Why the EU’s market matters to Britain by John Springford
Brexit would free Britain to sign bilateral free trade agreements with the ‘BRICS’ emerging economies, the Anglosphere and Japan without having to reach a consensus with 27 other EU member-states. The rest of the world is growing faster than the EU, and it offers opportunities that would make up for any forgone trade with Europe. This means that Brexit would boost the economy in the long term, especially if you throw in some deregulation to boot. This commonplace view is wrong. There are three reasons why. The first is distance. If Britain were to start its trade negotiations from scratch, its first priority should be to reduce the cost of trade with big, nearby economies. Trade diminishes quite rapidly with distance. Half of Britain’s exports go to the EU, which makes up a fifth of the world economy. Meanwhile, the non-European members of the OECD –although they comprise a third of the global economy – only buy a quarter of Britain’s exports, because on average, they are seven times further away. The second reason is that trade with the BRICS is not the unalloyed good that many disciples of free trade imagine. After he came to power in 1978, Deng Xiaoping’s pro-market reforms allowed China to make use of its comparative advantage in low-value added manufacturing. Other developing economies followed. This process enriched Britain’s consumers: electronic goods, toys, clothes and steel became much cheaper in real terms. And over time, labour and capital were redeployed to more productive sectors of the
British economy, raising incomes further. Together, these two effects made Britain richer on average. However, those last two words matter. Trade with poorer countries is not without cost. The scars of deindustrialisation are still visible in Britain’s unbalanced economy, with higher unemployment rates and lower productivity continuing to blight the UK’s northern cities. As manufacturing and industrial work dried up, many low-skilled people moved into poorly paid services jobs. Productivity growth in low value-added services sectors has been slower than in manufacturing. These trends have contributed to the ‘hollowing out’ of the British labour market, with more low- and high-paid jobs being created than those which provide middling earnings. That does not mean that an ‘independent’ Britain should avoid a trade agreement with China – but it does suggest that agreements with richer countries should be its priority. After the 2008 crash, Britain’s productivity plunged and then stagnated. It had been catching up with US levels over the preceding decades, but after six