Unilateral free trade is far more attractive than membership of the single market

Unilateral free trade is far more attractive than membership of the single market

Professor Patrick Minford has written extensively about the economics of the European Union and is the author of Trading Places: Consumers v Producers in the New Brexit Economy, which is published today by Politeia.

The Brexit referendum was a battle between UK producers and UK consumers.

The main effect of the EU is to raise prices through protection and regulation to benefit groups of producers at the expense of the consumers who pay these higher prices. Other effects that benefit producers and cost consumers through taxation are free unskilled migration (cheap labour for employers but costly to the welfare state) and of course the direct costs of paying into the EU budget.

On the one side the producers were the farmers and the manufacturers who gained directly from the protection as well as particular groups such as universities, regional assemblies and City firms such as big banks with large EU business who had a direct interest in EU funding. But on the other side were the general householders who did not belong to any of these groups who paid the higher prices or the extra taxation.

The producers cast their argument as ‘needing to be in the Single Market’ which sounds grand and deserving. But the Single Market is simply the geographic area within which EU regulation creates ease of doing business and around which the EU creates a protective trade barrier as well as mandating free migration.

The calculations in my Politeia paper, published today, show that being in the Single Market is damaging to us compared with the best policy we can follow which is to be outside with no trade barriers against the rest of the world (‘unilateral free trade’ so that we trade at world prices with all including the EU), our own regulation and our own migration controls. The gains from this best policy take the form of much lower prices and taxation paid by consumers which in the long term give rise to higher output and living standards. In the Brexit referendum, for once, those consumers were able to examine the whole EU package and to reject it.

The producers are currently fighting back, now that the referendum is over and normal politics has resumed. The line they are arguing is that somehow we can do a ‘deal’ with the EU that allows us to be ‘in’ the Single Market while also ‘leaving’ the EU. Put on one side their clamour for EEA-type agreements which are little different from remaining in the EU and would violate the referendum result. Is there perhaps a deal where we have free trade but still make our own regulations and control our migration?

Alas, no! This very weekend it was made clear by the Visegrad group of Eastern European countries that they would veto any deal that did not have free migration. Meanwhile both France and Germany have stated categorically that free trade access to the Single Market would require signing up to its regulations and its ‘four freedoms’ including migration; they have hinted at concessions but these could never satisfy Eastern Europe. Like David Cameron we could waste valuable months trying to get a deal that can simply not be achieved given the fractious current state of the EU.

Second, such a deal will make us no better off than simply leaving for unilateral free trade (on all including the EU), our own regulations and migration controls, with no deal at all – call it a ‘full Brexit’. We actually do not care whether the EU or other countries give us free trade or not!

This may seem paradoxical. But it is true. The reason is that the effect of tariffs on us by country X switches some demand in X from UK supply to other suppliers for the products we sell; but there will be no effect on the total world demand for these products and so none on their world prices. But it is these world prices that determine how much in total we produce. So we produce the same output in total and sell less in X and more elsewhere at the same prices; and others sell more in X and less elsewhere. Irrelevant to us! The effect is simply on the pattern of trade alone – known as ‘trade diversion’.

This argument applies to any trade agreements we sign around the world, whether with the EU or any other country; and there will be no effect once we have abolished our tariffs and other trade barriers.

It also applies to all those City financial products for which the EU might give or deny us preferential access: it applies for example to ‘passporting’. Yes, you will hear a lot of firms with EU markets arguing that we should keep the EU arrangements; this suits their interests but it has nothing to do with the national interest.

Once we leave the EU, Liam Fox can indeed  do some trade agreements with friendly countries like Australia and India. But strictly speaking we care not; this would just be good international politics. Unilateral free trade has been a policy widely practiced by others, notably Singapore, New Zealand and China. Their success has not relied on trade agreements. Nor have we ever had a trade agreement with our largest individual trading partner, the USA.

Of course in practice other countries, including the EU, will mostly think better of protection against us because it is self-damage. All around the world in fact trade barriers have been dropping steadily as this truth has dawned on country after country. Our move to free trade will enhance this great global tendency to world free trade.

So, in sum, the only action that guarantees we meet what consumers voted for in the Brexit referendum, which was control of our borders and our laws, is that we leave the EU cleanly and rapidly; and the optimal economic way for us to do that is to go to unilateral free trade with all countries including the EU.