An Economist's case for a Hard Brexit

Is free trade a Sovereign Nation’s right?

Vasco Camara

 

- “Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth, but the most effectual preventative of a famine; so would the freedom of the exportation and importation trade be among the different states into which a great continent was divided.”


Adam Smith, "The Wealth of Nations"


The Virtue of Vassalage


For the past months, Theresa May devoted herself to devise a plan that would respect the people’s choice, however soften the possible repercussions of this divorce. Instead, she brought a deal to the parliament that complied with none. The main stain was the Irish backstop. As it is known, Northern Ireland voted to remain in the EU, which gave May another headache. To avoid the re-introduction of a hard border between Northern Ireland and the Republic of Ireland, as this would bring back border control, and likely tariffs and quotas, the infamous backstop was proposed, ensuring trade would remain open and free between Northern Ireland and the European Union, until further agreement were to be reached between the parties at stake. However, for this to apply, the entire United Kingdom would have to remain in the EU’s customs union, losing decision-power to pursue trade deals with non-EU countries, and submitting itself to EU regulations. This situation would be extremely perilous for the British economy, as, following the divorce, the UK would no longer hold representatives in the European Parliament, meaning they would lose a seat in the devising and voting of these regulations, making Britain a vassal state of the European Union, and hoping for the best for an undetermined period of time.


Fearing that her deal could be rejected in the Parliament, May addressed the European Commission seeking guarantees over the duration of the period of vassalage. But none were given. After the parliament voted for an amendment of this condition, the commission reinforced their position.


Benefits of the EU:


The reasons to condemn Brexit are many. Especially in the event of a divorce with no sort of agreement.


Being the EU’s Single Market a free trade area, it seems rather reckless that the British would opt out. Afterall, the benefits of a membership to the EU are innumerable: access to a free market, rights of European citizens to live and work in any member country, free movement of goods, services, people and capital, and many more. In the event of a no-deal Brexit, we were warned that it would lead to a break in all ties with the EU, all the way from trade to rights. It could lead to a disruption in trade, shortage of supplies, loss of jobs and rights, a crash of the Great British Pound, and so on. It does not require much to understand how much the UK has to lose with this departure. Or so they say. Let us question the costs and benefits of this membership, and their origin.


Integration and Economic Prosperity:


It has been widely assumed that integration is contradictory to sovereignty, and that, economic prosperity is positively related with integration. Thus, economic growth justifying the sacrifice of sovereignty. It has been established that globalisation is not only inevitable but beneficial too. And it is from this that we, so impulsively, draw the innumerable harms of Brexit.


Leaders of EU institutions continue to justify integration by reversing general causalities, this is, by promoting the good of individual members by striving for the well-being of the whole. However, this philosophy forgets to account for the idiosyncrasies of the individual members, making its final end unattainable. Yet, as monetary integration is not enough, we are witnessing growing efforts to harmonise fiscal policies. We are moving towards a single state that no one desires.


The Brexit referendum should have been the last sign for the EU to run some internal libertarian reforms. Instead, the Commission and leaders of EU-members continue to vow for even further integration. The European Union has proved to be anti-democratic; governed by an aristocratic commission, and a parliament in which MEPs vote for the best of their domestic economies rather than for the union as a whole, which challenges the whole EU project. EU legislations are enacted democratically, that is, to the jeopardy of the minority; essentially meaning that in the issues the MEPs are permitted to vote, some countries must suffer to the benefit of the majority. Also, data collected by VoteWatch.eu shows how the UK was on the losing side of the Council when it came to EU legislation decision-making, a position that increased especially in the years prior to the Brexit referendum.


There can be no union where there is no unanimity.


Brexit symbolises the first defiance to this narrative, and that alone justifies such movement. Therefore, it poses a threat to the EU’s narrative and its endurance, and to the eyes of its leaders, must be condemned, for a successful divorce is an incentive for further disintegration.


“Free” Trade:


We often assume the European Single Market to be a free trade area, and often advert to its unlimited and inherent benefits. However, this notion may be overrated. This market has been moving towards free intra-EU trade, but it has not quite yet achieved it. Even though the frictions of trade have thoroughly been reduced in the union, they are far from extinguished. There is far more liberalism in the trade of goods than of services, but still, some sectors, such as car manufacturing, have not been completely open to competition. We can say that trade is partially free. But trade to the outer countries is far from open. The Single Market is instead a pseudo super-state that advocates protectionism, to ensure political power. It is a place where the right to trade is determined by an aristocratic commission, and the privilege of choice is limited to their notions of what is good are.


Between the member countries, the constant introduction of taxes, for every purpose, makes trade so expensive, yet bearable for being the cheapest of options. It is easy to indicate the benefits of integration when disintegration is unknown. As equally, is it difficult to indicate the costs of integration when disintegration is unknown. Being my point that we can measure the potential benefits of disintegration because integration is known, thus being the costs those of sacrificing integration. And sacrificing integration does not mean sacrificing trade relationships.


UK-EU:


The proportion of the UK’s share of trade with the EU has been falling since the 1999. Conversely, the share of trade with non-EU countries has been increasing. Exports to EU fell from 54.6% to 44.5% of total exports, while the proportion of exports to non-EU countries rose from 45.4% to 55.5%, showing a growing trend of trade to the outside of the Union. Trade with the EU amounts to only 12.2% of the UK’s GDP, and 92% of British companies do not trade with European countries. Yet, all supreme trade regulations are set in Brussels. Being stuck in the Customs Union would hinder Britain from exploring the enormous potential that its economy holds in stand-by.


Threats to EU:


The exit of the UK poses many threats to the Union. As a contributor of around 16% to the EU’s total GDP, the divorce weakens the union even further. The only reason why the union is still standing, is the same reason why it will not stand for long. Having a low proportion of strong economies that show “solidarity” to the weaker ones, and compensate for their bad performances, the divorce essentially removes one of the strongest of their economies from this union. The EU’s economic system may be close to a crash. As the strongest economies borrow their tax revenues from their private sectors to the weaker economies, whose debts continue to amount by ridiculous amounts that will never be paid back, the whole economic situation keeps growing feebler.


The only deal:


We have constantly been exposed to the “reality” that is ahead of us. That the deal the Prime Minister proposed was the best Britain could get. It was widely supported by the leaders of the EU countries, and we were told that this was the “only deal possible”. That any other option would be catastrophic for the UK’s economy. But is the outcome of this terrible deal really the lesser of two evils?


The Commission and the representants of EU potencies have had a disgraceful stance on rushing into exercising an enormous pressure upon Brexit negotiations and the future of Britain. They are not willing to re-negotiate, as the terms have already been stated; suggesting the EU has absolute advantage in these negotiations, and that it plans, to its own avail solely, to manipulate the future course of Great Britain, and discourage other countries from attempting to exit the Union.


The Crash of the Great British Pound:


Such behaviour suggests that we can expect a trade war. If Project Fear’s forecasts are correct, and if the GBP does fall by 30% to the Euro, any setback to WTO tariffs would far deeper hurt the union than they would the UK. This because by adding the tariffs to the fall of the Pound, EU goods and services would become extremely expensive to the UK. The opposite would not verify, as British exports to the EU would turn out remain little changed or even cheaper. Certainly, no party would benefit from a trade war, but if we look at them individually, we see that such is of no interest to the Union. Yet, it does not eliminate its likeliness. But what price is the EU willing to pay to prove a point. It did not last for long against the US.


It is difficult to imagine Britain, as a lone wolf, surviving this divorce, especially in the event of a trade war. Which often lead us to conclude that you are either with the EU or against it. But that sounds like a false dilemma.


On the contrary, it should not be difficult to reach an agreement with the EU, given that as the UK has been integrated for over 40 years, it would not have to change much to comply with EU production standards.


Governments VS Businesses:


The UK has a strong trading relationship with the EU, making Brexit uncertain and risky for all parties involved. But we are fools if we believe that the supply of goods and services is somewhat set by the governments. UK and EU businesses have had a relationship for long, and they will continue to. If, at any instance, their businesses are affected, and therefore consumers are affected, governments will have to step down and reach an agreement. No one gains from tariffs except governments. Everyone benefits from free trade, except governments. Tariffs are just a way to gather money. The government is the enemy of business. If the businesses that sustain the economy fail, then the governments fail. The best solution, for every party involved, is to promote free trade, after the divorce.


Below is a list that shows the share of each EU-member’s GDP that is exposed in view of Brexit:


Ireland: 10.12%

Germany: 5.48%

Malta: 5.08%

Netherlands: 4.39%

Belgium: 3.5%

France: 2.19%

Czech Republic: 2.14%

Hungary: 1.71%

Sweden: 1.68%

Denmark: 1.49%

Slovakia: 1.31%

Poland: 1.31%

Luxembourg: 1.05%

Lithuania: 1.02%

Latvia: 0.86%

Estonia: 0.85%

Finland: 0.8%

Austria: 0.77%

Spain: 0.77%

Greece: 0.75%

Portugal: 0.67%

Romania: 0.56%

Italy: 0.55%

Cyprus: 0.52%

Bulgaria: 0.44%

Slovenia: 0.42%


Source: The continental divide? Economic exposure to Brexit in regions and countries on both sides of the Channel, by Wen Chen, Bart Los, Philip McCann, Raquel Ortega-Argilés, Mark Thissen, Frank van Oort


This list shows how every single EU-member, and each one of them, is so embedded in trade with the UK, that trading under WTO regulations would seriously hurt their economies. The truth is that each individual member of the Union must be so frightened of a disruption in negotiations, that in the event of a no-deal, it is highly likely they stand together to reach an agreement. And while this does not ignore how important trade with the EU is for the UK, it clarifies that no country will allow trade relations to cease. Everyone can benefit from free trade, and any attempt to punish one other, will certainly backfire.


To understand current negotiations, it is important to understand that the European Union has a lot to lose, and therefore it become dangerous. If chaos settles, this is a hard-Brexit, the EU will be forced to play along.


Threats to the UK:


One of the strongest threats to Britain is the trade in services, as this sector amounts to 80% of their economy. But trade in services with the EU represents only 5% of the UK’s GDP, which still is a great amount and it certainly is at stake, if France or Luxembourg intend to take over its provision. But these were neither safer were Britain to remain in the union. Several were the times the Union tried to introduce new forms of taxation, such as the Tobin tax, to which Britain opposed. A UK in the customs union would potentially have its services at peril. Even if were Britain to hold seats in the EU Parliament, a share of less than 10% of the votes would guarantee no safety against such endeavours.


Another strong threat could be non-tariff barriers.


But the timing could be no more favourable to the British. As the past months commence to reflect a decline in the world’s GDP (%), especially the in Eurozone, it becomes clearer that the EU Commission is in no favourable place to play wars, or to restrict trade, whatsoever.


The ECB’s decision to reduce its bond-buying programme threatens the Eurozone, in a time when Domestic Production is decelerating and the demand for funds is growing. Market figures suggest that domestic banks are not willing to lend to their governments, beginning to create what we know as a credit shock. Ironically, despite years of Quantitative Easing, inflation targets were not attained, growth (%) remains feeble still, and National debts have reached extremely high values since 2007. Some EU-members have debts over 100% of their GDPs. In summary, EU countries are less ready to face a global recession than they were 10 years ago, and this time there is even less capital. We have just gone beyond the edge of the abyss, and chaos is inevitable. As the whole thing is set to crash, a United Kingdom free of EU-regulations and open to competition and trade could prove very successful.


I have been wondering if the special place in hell Tusk cursed on Brexiteers looks anything like the place in hell for those EU leaders who are willing to have a trade war rather than a fair deal.


EU membership:


In order to benefit from a membership to the EU, the United Kingdom is obliged to pay a weekly fee, which, even though it changes every year, rounds about £350m pounds, amounting to nearly £18,2bn a year. This is not, though, the net amount of money paid into the EU.


For 2017, this amount was £18.6bn. But the rebate applied to this amount was £5.6bn. Meaning that the total amount sent to the Commission was £13bn. A part of this money is sent back to the UK’s public sector as the Commission best sees fit. In 2017, this amounted to £4bn. An on top of this, the UK receives funding to private sector areas, which is estimated to have been £1.5bn for the same year. Altogether, it essentially means that the UK paid around £7.5bn more than it got back, which pay for the other benefits of being an EU member.


A hard Brexit would essentially mean that this membership fee would cease to exist, therefore, these yearly payments of around £13bn, remaining in the British economy, to be used as its government would better see fit. The money itself does not represent the costs and benefits of the membership, or their externalities; but it is not, with certainty, a loss or gain. However, the UK’s government could begin to use this money to suit the best interests of its economy, and not the EU.


The futility of models and forecasts:


It is easy forecast the costs of leaving the EU, by taking the existing circumstances as base. However, the future circumstances are unknown. Furthermore, the enormous potential that the British economy holds, and that has never been materialised, as it has been confined to EU regulations, makes it extremely difficult to produce a credible forecast. Given the situation, any model or forecast is invalid, and must be put aside.


The Clock is Ticking:


Now there is the major cost of timing. As the parliament seems to not agree on a single issue, and the conservatives keep doing a terrible job, not only a hard-Brexit becomes more inevitable, as the prospects for future trade deals remain non-existent. The short-term cost of disruption is too big and certain to make Britain tremble, and injection of fear helps no one. As uncertainty over the post-Brexit regime maintains, new trade deals are being delayed. So, the current stand-off is between a deal with the EU and a deal with outsiders. Until the parliament picks a path, nothing will be accomplished. But taking into account the current state of things, the only way this can go well, i.e achieving a stable UK-EU relationship and a fair trade agreement, is, in my view, if Britain goes the hard way.

 

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