements of cost–benefit. Nor would the UK
adhere to the single market in labour, rather exerting normal immigration
controls based essentially on skill points, as in the US ‘green card’ system.
It would withdraw sine die from any potential involvement in the euro or
in trans-EU bail-out arrangements. It would agree to mutually advanta-
geous extradition arrangements but not to any pooling of justice systems.
It would cooperate with the EU foreign office just as it does with the US
State Department. It would join forces with the EU in general talks on
trade, such as the one currently going on with the US, where all sides stand
to benefit from agreement.
In short the UK would once again become a sovereign country, friendly
with its large neighbour just as it is friendly with countries such as the US,
Canada and Australia, and it would agree to close trading and regulatory
relationships with the EU as needed for mutual benefit. It is wrong to
suggest that such a new treaty cannot be achieved because of the ill-will
generated by our demands, though of course it is possible that negotia-
tions for a new treaty would break down, at least for a time. In this book
we do our costing on the basis of breakdown and we show that it is worth
the UK’s while to leave even on this basis; essentially leaving without any
new UK–EU treaty would be to adopt a role as a free trading nation in the
WTO community, with all our other existing political relationships such
as NATO, the OECD and the IMF, and there is absolutely no problem
about such a role, as we explain in detail below. But since there is mutual
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