Trading Options

Patrick Minford

Friday 10th June: This week a WTO official, Robert Azevedo, a Brazilian diplomat and an electrical engineer by profession, took to the BBC air waves to issue a warning to Britain, should voters in this country decide to leave the EU. The warning seemed out of place from the head of an organisation dedicated to removing the obstacles to trade.

Moreover, as Patrick Minford explains in Politeia’s new publication Flawed Forecast: The Treasury, the EU and Britain’s Future, and what Mr Azevedo did not flag up, is that in fact under one WTO option, Britain could ‘eliminate its trade barriers against the rest of the world while abandoning its zero barriers against the EU: not at all the reverse of what it did on entering the EU’.  Professor Minford writes…

As many economists, including the Economists for Brexit group have explained, Brexit will lower the prices of imports by abolishing the EU tariffs currently erected due to the EU Customs Union. This has a massive effect in raising our cost of living, through higher food and manufacturing prices. It is just like the Corn tariff which, because in those days corn and its food by-products were the main constituents of people’s shopping baskets, also had a huge impact on the cost of living.

As for the threat that the rest of the world with whom the EU has trade agreements will no longer allow these agreements with a UK outside the EU, such agreements have a negligible effect on our economy and even if they were to stop (which there is no reason to expect), the same would be true. Exactly the same was true in the time of the Corn Laws. British manufacturing products were sold all around the world at good prices because they were worth buying; yes, some countries put up barriers but this had no effect on the world prices of those British products, sold to buyers from all over the world.

Yet as we see today any proposal of free trade is met with great hostility by the establishment. Why is that? In the immortal words of Mandy Rice-Davies, ‘they would, wouldn’t they?’ Probably unconsciously, to be kind, those who would lose from the disruption of free trade, the falling prices, the greater competition, create arguments as to why changing the status quo will damage the economy. Of course, these arguments are quite easy to sell to casual standers-by who can see that some existing business and jobs would be disrupted and lose out, and find it hard to see the new businesses and jobs that would be created out of the disruption. The workings of the economy to create those new jobs and businesses are indirect: what happens is that as consumer prices fall and workers are better off as a result, they are willing to work for less and this raises the economy’s overall competitiveness and expands new business, more than offsetting the contraction in the old protected sectors. Because the economy becomes more efficient, production overall increases; to sell this higher production the exchange rate falls and this reinforces the rise in competitiveness.

This is not the first time that the UK establishment has opposed reforms that now we know greatly advanced the UK economy or defended EU monetary institutions that have later proved disastrous. At my advanced age, I can remember 40 years of such behaviour. There was monetarism which finally conquered our inflation (remember the 364 economists writing to The Times…); trade union reform which brought order and efficiency to our industrial relations; privatisation which ended the dreadful mismanagement of publicly owned industry; and then most recent and most well-known, the issues of the European Exchange Rate Mechanism and the issue of us joining the euro. On all these major issues the establishment was on the wrong side of history. Their insults flew and their condescension inside the consensus as great then as now.

Soon after its long term report the Treasury set out its short term shock and horror forecast for the UK economy. But beware! Long term garbage in, short term garbage out!

*Professor Patrick Minford, is Professor of Applied Economics at Cardiff University. He has been an economic adviser to Her Majesty’s Treasury’s External Division . His recent publications include: Breaking Up is Hard to Do: Britain and Europe’s Dysfunctional Relationship (2016) and Evaluating European trading arrangements, Cardiff Economics Working Papers, (2015).