The Economic Case for Brexit

26/05/2016 12:59
Jack Taylor via Getty Images

This blog is an adapted version of a speech delivered by David Davis on 26 May, making the economic case for Britain leaving the EU

It is now exactly four weeks until the British people make the most momentous decision of modern times.

I rather wish that the standard of argument from the other side had lived up to the occasion.

In the past few weeks, the British people have been accused not only by the EU but by their own leaders here, shockingly, of being small-minded, ignorant, economically illiterate, and even 'horrible racists' for wanting to leave the EU.

They, we, have been bombarded with a plethora of scare tactics, and with myth after myth about the many miracles the European Union brings about and the disasters that will allegedly rain down on us if we leave.

Many of those supposed disasters have in fact been extraordinarily unsubtle threats, in which European countries threaten to act against their own interest to take revenge on us for the terrible sin of resigning from their club.

To parody Groucho Marx, I wouldn't want to be a member of any club who threatened to ruin me if I left it.

Particularly when those threats have been so petulant and implausible.

The tyranny of conventional wisdom

I do not know what the collective noun for the international elite is, but we have had a whole gravy train of them in the last few weeks, all making assertions that do not quite stand up.

We have had the President of the EU, the President of the USA, the head of the IMF, the ex-head of the WTO, the Governor of the Bank of England, the current Chancellor of the Exchequer, the previous Chancellor of the Exchequer, and of course the Prime Minister.

If the tyranny of conventional wisdom has a Praetorian Guard, this is it. Except it is the tyranny of conventional unwisdom.

It seems to me that many of them have been relying on their status, and the pace of events, to protect them from forensic challenge.

The entire Remain case has been, if I may mimic Boris, one big 'argumentum ad verecundiam'.

They are hoping, in short, that the British people will do what they are told, unquestioning. That they will doff their caps and defer to their betters.

But the British people are made of sterner stuff, and they want to be given the full facts - not just a pro-EU edited version - so they can see through the myths, and decide for themselves whether ever closer European Union integration is a good idea.

More than anything this campaign is emerging as a battle between The Establishment and the people.

The International, the European, and the London Establishment standing up for its view of the world versus the British people, standing up for their rights, their country, their democracy, their freedom.

Today I want to unpick some of those arguments and expose them to factual analysis.

The establishment's poor track record

Let us start with a tiny bit of history.

The British, and indeed the international establishment, do not have a great track record when it comes to the great questions of their era.

Brexit was famously described as a "leap in the dark".

That phrase was first used in politics by Lord Derby to describe the 1867 Reform Act. For the Establishment it was a leap in the dark.

For the ordinary working Briton the relaxation of the property qualification gave them their first chance at voting in our burgeoning democracy, their first crack at controlling their own destiny.

That so-called leap in the dark was actually a breakthrough into the sunlit uplands of modern democracy. Just as Brexit will be.

It was not the last time that the Establishment made massively flawed judgements.

The Gold Standard. Appeasement. The craven "management of decline" in the 60s and 70s. The ERM. On the continent, the Euro. Globally, the 2008 crash. And we haven't heard from Chilcot yet...

Time after time the elite have got it wrong, and the ordinary people, whose wisdom was derided, have paid.

The Establishment groupthink on the central issues of the day has too often got it not just wrong, but spectacularly wrong.

So this time we should test their arguments more carefully.

The Treasury and the IMF

Both the Treasury, and the IMF in the form of Christine Lagarde, claim that Brexit will cost Britain economic growth.

Because a gullible British commentariat swallowed that whole, the Prime Minister and Chancellor have doubled down on that claim this week with the assertion that it will now cause a recession.

However, remember that neither the IMF nor the Treasury have a very good track record on forecasting.

Last Autumn the Treasury found £27billion down the back of the sofa, only to be strapped for cash by the Spring.

It cannot accurately forecast six months. Why should we believe they can forecast 15 years?

The IMF on its own admission famously got the Asian crisis wrong, got the Greek crisis wrong, and attacked Britain's economic performance mere months before the UK recovery.

And of course from 2005 until 2007 both the Chancellor and the Prime Minister were blithely telling us that Britain could spend at Labour levels of excess. Just before they told us the exact opposite.

So their forecasts, their models, their black boxes, are not very reliable.

But even if their black boxes were accurate and reliable forecasting machines, they are dependent on the assumptions that you put in. Economic models are the perfect example of the phrase "Garbage in, Garbage out".

There is a phrase for people who blindly believe what economic models tell them, and pace the Chancellor, that phrase is not "economically literate."

The assumptions that the Treasury and the IMF have plugged into their models are essentially that we will lose trade in Europe and not gain any in global markets.

Neither, in my view, are remotely plausible. All their calculations are doing is putting an implausibly precise number on an entirely improbable scenario.

'Recession' claim

Just look at the Chancellor's latest claim that Brexit will plunge us into recession later in the year.

By predicting what is the absolute bare minimum for a technical recession, this forecast is a victory for precision over accuracy, and for politics over economics. A forecast designed to deliver the maximum scary headlines with minimum justification.

As with the last Treasury forecast, dubious assumptions have led to the required outcome.

The Chancellor has been given a result which allows him to link a potential recession, the main cause of which is actually that 'dangerous cocktail' of global risk that he so recently warned us of, to Brexit.

So the Treasury forecast is not an economic forecast, in the normal sense. It is a political forecast, with a political purpose.

The benefits and disadvantages of the Single Market

If the Remain campaign's claim is that we are going to be damaged by losing all the benefits of EU membership, let us start by assessing how sizeable those benefits are.

We should not be ungracious. The European Community has been useful to us.

When we joined it was undoubtedly to our advantage. We were a tottering industrial economy, and the European Community was a modern, go ahead, trade bloc.

To coin an old phrase, they were the future once.

Before we joined, our share of the European market was pathetic, at about 4%. After we joined, over about a decade and a half, it doubled, to 8%. That was the Common Market period.

But since then, during the Single Market period, it has halved again to less than the 4% we started with.

After 40 years in Europe we are no better off than when we started.

Source: Professor Stephen Bush, Britain's Referendum Decision and Its Effects, Technomica 2016.

The reasons are clear enough.

During the '90s tariff barriers around the world came down, after the Uruguay Round, including around the EU, so we lost the protection of those tariffs against global competition.

The burdens of the Single Market regulations handicapped us as well, and general competition from developing countries eroded market share.

The consequence is also clear.

The benefit of being within the the EU Single Market, whilst not zero, is much much, much less than it was under the Common Market period.

It's a bad deal - a huge trade deficit with the EU and a net £10 billion subscription on top.

That is why we are losing our advantage over countries from outside the EU in markets within the EU; that is why the share of our exports going to the EU has dropped from over 60% to about 42%.

And this share is predicted to fall even further in the future.

The EU and employment

This also has implications for employment in the UK.

The easiest way to look at this is to take the years since 2010.

In that period about two and a half million jobs have been created in the UK.

In that same time exports to Europe have been essentially static, whilst exports to the rest of the world have grown by £57bn, or 25%.

And almost all the jobs that have been created are in sectors that have grown in line with the UK's internal market, and with our trade with non-EU countries.

So trade with the EU almost certainly generated no job growth in that time - the entire growth in jobs came from either the trade with rest of the world, or internally driven growth within the UK domestic economy.

Add to that the fact that a significant proportion, one million of the two and a half million jobs created in the UK economy, were taken by EU migrants.

And there is significant evidence, from the Bank of England among others, that migration pressure has depressed the lowest wages.

It is clear that the impact of EU membership in the last five years has been deleterious to the poorest workers. Their job prospects and their wages have both been reduced.

This is much of the answer to the conundrum of the last few years: economic growth but with low productivity and low wage increases.

It is also a stark reminder that it is not absolute growth that matters, it is growth per capita.

The Government's reliance on GDP as a measure of prosperity has been misleading, especially when considering the high immigration which Britain has experienced in recent years.

Since 2010, GDP per capita, a far better measure of people's living standards than raw GDP, has grown at only just over half as quickly (or 6.5% over that period) as the economy as a whole because of immigration.

This matters.

It is increases in GDP per capita that support growth in jobs, in people's wages, allows the country to invest in the future, and helps us to pay for public services.

That is what matters for the people of Britain.

To summarise, the Treasury and other establishment claims that Britain's prosperity, trade and jobs pivot on our membership of the EU is pure propaganda.

The facts suggest something quite different.

In the last five years membership of the EU has not increased net employment at all in Britain. But we have been creating jobs for EU citizens - around one million of them.

Britain, not the EU, is the job creation machine. The EU is in fact a job transfer machine - switching employment from British workers to those from the Continent.

If Gordon Brown really wanted "British jobs for British workers", as he once said, he would support leaving the EU.

The CBI

Of course large scale immigration is one of the reasons that that other establishment group, the CBI, are firmly in favour of EU membership.

A virtually limitless, low cost, ready trained workforce is understandably attractive to big business.

It is also why, in a moment of frankness, Stuart Rose admitted that leaving the EU would lead to an increase in average wages - this would particularly be true of the least well paid.

The other reason for the CBI stance is the fear that its members would lose their existing market position.

Nearly all big companies have marketing, distribution, or supply networks in the EU.

They have entrenched regulatory positions which protect their particular products.

It is also important to remember that big companies are not particularly good at innovation or job creation. Accordingly, they do not see enormous upsides, but they are acutely conscious of risks.

Pascal Lamy and trade post-Brexit

Pascal Lamy, an ex-EU Commissioner and ex-World Trade Organisation head, is as much an international gravy trainer as Christine Lagarde.

He threatened Britain with loss of European markets, and did not mince words about it.

He made it plain it was a threat of punishment for leaving, not a rational act.

Ironically, he phrased the threat in terms that made it clear that continental politicians fear that the UK will make too much of a success of being outside the EU - this undermines the Remain case and rather gives the game away.

Of course this is to be expected, particularly from the French. It does not mean this is how they will behave after the decision.

People behave in ways that fit the circumstances they are trying to deal with.

Think back to the 2010 election.

David Cameron and Nick Clegg did their best to knock seven bells out of each other in the election campaign.

Then, within a week, they were sharing a photo call in the Rose Garden of 10 Downing Street.

Circumstances had changed, and with it their behaviour.

Similarly after Brexit, the pressures on the countries that make up the EU will be different.

Free trade with Britain is in all their interests.

This is particularly true of the most powerful leader in Europe, Angela Merkel.

Her economy is dependent on exports, particularly of manufacturers, and especially of cars. Britain is the second largest and fastest growing car market in Europe.

Audi, BMW, Mercedes, and Volkswagen alone are over 25% of the British market, with the UK buying one million cars from Germany every year.

They cannot afford the threat being levelled at Britain, so called "WTO terms", because they would involve a 10% levy on all car imports.

A German Chancellor would have to avoid this, particularly in an election year. In Europe, what a German Chancellor wants, a German Chancellor generally gets.

Indeed the first calling point of the UK's negotiator in the time immediately after Brexit will not be Brussels, it will be Berlin, to strike the deal: absolute access for German cars and industrial goods, in exchange for a sensible deal on everything else.

Similar deals would be reached with other key EU nations.

France would want to protect the £3bn of food and wine it exports to the UK. We have seen the sort of political pressure French farmers are willing to bring to bear when their livelihoods are threatened, and France will also be holding a general election in 2017.

Italy will deal to protect its billion-pound fashion exports. And Poland its multi-billion pound manufacturing and electronics exports.

So there is almost certainly going to be a deal, one that maintains a free market between the EU and the UK.

WTO terms

However, let us assume for a second that everybody behaves irrationally, and we are forced back onto WTO terms.

Let us be clear - I do not believe for a moment that that will happen, but let us humour the Treasury fantasy.

In that eventuality people seem to forget that the British government will be in receipt of over £2billion of levies on EU cars alone.

There is nothing to stop us supporting our indigenous car industry to make it more competitive if we so chose.

WTO rules would not allow us to explicitly offset the levies charged, but we could do a great deal to support the industry if we wanted to. Research support, investment tax breaks, lower vehicle taxes, there are a whole range of possibilities to protect the industry, and if need be, the consumer.

Such a package would naturally be designed to favour British consumers and British industry.

Which of course is another reason that the EU will not force this outcome.

Trade negotiations

The other bogus element of the Treasury forecast is the presumption that the UK will do badly in global trade negotiations.

Trade negotiations are exercises in mutual self-interest. They are not power plays, or coercions, particularly now the WTO default rules are in place.

Without the emotional politics of the EU in play, there is no reason whatsoever to expect that most countries in the world would not actively want a free trade agreement with the UK.

This makes the claim by the Remain Campaign that we would have to "renegotiate 50 trade deals after Brexit" look particularly silly, indeed almost hysterical.

The simple truth is that under state succession rules all existing trade deals with non-EU countries would stay in place until either side wanted to renegotiate them. Why on earth would any non-EU country behave differently?

Of our top 10 non-EU trading partners only Switzerland and South Korea have FTAs with the EU at the moment.

Is Remain really asserting that South Korea or Switzerland would repudiate an existing trade arrangement with us? Would South Africa or Singapore? Whatever they might say, they won't.

Barack Obama

Which brings us to the next international grandee that the Remain team trotted out, namely Barack Obama. He was wheeled onstage by the government to try to undermine the argument that we will be able to negotiate our own trade deals outside the EU.

It is not necessary to imagine any anti-British sentiment to explain Obama's comments about "going to the back of the queue." Indeed, he was clearly doing the British Prime Minister a favour, as demonstrated by the choice of language.

More importantly he was simply serving what he saw as America's best interest, trying to keep the UK within the EU. Nor is this the first time that a US president has misconstrued their national interest.

Americans have a very poor comprehension of the EU, and they see having Britain within it as a useful benefit for them.

They have no concept of the cost in lost sovereignty that this entails.

If they did they would be a little more shamefaced in suggesting something that they would never themselves countenance.

But none of this makes Obama's comments true.

Firstly, he will not be there at the appropriate time, so he won't make the decision.

Secondly and more importantly, there is no queue. These matters are handled in parallel.

The USA signed eight FTAs in three years recently.

They have a well-established and often used 'fast-track' process.

It is highly likely that we would manage to negotiate an FTA with the US in about three years, well before TTIP is completed, and one which is far more tailored to our interests than TTIP will ever be.

Benefits to UK trade

Outside of the EU, there are two major potential benefits for the UK.

One, the ability to pursue lighter and better tailored regulation not possible under EU membership; and Two, the ability to strike new trade deals with the rest of the world, not possible in a club of 28 members.

Those aren't my words, that's according to Open Europe, who are no supporters of Brexit and whose ex-director, Mats Persson, is now the Prime Minister's EU adviser.

I agree. Britain would negotiate a lot more trade deals, a hell of a lot quicker, if we weren't leashed to 27 other countries in every negotiation.

EU poor at negotiating trade deals

Negotiations to reach a trade deal between the EU and Singapore, for example, lasted nearly six years.

It took nine years to come up with a free trade deal with Canada - which may well founder after Romania indicated they may exercise their veto in a row over visas.

The negotiations between the EU bloc and India went on so long they gave up.

The EU, can you believe this, does not have trade agreements with China, or India, or Russia or the US.

The reality is that the EU's track record on trade is very poor.

And yet, the Prime Minister claims that, "we sign better trade deals, and more quickly, in the EU." This is simply not supported by the facts.

The claimed benefits from the EU bloc are completely outweighed by the complexity and dilution of dealing for 28 members. Just compare the EU's performance to that of single countries.

Single countries are better at negotiating trade deals

For example, look at Chile, which has a third of our population and a tenth of our economy.

Chile has managed to get trade deals with the biggest economies around the world, including the US, China, India, Japan, Australia, Canada and South Korea.

The EU has trade deals with economies which have a total GDP of just £4.7trillion. Chile has trade deals with £40trillion-worth of countries. Almost ten times more.

Not only has Chile got these deals, it has negotiated most of them a hell of a lot faster than the EU.

It took Chile, without all the supposed influence of being a member of the EU, just 10 months to negotiate a deal with China. 10 months.

They took just nine months to negotiate a deal with Australia, 10 with Canada, 12 months with Japan and 24 months with the US.

Can the Remain campaign seriously continue to argue that we would not be able to open up new trade opportunities if we voted to Leave?

And before Remain do their normal banal trick when faced with hard facts, and try to claim that we are now going for the "Chilean model", it isn't just Chile.

Singapore, Switzerland and South Korea, negotiating their own trade deals and without the so-called 'clout' of the EU, each have FTAs with over £27trillion-worth of countries.

They also negotiate their deals far faster than the EU does.

Trade in services

And 90% of their trade deals include services, critical to the British economy, as opposed to only two out of three of EU deals.

Only six EU members have a significant trade surplus in services, and the UK's surplus is twice that of any other nation.

And the UK exports more in services to the rest of the world than any other EU nation.

For the EU, trade in services is simply not as much a priority as it is for Britain - just look at how the completion of the Single Market in services has been stalled for years.

This is why the EU's trade deals often don't include services.

This is why the EU's trade deals are with countries that offer few trade opportunities for Britain.

So a lot of the EU's so-called Free Trade Deals don't cover the areas we care most about. And the result is that in two thirds of them our growth rate in exports to the relevant country goes down, not up!

Of course, the importance of trade deals can be overstated, particularly in the new globalized, internet world. After all, it is not politicians who trade, it is businessmen.

We do as much trade with countries without any sort of deal as we do with the whole EU. And those countries tend to be the fastest growing.

But there is no doubt that we are missing out on huge trade opportunities around the world. The EU's dysfunctional trade policies make it harder for UK businesses to trade with those parts of the world that are growing fastest.

So given how poor the EU is at negotiating deals on our behalf, is it any surprise that 90% of the EU's trade deals account for just 2% of our exports?

Never mind Little Englander, being stuck in Fortress Europe ignoring the exciting economies in the rest of the world is being a Little European. A myopic, introspective and troubled Little European.

Foreign direct investment

One of the other supposed advantages claimed for being in the EU is more inward investment. Actually the highest investment per capita in Europe is not in the EU at all.

It is in Norway and Switzerland - even if you take out all the FDI that is based on oil, gas and financial services.

Those countries also have the lowest unemployment, highest wages, and rather lower levels of inequality, which rather takes the edge off the claims for economic benefits in the EU.

And before anybody on the Remain side jumps to their usual conclusion, no I am not arguing for a Swiss or Norwegian option, I am arguing for something considerably better.

Eurozone

Finally, in economic terms we have to consider the impact of the Eurozone.

I will not dwell on this because it deserves a whole speech in its own right.

Being in Europe but not the Eurozone in many ways gives us exactly the opposite of what the Prime Minister claims - the worst of both worlds, with little say in fundamental financial issues, but eventual responsibility for many of the costs when it stumbles.

Only last year we were dragged into the eurozone's efforts to rescue Greece, when the EU used the European Financial Stability Mechanism to bail out the debt-stricken country, against the Prime Minister's protests - another example of just how vulnerable the UK has become in Brussels.

The Euro has been devastating for Greece and Southern Europe, but very comfortable for Germany and what might be termed the old Deutschmark zone, which now trades with the rest of the EU and with the world on a 30-40% currency discount.

The huge trade imbalances in the Eurozone make it financially unstable, and as we know from recent history we end up paying for that no matter what we think we have negotiated in the rules.

Greater separation from this financially unstable structure will not give us perfect protection, but it will be better than being shackled to it.

Of course, none of this risk is reflected in the Treasury model.

Conclusion

So if we leave the EU we will be free to negotiate our own deals faster, and they will be better tailored to our economy than the EU's deals are.

Our trade will almost certainly continue with the EU on similar to current circumstances.

In the highly improbable event that it will not, we can accommodate that with domestic policies using the money released by Brexit, the 'Independence Dividend'.

So both the major premises upon which the Treasury model is based are flawed.

And the Treasury did not even attempt a calculation of the EEA option - actually by no means the best option - presumably because it looked too good, and didn't offer the Chancellor the headlines he was looking for.

The Remain campaign has strained every sinew in painting as relentlessly pessimistic a picture of the UK after Brexit as is possible. And in doing so, their predictions and forecasts have lost credibility.

They have claimed that hundreds of thousands, if not millions of jobs rely on our membership. The reality is that the EU has been a destroyer of jobs across the continent, and has created next to no jobs for British people in the UK in recent years.

They have claimed that our economic interaction with the continent will all but cease, and in the case of one over-excited Minister, that it would fall to absolute zero, should we leave the EU.

The reality is that the hard-headed, pragmatic businessmen on the continent will do everything to ensure that trade with Britain continues uninterrupted.

They have claimed that we will be unable to forge new trade links across the world, that we will have no influence, that we will be sent to the 'back of the queue'.

Well I'm sorry, but this is nonsense.

Chile, Switzerland, South Korea and Singapore - all smaller than us - prove that this is untrue.

We are members of the G7 and G20. We are on the UN Security Council, belong to Nato, the OECD, the Commonwealth and the World Trade Organisation.

We have a global tradition and speak the most important global language. Our influence and reputation are greater than any nation of 60 million has a right to expect. We are the nation of Darwin and Dickens, of Shakespeare and Shelley, of Newton and Nelson.

How can Remain possibly suggest that we cannot flourish should we decide to govern ourselves?

Britain has always prospered when we have been at our most daring, our most adventurous, when we have raised our eyes to global horizons.

That is what this referendum is all about - do we want to accept decline, as many did in the '60s and '70s, as part of a regional bloc with limited potential?

Or do we want to take back control of our destiny, and show the world how great Britain can be.

Davis Davis is a former Shadow Home Secretary and Europe minister, and the Conservative MP for Haltemprice and Howden

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