The Treasury has produced its 200-page report about the effects of Brexit on the economy. Predictably, it is highly negative. It is sad that the Treasury, for which I once worked for a few years, has become so politicised that it is reduced to rationalising the views of George Osborne.
The modelling methods it has used to do Osborne’s bidding are the ones anyone would employ to rubbish Brexit. They involve estimating relationships over the past between such things as trade with the EU or Foreign Direct Investment, or tariffs and GDP. Unfortunately, as I pointed out in my book on the UK and the EU, these estimated relationships are highly unreliable when it comes to considering a whole new world of trading rules, which is what Britain would face after leaving the EU.
The basic point you have to ask is how the whole economy would react to the main alternative to our current regional EU rules, which is global trading rules under the World Trade Organisation (WTO). For this you need the sort of model I used in my book, a global world trade model. The results from such a model are perfectly intelligible to anyone and, what is more, they tally with what we all understand about free trade: that the wider the freedom we have to trade, the better the result.
Now consider what the EU arrangements we have actually are. The EU is a protectionist organisation known as a “Customs Union”; this raises barriers through tariffs and other non-tariff means against every country outside it. These barriers raise the price of goods sold inside the EU by the protectionist margin; so prices are higher for everything bought from anywhere that is protected against in this way. This is because, to sell into the EU, you must pay the tariff and also the extra costs of the non-tariff barriers.
The gainers from this Customs Union are the EU producers inside the protective wall: like children in a walled garden, they enjoy a cosseted life. EU producers sell their products inside the EU at inflated prices.
But the losers are the consumers who pay these inflated prices. It is a matter of some irony that our chancellor praises this Customs Union as a wonderful “free trade arrangement”! It takes your breath away that he should dare say this to UK voters and consumers. But of course they are blown away by his confident rhetoric, and who are they to argue?
When we measure the extent of the EU protective wall, we find that it is rather high, quite contrary to this rhetoric. Food prices are nearly 20 per cent higher on average, and average manufactured prices a bit more than 20 per cent higher. Even assuming, as I did in my book, that there is some reduction in this protection over time, to say 10 per cent on each, the overall effect of the EU on the consumer shopping basket is to raise it by 8 per cent – around £40 a week for the average consumer.
By leaving the EU, we move to global free trade; goods come in here from all over the world at world prices, without the EU add-on. Our consumers benefit. Our producers have to earn their way in the world at the true world prices of their products: the industries that do best will be our best industries, not our most protected ones.
But even the protected ones will not fare so badly: they will face world competition at home and they can still sell to the EU and pay the external tariff, which is only about 4 per cent on average. Under WTO rules, the EU would be unable to inflict the non-tariff barriers on them because our producers do not “dump” and they completely adhere to EU regulations already.
People ask: can we rely on the WTO to police these rules? Yes we can: the WTO is an active and powerful system of international courts that all members highly respect. Since all countries, including the US and the EU, use it repeatedly against others, they obey its judgements when they go against them. It enforces non-discrimination, the “most favoured nation” principle: that is all we need outside the EU because it means we sell our goods on a world market where no-one can arbitrarily discriminate against us, including the EU.
By leaving the EU, we go to global free trade and we rid ourselves of the intrusive EU regulation that bears down most heavily on our smaller firms who cannot afford huge HR and compliance departments. The gains to our economy from this are huge, as anyone would readily expect. The trade gain amounts to 4 per cent of national income, directly enjoyed by our voters even after spending some of it helping out those affected producers, including our farmers. The gain from getting out of the heavy-handed regulation of our whole economy by the EU is more again, and a boost to our growth rate. The Treasury report gets it precisely the wrong way round.
Patrick Minford is professor of applied economics at Cardiff Business School and author, with Sakshi Gupta, Mai Le, Vidya Mahambare and Yongdeng Xu of “Should Britain leave the EU?” (Edward Elgar, second edition, 2015).