Thursday, 2 June 2016

The EU Referendum: Remain or Leave? You Might Like To Ask The Question In Another Way

First a quick intro
While immeasurably worse off than modern times, generally speaking, one good thing in its favour was that in the late 19th century Europe was pretty much borderless, barring a few exceptions - it was a world of free trade, mass immigration, low taxation and hardly any regulation.

Then two world wars interrupted the free flowing migration of widespread trade, and as well as mass murder on an unprecedented scale, socialistic tyrannies were spread across lots of Europe via the Russian, German and Italian dictatorships. Consequently, many of the resultant post-war government interventionist policies that followed the world wars set precedents for the economically stultifying State meddling that we’ve become so used to in the past six decades. Once upon a time, the idea that Europe would need a bunch of unelected socialist bureaucrats for its nations to enjoy the free movement of people, goods, services and capital in a “single market” would have been ludicrous.

The EU officials and their misguided desire to create a single homogenous European identity through stuffy centralised regulation rather than allowing the heterogeneity of individual nations to construct a Europe with their own strengths is bad – not wholly, of course, there are obviously some benefits to inter-relation cohesion – but given that by far the most successful vehicle for progression is the trial and error mechanism of competition and co-operation, the EU monolith is a project that does an awful lot to retard and in many cases jeopardise human progression, particularly in developing countries.

So what is this big question then? I'm glad you asked: The question is: Would you vote for the current EU if you didn’t have it?

With the above intro in mind I think the most helpful way to ask about Europe is not to think of us as currently in and deciding on whether to get out, but actually imagine there was no such thing as the EU in its current form and ask ourselves whether we would vote for such a thing if we had the chance. I think when the question is framed that way, there would be far more people in the UK saying ‘no’ to this EU proposition than ‘yes’, which rather suggests that if they applied their feeling of the proposition in prospect to the actual EU referendum question in retrospect the ‘leave’ contingent should be a lot more numerous than the ‘remain’ contingent.

Don’t get me wrong, I’m not wholly anti the EU – there are some good elements to it (which I mentioned in this Blog post), but the reason I’m voting to leave is because so much of the EU is inimical to free trade, as its unelected busybodies get about as much wrong with their analysis of markets as is possible to get wrong. When two countries, even slightly politically hostile countries, agree to trade, they sign up for a deal in which both have self-interest. Economic trade deals do not need to bear relation to political differences, they are largely transcendent of political borders. The idea of a single marketplace into which you have to pay to gain access to the benefits of trade with a fellow self-interested trader is quite bizarre, particularly when large chunks of the money actually goes towards paying for the bureaucratic centralised structure that we’d be better off without.

So although it is not without its positive elements, broadly I think if offered the chance to vote for it coming into existence, most people of today would not vote for a single currency (the euro) that’s so often inimical to successful free trade, nor for the imposition of a political monolith that tries to homogenise different and diverse countries within Europe as well as imposing stultifying restrictions on their economic well-being (both cases assume, of course, that the individual voting actually does understand these issues competently).

And then there are tariffs
The other big question just about everyone seems to be failing to mention is the one about import tariffs. For sure you’ll hear lots about to what extent we’ll be subject to tariffs if we leave, how many different ones, and what rates the tariffs will be, but I’ve heard no one actually stop and ask “Why the heck do we even entertain tariffs of this kind when it is so obvious (or should be) that tariffs harm both the importer and the exporter?" To me it beggars belief that their ubiquity is so lazily accepted without more pressure for a huge set of culture changes. Let me explain with a simple illustration how it is that import tariffs make both countries worse off.

Some people wish to trade pounds for dollars, or pounds for euros, or euros for yuan and so on. Let's simplify it and say x is one type of currency and y is another. If more x are supplied than demanded, the price falls; if fewer, the opposite. When supply equals demand, the price is at equilibrium, just as it is with bananas, blouses and laptops. To understand this in relation to pounds, dollars or euros you first have to understand why people want to trade currencies. Forget for a moment the incentive to invest in other countries (in land, shares, debt, and so on), and pretend that the only reason to buy British pounds or euros is to buy their goods.

For simplicity, suppose that with the present exchange rate most goods are cheaper in China than in Britain. In other words, Britain is uncompetitive compared to China. Many Brits want to trade pounds for Chinese yuan in order to buy Chinese goods, but not many Chinese want to sell yuan for pounds as very little in Britain is worth buying. Consequently the demand for yuan is greater than its supply, so the price of the yuan goes up. Yuan are now traded for more pounds than before, and pounds for fewer yuan.

The result? The fewer yuan you get for the pound, the more expensive Chinese goods are to the Brits, since Brits have pounds and Chinese goods are priced in yuan. The more pounds you get for the yuan, the less expensive british goods are to the Chinese. The exchange rate adjusts dynamically until pounds offered by Britain equals the quantity the Chinese wish to buy - or in other words, until the prices are on average the same in both countries. This means that by and large Brits export goods in which we have the comparative advantage, and import goods in which China has the comparative advantage - all of which is measured by production costs being low compared to the country with which we trade.

From all of the foregoing, it ought to be obvious that import tariffs make imported goods more expensive for the nation imposing the tariffs (something Donald Trump can't seem to grasp at the moment with his election rhetoric), which affects the goods we buy and the demand for the currency. A British import tariff against Chinese imports would mean the price of the yuan measured in pounds falls, making British goods more expensive to the Chinese, which reduces demand for things priced in yuan and reduces demand for yuan, making UK consumers worse off.

Obviously the reason the Chinese want pounds or dollars is not just to buy our goods, it is to invest; in shares, land, businesses, and government bonds, all of which require our currency. Therefore demand for pounds on the currency market consists in part of demand by the Chinese who want pounds or dollars to buy goods, and in part to invest.

Tariffs do have a bearing on our decision because the EU rather closely resembles a protectionist trade bloc, where a tariff wall has been erected around EU member states which raises the prices of protected goods, making it worse for both buyers and sellers. The economist Patrick Minford suggests consumers waste around 4% of GDP on excessive costs because of EU protectionism, because the EU marketplace has prices fixed significantly above world market prices, and because of this, it distorts the flow of our economy towards these EU-protected goods and away from better value in the marketplace outside the EU.

The consequences of which, as I illustrated above, means inside the EU bloc we produce more of the goods and services over which we do not have the comparative advantage, and fewer goods and services over which we do. Or to put it in even simpler terms, we produce an excessive amount of the things we are less good at producing, and insufficient amount of the things we are better at producing.

There is nothing unique about competition that comes from non-EU producers that necessitates politicians to treat it differently from competition that comes from EU producers or producers in one's own country. As long as suppliers adhere to the requisite standards (standards that can be enforced in their own country pre-export) then there is absolutely no need for any cross-border penalties (tariffs) from politicians.

What about a post-Brexit UK?
Although I’ve given several reasons why I think we should vote to leave the EU, some may feel that I haven’t answered sufficiently the question that everyone seems to be asking: what precisely will a post-Brexit United Kingdom will look like? The reason I’ve not gone into lengthy prose on this is that, truthfully, no one actually knows for sure – quite simply because we don’t know what our government’s policies are going to be if we do exit, nor whether the UK will begin the process of breaking up, particularly with Scotland being so pro-EU, and Wales starting to show more support for remaining in too.

We don’t know what the effects of Brexit will be because we don’t know who’ll be governing the UK if we leave, what economic policies they will adopt, to what extent we’ll remain under certain regulations, what policies will accompany any unilateral free trade we have, or whether immigration levels will drop to the detriment of our economy. Because the truth is, even if we leave there are still a lot of unknowns.

To compound this point, consider leaving the EU and being governed by someone like Jeremy Corbyn - someone even more economically illiterate than many of the EU regulators. Corbyn is a man who wants to renationalise most of our industry, impose further price controls, artificially subsidise our manufacturing industry and bail out any UK industries that lose out to foreign competition. If you are the sort of person that cares about economic growth then Corbyn is a very dangerous leader to contemplate having.

While this doesn't in any way endorse the overall structure of the EU, one tiny thing in its favour is that some of the EU regulations would keep the wolf of Corbyn's Anglo-centric economics quite far from the door, as EU competition law prevents member countries from granting the kind of Corbyn-esque special treatment like subsidising, bailing out ornationalising domestic firms over competitors from elsewhere in Europe (much of this is thanks to Margaret Thatcher and Leon Brittan in the 1980s, both of whom knew the dangers of this).

For me, despite some obvious interruptions to normalcy as we gradually extricate ourselves from much of the EU influence on our laws, regulations and trade, the post Brexit UK probably will go on to be in an even more prosperous nation, and this in spite of the fact that seemingly any party that runs our country is a country mile away from a proper endorsement of the free market (one might say they are all socialists).

It’s worth mentioning too that growth of non-EU economies has outpaced the growth of EU economies in recent years, and looks set to continue at an even greater extent, which means future indication is that leaving the EU would free up Britain's non-EU trade potential, enriching us along the way (since we've had a floating exchange rate the balance of trade is less important than it used to be, as a trade deficit simply means we are up on consumption, which is the primary benefit of trade). A situation in which we treat the most emerging countries like China, Brazil, India and Russia less distantly and patronisingly in deference to Brussels is highly likely to be beneficial to the future UK economy, particularly with our proficiency in exporting services such as in education, digital technology, neuroscience, financial and litigation expertise and the sciences as we are well poised to do.  

How do trade deficits fit into the equation?
Well currently the UK goods trade deficit with the EU is over £77 billion, last I heard, plus we have a service trade surplus of over £15 billion, which means an awful lot of trade to and from, which obviously all agents involved will want to retain, irrespective of whether we leave the EU or not. In other words, by themselves, the arguments that leaving the EU will be terrible for trade are almost certainly spurious.

The other thing you need to realise is that a trade deficit is a good thing, because it means we are consuming more than we are exporting. A lot of people think the net benefit is when the opposite occurs, but they have misunderstood the purpose of trade which is ultimately consumption. I'll explain it with an analogy about my life. I live in Norwich, and I like our market. I like it particularly for the food I often buy there when I visit the city centre. Given that I don't work on the market, but do spend money there, I have what's called a trade deficit with the market. A trade deficit is the amount you spend in a particular place minus the amount you earn there (a trade surplus is just the opposite).

In recent times many Brits have argued that we are worse off because of a trade deficit with China. But by that same logic I would be better off without Norwich market. When people are able to trade to acquire things they want, value is created in their lives, and it makes them better off. Whenever trade increases between James Knight and the Norwich market stalls both James Knight and the market stalls are better off. Similarly, whenever two countries are able to trade to acquire things they want, value is created for its citizens (note, I'm talking about open, mutually beneficial trade).

That's also why trade deficits are not the bogey so many on the left imagine. Recently I bought £750 worth of shirts for £330 in a sale. I earned nothing that Saturday so my trade deficit for that day was £330. By the logic some of the 'Remain' campaign use they would have to tell you that I had a bad day - but, in fact, I had a great day - I bought shirts that I value much more than the money, and the clothes store had a good day because it made a profit on the merchandise (albeit a limited one, it was a sale - but still a profit nonetheless).

Nations consist of millions of people all doing as I am doing. They work to earn money and they buy when they value the goods or services more than the money (the exact opposite is true for sellers). Hopefully you can see now, if you couldn't before, that there is no reason why coming out of the EU should have a negative effect on our trading or our economy, providing the British government's post-Brexit polices are favourable to its citizens. 

To compound the point, here's an exercise for you. Think about all the transactions you've ever undertaken in your life, and then consider whether any of them had the remotest positive bearing to whether we were in the EU or not. I'll bet, like me, you'll find it is virtually none of them. In reality, the reverse is true: when you consider the huge expense, subsidies, trading tariffs and countless regulations that hamper the process of free trade - not to mention the hugely excessive bureaucracy these things create - you'll find the balance sheet has an almost uncountable negative bearing on our transactions.

Note: I haven't mentioned immigration, but will do so in an imminent blog post.

EDIT TO ADD: Personally I suspect that even if we do leave the EU, the Brexiters won't exactly have many reasons to do cartwheels. If the politics of the present day socialist Tory and Labour parties are anything to go by, the post-Brexit UK government will probably actively mirror most of the annoying interferences that are currently present in the EU from which they are filing for divorce.

* To give you a microcosmic example of the cost of overly-bureaucratic political interference by looking just at America, Dan Mitchell of International Liberty (who is about as well researched as anyone on these matters) shows how Americans spend 8.8 billion hours every year filling out government forms, how the economy-wide cost of regulation is now $1.75 trillion, and how for every bureaucrat at a regulatory agency, 100 jobs are destroyed in the economy’s productive sector.