I’m strongly in favour of the UK remaining part of the EU. However, I recently went to a talk given by a Brexit supporter, to hear the other side. I believe that he/she gave some persuasive arguments. Even though I don’t agree with all of them, I thought to share them here, since it is important for voters to be informed about both sides. I’ve supplemented them with perspectives from an excellent report by Capital Economics, commissioned by Woodford Funds, at https://woodfordfunds.com/brexit. Feel free to comment if you disagree!
Trade
Current State of Play
- UK exporters benefit from not needing to pay the EU’s Common Customs Tariff if they export to the EU
- But UK consumers pay more for imports from outside the EU, since we need to impose the EU’s Common Customs Tariff
- UK can benefit from the EU’s clout in international negotiations
- But the UK can’t negotiate its own trade agreements. Having the clout of a large group is not a benefit if the UK has different goals from the rest of the group. E.g. UK is primarily concerned with the City, France with agriculture
- The UK can help complete the Single Market in services, because it’s part of the club – e.g. reduce discrimination (at present, online offers are only available to people browsing the internet in certain countries)
- Free trade with the EU is important, but not absolutely critical
- Tariffs have fallen substantially. Average tariff to non-EU exporters is 4%, vs. 8% in the early 1990s
- But 4% is only an average. Some sectors will be hit more. Car industry would suffer from a 10% tariff on cars and a 5% tariff on imported components
- Manufacturing has fallen from 20% of UK GDP in the mid-1990s to 10% now. Tariffs only apply to goods, not services
- Europe has become a less important export market. 45% of UK goods and services exports go to the EU, vs. 55% in 1999. Exports are 30% of UK output, so goods and services exported to the EU are 14% of the UK economy
- Tariffs have fallen substantially. Average tariff to non-EU exporters is 4%, vs. 8% in the early 1990s
Post-Brexit
- Will the UK be able to negotiate a trade deal post-Brexit?
- The EU might refuse to deal as punishment for Brexit – in particular to deter others from leaving.
- But, even this situation won’t be a disaster. The EU won’t be able to “punish” the UK with a worse deal that (say) the US – under World Trade Organization rules, the UK has “most-favoured-nation” status with the EU – i.e. is entitled to the best deal that the EU gives to any other country
- UK exporters would face costs, e.g. clearing customs or complying with the EU’s rules of origin (documenting that a sufficient % of components in a product come from within the EU, to get tariff-free access). But this would only be an inconvenience – the US and other non-EU countries aren’t too hindered by it
- The EU might be forced to enter into a deal because, just as the EU is the UK’s #1 export market, the UK is the EU’s #1 export market. Thus, it would be madness for the EU not to deal
- The EU might refuse to deal as punishment for Brexit – in particular to deter others from leaving.
- There’s significant precedent for trade deals between the EU and non-EU countries
- Norway, Iceland, and Leichtenstein are outside the EU, but part of the European Economic Area
- Switzerland is outside the EEA, but still has access to the Single Market due to numerous bilateral agreements
- If the UK leaves, it shouldn’t stay within the EEA. The whole point of leaving the EU is freedom to negotiate our own trade deals with third party countries; this wouldn’t be possible in the EEA. Instead, the UK should be outside the Single Market, and outside all the regulations. Being outside the Single Market doesn’t preclude a trade agreement. Japan, China, the US, Canada all sell into the Single Market
- The UK would be able to broker its own trade deals with non-EU countries, rather than being bound by the EU’s trade deals
- There are many countries with which the EU hasn’t reached a trade agreement. The UK might be able to by negotiating alone
- At the moment, the UK is bound by the EU’s Common Customs Tariff on imports. After Brexit, it might wish to have a free trade policy, leading to cheaper imports (helping consumers and reducing manufacturing costs)
- The UK has 2 years to negotiate a deal – it will still benefit from the Single Market for 2 years. Thus, there would be no sudden impact on trade
The Public Purse
- The UK would save on its membership fee, c. £10bn net. This is 0.5-0.75% of GDP, and 1/7 of the government’s annual deficit of £70bn
- But, the government might have to compensate some sectors that are currently benefiting from EU handouts, or trade agreements (e.g. car industry)
- The UK might need to continue to contribute to the EU to preserve Single Market access, Norway pays €107.4 per capita (versus the UK’s €139 as an EU member)
- The gains may be offset by economic disruption and lower migration following Brexit
Regulation
- The UK suffers the burden of EU regulation across the whole economy, not just the part that trades with the EU. The UK’s exports to the EU are 14% of the economy, but concern for this 14% leads to rules affecting the entire economy.
- The media likes to cover “annoying” rules, e.g. that hairdressers can’t wear high heels. But, these are relatively unimportant.
- But, some of the rules are important. E.g. the National Health Service must comply with the Working Time Directive, and retailers with the Agency Workers’ Directive. The impact of the 100 most costly EU regulations for UK business has been estimated at £33bn/year
- The benefit from axing EU regulations is muted by the fact that the UK would still voluntarily adopt many of them
The City
- Financial services is 8% of the UK. 4% of this is “City-type” activities; the remaining 4% is retail financial services. Manufacturing (seen to be dead in the UK) is 10%. So, the City is not unimportant, but not huge
- As a EU member, the UK benefits from “passporting rights”. A US bank with a branch in the UK can sell to the rest of the EU without having a branch there.
- If the UK loses its passporting rights, its exports of financial services to the EU could halve from £19.4bn to about £10bn.
- It may be possible for firms to simply set up a “brass plate” subsidiary in the EU for legal reasons, and keep their key activities in London – similar to how many US firms are headquartered in Delaware, but their key activities are in New York
- It would be very hard for banks to move their major operations from London to Frankfurt. More people work in financial services in London than live in Frankfurt
- People had the same fears, that the City would be hit, if the UK stayed out of the Euro or left the Exchange Rate Mechanism. But, this didn’t happen. London is uniquely attractive due to the English language, low taxes, low regulation, skilled labour, expertise in accounting and law
- The UK would be able to broker deals with emerging markets that could help the City, and increase financial services exports to China and Hong Kong
- The City has been bound by EU rules that it didn’t want to adopt, e.g. caps on banker bonuses (which led to an increase in banker salaries), and restrictions on short-selling (which can lead to bad companies being overpriced)
- Property prices in the City could fall by 8-15%
Immigration
- Net migration from Europe has more than doubled to 183,000/year (0.5% of the UK workforce) since 2012. This helps the UK economy to grow without pushing up wages
- Brexit would enable the UK to adopt a policy more tailored to its own requirements, vs. the EU’s one-size-fits-all policy – e.g. restrict low-skilled workers and attract high-skilled workers.
- Brexit might lead to a short-term increase in immigration
- There may be a rush-for-the-border ahead of the restrictions
- EU migrants already in the UK will stay longer than they might otherwise have, since they fear they won’t be let in if they leave
The EU’s Track Record
- The economic record of the EU is poor:
- The Euro. The EU did fine before it. Instead, the Euro has led to
- Suppressed competition between nation states with respect to economic policy
- Poor countries being locked into too strong a currency
- Germany having too weak a currency; amasses huge surpluses, lives off aggregate demand elsewhere
- The Euro can’t last in its current form. It’s a “light monetary union”. It needs to either go all the way to a common fiscal policy and political entity, or be reversed
- Extension of the EU to the East without careful consideration of the nature of the extension
- Schengen
- Common Agricultural Policy
- The Euro. The EU did fine before it. Instead, the Euro has led to
- One symptom of the EU’s weakness is European universities. Despite the EU’s strong cultural and intellectual heritage, they’ve vastly lost their influence and position in the world
Counterarguments from the Audience
- Would Brexit lead to Scotland leaving the UK?
- Unlikely. The case for Scotland leaving is much weaker now, due to the low oil price
- Scotland leaving the UK wouldn’t automatically allow it to return to part of the EU. It would have to apply for membership
- The EU has helped lead to social progress, e.g. equal pay for men and women
- The EU has helped maintain peace
- It has been NATO rather than the EU that has kept peace
- The UK leaving could lead to the EU breaking up
- This would be good for Europe, since the EU has a poor track record