Trading insults

The grayling is a freshwater fish of the salmon family.  It can be found across Northern and Central Europe and in abundance in British rivers.  It was believed by anglers to limit the breeding opportunities for the more favoured trout, but recent research has shown that the two types of fish have mutually exclusive food sources, disproving this theory.  The pan-European grayling is in direct contrast to the Eurosceptic Chris Grayling, Leader of the House of Commons, who repeatedly gives us his views on “feisty French farmers” or German car manufacturers.  In the absence of Iain Duncan Smith from taking any sort of role in the Leave campaign and Boris Johnson taking the role of court jester, the Conservative leadership of the out campaign has fallen on Mr Grayling and Michael Gove.

After seven weeks of discussion about whether the United Kingdom should leave or remain within the European Union, and with just under nine weeks until the date of the referendum, the battle lines of the debate appear to be hardening.  There appears to be two clear issues that divide the sides and these are the issues of trade and immigration.  Depending upon which issue an individual voter considers to be the most important seems to be a key determinant in whether the voter is likely to support Bremain or Brexit.

Those wishing to remain argue that leaving will have a detrimental effect upon British trade.  The United Kingdom would, they argue, lose free access to European Single Market which could only be re-attained by the payment of a significant subscription to the European Union (against which there would be no rebate, as at present).  If the United Kingdom does not pay for free access to the Single Market as a member of EFTA, it will be forced to either negotiate its own deal with the EU (something which Canada took seven years to achieve) or accept that its exports to the EU will be subject to tariffs against which it is currently exempt.

The impact on British trade would not be restricted to its trade with the European Union though.  The European Union has negotiated trade deals with many countries, of which the United Kingdom enjoys the advantages as a member of the Union.  In the event of Brexit, the United Kingdom would no longer be party to these deals.  As President Obama indicated yesterday, in terms of the United Kingdom negotiating a separate deal with the United States, we would be at the back of a lengthy queue.

Various lead members of the Vote Leave campaign have complained about President Obama’s intervention, suggesting it was none of America’s business to try to influence a British referendum, or was hypocritical.  However, it is President Obama’s duty to represent the views and interests of the United States, and if he believes that a British exit from the EU would leave to trade difficulties of the scale indicated by the International Monetary Fund, the London School of Economics and the Treasury (amongst others), then to represent US interests, he has to do what he can to discourage a Brexit, as failure to do so could have adverse affects upon the US economy.

The list of renowned organisations, companies and individuals predicting that Britons will be worse of after Brexit includes the International Monetary Fund, the Institute of Directors, the heads of NATO and Europol, the Bank of England, Credit Suisse, BAE Systems, the London School of Economics, Rolls Royce, Nissan, the Treasury, Sir Richard Branson, Bill Gates, HSBC,  Professor Stephen Hawking, the Russell Group of Universities, Toyota, BMW, amongst many others.  When on the BBC’s Daily Politics Labour MP and out-campaigner was asked to name any similarly prestigious organisation which had produced a counter report, she was unable to name a single one.  When on the same day, but on BBC’s Question Time, Lord Paddy Ashdown raised the same point, Dr Liam Fox responded not by producing an equivalent list, ut by stating that these institutions and individuals had all been in favour of the United Kingdom joining the Euro and they had all been wrong then, just as they are now.  It is a moot point, but it is simply untrue to say that all of the organisations and institutions in support of the United Kingdom remaining in Europe now, were also in favour of the Pound being replaced by the Euro.

The main difficulty that has consumed the Euro over the recent past, has been the basket-case state of the Greek economy.  This though is not an intrinsic fault within the concept of shared currencies, but with a combination of the financial crisis of 2008 and the dishonest accounting of Greek Governments who substantially under declared their budget deficits in order to comply with the tight financial rules required for entry to the Euro.  The institutions did not and could not have known about Athen’s massaged figures, which have proved so calamitous for the Eurozone.  But then neither did Dr Liam Fox.

Chris Grayling has waded into the debate about how trading relationships might evolve after any Brexit with the outers typical optimism.  In his strangely suave and eerily menacing voice, that are reminiscent of a malevolent but sophisticated Harry Potter character, he advises that as we have a trade deficit with the European Union, they need us more than we need them.  So of course, he continues logically, they will fall over themselves to enter into a trade agreement beneficial to the British.  Does anyone think, he asks rhetorically, that “feisty” French farmers would accept not being allowed to sell their cheeses and wines in the United Kingdom, or German car manufacturers not be able to sell their BMWs and Mercedes in British garage forecourts?  Of course not.

But this is an economic fallacy of the highest order.  Running a trade deficit is not a sign of economic competence and a persistent trade deficit is more damaging to the British economy than a persistent government funding deficit.  On a simplistic level, the purchase of foreign exports can only continue for so long as a nation has reserves of foreign currency with which to purchase them.  The nation obtains foreign currency by exporting goods.  So a nation which imports more than it exports is in effect spending more than it earns.  In an economy with free floating exchange rates, this is not such an issue, as the effect of a long term trade deficit is to weaken the importing nation’s currency, lowering the consumer cost of their exports and increasing the cost of the imports. The exchange rates will act to close the deficit.  A trade deficit should only be a temporary measure.  It certainly is not the foundation upon which to base a nation’s economic plan or trades deals.

Mr Grayling is wrong though in his assertion that the farmers and car manufacturers would force their Governments into a trade deal as they would want to continue trading with the United Kingdom.  Our leaving the European Union would not prevent Britons from purchasing Mercedes or Muscadet.  But it would make their purchases more expensive, as they would no longer be traded freely, but be subject to tariffs.

Mr Garyling’s biggest mistake though is exactly the same as the one made by Nicky Morgan in relation to the budget debate, reported by The Mumbler here.  Like Mrs Morgan, Mr Grayling confuses himself by comparing absolute and proportionate terms.  So he is correct in stating that we trade at a deficit with the rest of Europe, that is comparing the value of exports and imports.  But he is incorrect when he states that as a consequence Europe needs the United Kingdom more than vice versa.  What Mr Grayling does not consider is that the rest of Europe to which he is making the comparison is about ten times larger than the United Kingdom.  The goods which the United Kingdom imports from the rest of Europe account for 7% of all Europe’s exports, but the United Kingdom’s exports to Europe account for almost 50% of our exports.  Which means that British exports to Europe are of considerably more importance to the United Kingdom’s economy than our imports are to Europe by a factor of seven.

The Vote Leave campaign have made a series of suggestions as to the types of trade deal the United Kingdom might strike after Brexit.  Douglas Carswell, UKIP’s sole MP, thinks we should negotiate a deal along the lines of the deal which Norway has made.  We still need to pay a subscription along the lines of our existing subscription, would still have to accept the free movement of Europeans, but would have access to the Single Market, but without the opportunity to influence its regulation.  Nigel Farage does not want us the have a deal like Norway and is not concerned whether or not we have access to the Single Market.  He is prepared to sacrifice trade for the ability to obtain full control of our borders.  Boris Johnson suggested in mid-March that we could negotiate a deal with the EU similar to the one negotiated by Canada over a seven year period.  The Canadian deal does not include services, which would be a key component for any British deal.  Within a week, Mr Johnson had changed his mind.  Mr Grayling believes that the United Kingdom would be able to negotiate its own deal from a position of strength, though as stated above, the position of strength does not stand up to scrutiny.  But last week, Michael Gove topped the lot, by suggesting that Britain should seek a deal that emulates the one obtained by Albania.  Whether this is some visionary prophecy on the part of Mr Gove as to the state to which the British economy can aspire after Brexit remains to be seen.

What is clear is that the Leave Campaign has no clear idea of how the United Kingdom would trade after any Brexit.  The leaders have individual but contradictory ideas.  They seek to persuade us that we will it will be beneficial to the United Kingdom for us to leave the EU, but they cannot even persuade each other of their arguments.

The outers have lost the argument over trade in straight sets.  There has been no credible argument put forward whatsoever to suggest the United Kingdom would benefit economically from leaving the European Union.

The question about immigration is one for another day.

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