Not a day goes by on the twitter #brexit hashtag or some kipper moans about Iceland being able to forge a Free Trade Agreement (FTA) with China, but not Sir the UK, because the EU won’t let Britain strike its own trade deals. The narrative goes that while Europe is in long term decline, Britain is being denied the opportunity to strike trade deals with the emerging economies of Brazil, Russia, India and China, sometimes referred to as the BRIC countries. Others moan about deserting ‘our friends in the Commonwealth’. The answer is always we must brexit and leave the EU as soon as possible, hire an army of diplomats to draft and sign lots of new bespoke FTAs and Britain’s old glory as a world trading nation will be miraculously restored. You really get the impression Kippers think a Free Trade Agreement is a bit like an OAP bus pass : Just apply for one, hop on and start riding. Very few stop to think that for a nation to trade successfully, you first need to produce quality surplus goods for export to trade with! In the heydays of the British Empire soon after the industrial revolution, Britain was indeed the world’s premier trading nation and UK fortunes were made importing raw materials needed for factories and cotton mills up and down the country, while at the same time return cargoes of precious manufactured goods and textiles were eagerly awaited in Britain’s colonies. But that was 150 years ago in Victorian times. Today, at the beginning of the 21st century, China has taken over from the Black Country as the world’s premier sweat shop, complete with the accompanying air pollution of burning loads of fossil fuel to power them. China has also taken over the neo-colonial role of stripping developing nations of their natural resources while flooding the same countries with cheap manufactured goods ensuring local manufacturing won’t take off. Do Kippers really want to turn back the clock to Victorian Times? Do they think Britain can compete with BRIC countries on price? Do they think our unemployed European youth can once more be gainfully employed soldering together printed circuit boards for iPads, assembling flat screen TV’s or churning out the Chinese tools and gadgets our DIY stores are stacked with to the rafters? In another of my blog posts I have explained what kind of industry and services we in Europe can successfully produce to make our way in the world. It will be high value goods with a high ‘knowledge’ content spawned from advanced EU sponsored Research and Development projects. Think advanced pharmaceuticals, cutting edge bio-technology, satellite technology, aircraft, high performance and luxury cars, computer software including games and popular culture. These products will not fill up all the empty return containers winging their way back to China though. Our more expensive products require consumers with a high disposable income. Not the consumers typically found in BRIC or Commonwealth countries. They often can’t even afford their transport costs! I get the impression most UKIP voters are of the poorly educated Express reading types that don’t even understand basic economic principles. They think ‘trade with Europe’ means the UK buying lots of expensive German cars and the UK exporting lots of….. err…. well pound sterling to pay for it all. Ukip even has a distinguished ‘in-house’ economist egging them on to think along those lines. I have debunked Ms. Lea’s dangerous delusions in another blog post and explained why in the end her kind of economics only can lead to ukip’s precious Pound Sterling devaluing to the level of the Zimbabwean Dollar. The more educated Eurosceptic will counter: “But how come Iceland can sign a Free trade agreement with China, they haven’t got much of a manufacturing industry either do they?” or “Mexico signed a Free Trade Agreement with the EU, why would the EU not sign one with us?”
First of all Mexico is not a European country and secondly the Iceland-China FTA is not all it seems to be on the surface. An article in the ‘The Economist’ explains that there are other interests at stake here than Iceland selling China some tariff free fish. Sure China struggles to feed its growing population, but it seems China is more interested in establishing some sort of naval base or bunker facility. They want a presence in a region quickly gaining in strategic importance.
“The more likely attraction for China is access to improving shipping routes through the Arctic as that region warms due to climate change. Last month, one of China’s top experts on polar policy predicted that, by 2020, as much as 15% of his country’s trade would move through the Arctic’s Northern Sea Route”
In short, quoting the famous warning of the economist Milton Friedman: Just as there is no such thing as a ‘free lunch’, there is no such thing as a ‘free trade agreement’. If two countries sign a trade agreement, you can bet your bottom dollar that there have to be gains for both sides, whether material or strategic. These gains can be access to raw materials to feed China’s hungry factories and workers or access to shipping lanes and bunker facilities to facilitate exports. I am sure China would sign a similar trade deal with Brunei tomorrow to settle the Spratly Islands dispute.
Difference between belonging to European Common Market and signing an FTA with EU
Let’s go back to one of the core reasons why the EU Common Market was created in the first place. After WWII the United Stated of America clearly emerged as the dominant industrial power and economic world trade power house. Economists studying the success of US companies growing so quickly from mom & pop stores into multimillion dollar corporations, noted that in the USA business start-ups immediately had access to a huge single market. Having a common currency, the absence of state borders and tariffs and a common language helped them grow rapidly. Having achieved economies of scale in their domestic market, US companies then naturally became internationally competitive on price and productivity, even when faced with competition of often lower wage economies. While the language barrier will of course remain an issue in the EU, by creating a common Euro currency and a single common EU regulatory trade frame work for goods and services, the EU has copied the success factors that made the US the No. 1 global economy. The fact that English is also in the EU the most spoken ‘second’ language only adds an extra advantage to the UK’s EU membership. After a brexit, there is no way that the other 27 EU nations are going to just give the UK unfettered access to the largest and richest unified consumer market in the world ‘for free’. ‘They’ll trade alright, but any post brexit EU trade agreement will have a stiff price attached as Norway will testify. Britain’s membership of the EU brings a net benefit of £3,000 a year to every UK household, employers’ organisation the CBI said in 2013. More recently in 2015, a German think tank the Bertelsmann Foundation calculated the potential cost of a brexit even higher at £3,500 per person! If you agree with me, as explained in a previous blog, that the net cost per family of EU membership can be estimated at £330 per family, then brexit certainly makes no economic sense. I would like kippers and any other British Eurosceptic to ponder the following statements: True or false?
- The simple signing of a piece of paper called FTA with EU or any other country is not a guarantee for trade to simply start flowing, it’s just an expression of intention of two governments; It’s UK entrepreneurs that must make it happen!
- The trading nations must have some relative trading advantage, e.g. an ability to produce cheaper manufactured goods of one sort or another, have access to resources or raw materials that the other nation doesn’t produce or needs lots more of;
- The trading party must have a stable currency or enough foreign currency reserves to pay for UK exports. It must be able to afford the UK’s relatively high prices for quality.
- If being in the Euro zone and EU regulations are such a trade killer, why does Germany export six times more to China than the UK does? And why does Britain export more to Belgium than to China?
- Ask yourself the question: Are customers of UK goods more likely to be found in affluent and nearby mainland Europe (GDP $35 K per capita), In former Commonwealth countries (GDP $3.5 K per capita), or in far flung countries of Africa with an average GDP often less than $900 per capita? Have a look at this list on Wikipedia that illustrates nations’ relative purchasing power.
- Don’t just look at growth percentages from currently very low base GDP countries. Remember 100% growth of nothing is still next to nothing. 0.5% growth of $17 Trillion is an awfully big number!
Thinking of the UK’s own imports and persistent trading deficit with Europe and most of the rest of the world (except with the USA for some mysterious reason)
- How long can the UK afford to pay for its trade deficit by selling the ‘family silver’ like expensive London real-estate and manufacturing companies to our creditors?
- Will Foreign Direct Investment (FDI) and the Financial Services sector continue to balance the UK’s negative goods trading books ‘ad infinitum’ or will it all end in tears?
- Do you think that, upon a brexit, UK eBayers and other eTraders will suddenly change their terms of business from today’s unaspiring ‘deliver to UK and Ireland only’ to an optimistic outlook of ‘Will deliver anywhere in the world’? Note that most refuse to send stuff to mainland Europe even if EU clients offer to pay for the extra freight:-(
- In other words do you really think brexit is a safe bet to make the UK a prosperous global trading nation once again, or just a dangerous and deluded ukip pipe dream?
Please don’t get me started on twittering about ‘national sovereignty’, ‘democratic deficit’ and other ukip rubbish in reply. If that was of such importance to the British people, why is it that more than 15.7 m. eligible Brits didn’t even bother to turn up to vote in #GE2015?