Where’s the outsider advantage ?

Today I was asked by a fellow UKtoStay Campaign Volunteer Dario Mazzola to have a look at a widely circulated Tory #brexit whitepaper.

The ‘Where’s the insider advantage’ Civitas pamphlet is often quoted by Euro sceptics that want to appear knowledgeable on international trade; they think it contains the ultimate statistical proof and economic arguments that EU membership has given no particular insider advantages for the UK economy. In this post I will gladly spend some time debunking the pamplet.

But before getting deep into the nitty gritty of trade league tables and historical graphs supporting weak economic arguments, it bears reminding the reader of that old Mark Twain warning : Lies, damned lies and statistics.

I admit sometimes I am guilty of this: I see a gullible #ukip twitterer and global trade wannabee produce a graph purporting to show how well UK exports outside Europe are doing and I have no problem producing a later graph from the same Office of National Statistics showing, that since that obviously ‘rare’ occurrence, those same exports have recently taken a massive tumble again. In other words, if you pick your time line carefully, with trade statistics you can underline any weak brexit or UKtoStay point.

This cautious approach to the use of graphs was well beaten into us at the Rotterdam School of Management (RSM): The dutch say it is easy to find a stick to beat a dog. Finding statistics to prove or disprove an economic point is even easier.

So spotting an upward or downward trend in trade statistics is easy. The correct economic analysis of the drivers behind those trends is the difficult bit. Let’s look at exhibit number one from the Civitas report. Note Burrage has used a good long term perspective, which he divides in three periods we will discuss.

civitas1

If you are blessed with the selective perception of a Eurosceptic, one might come to the same ‘quick and dirty’ conclusion of the Civitas report:

“The proportion of goods going to the future EU member countries grew rather sharply, by 12 per cent, over the twelve years before the UK entered the Common Market, from 49.6 per cent in 1960 to 61.6 per cent in 1972. However, over the 40 years of EU membership, the proportion of UK exports going to the UK’s future EU partners has changed hardly at all. To be precise, it has fallen by two per cent, from 63.9 per cent in 1973, the year of entry, to 61.9 per cent in 2012, with 0.5 per cent of the fall occurring during the years of the Single Market, despite the insider advantages the UK was supposedly enjoying.”

If you are equipped with a more critical approach to statistics it is not hard to spin a totally different narrative around the same graph. First of all I would like to point out that the first part of the graph is almost a complete inverse of a similar graph of the UK’s export percentage to their blessed Commonwealth. I reproduced this rapidly declining graph in a previous blog post entitled ‘ukip economics and brexit’. Over the same pre-European Community period, UK to commonwealth exports dropped from about 30% to 18%. Funnily, graphs that express a percentage on their Y-axis invariably do add up to 100%. Such graphs do not explain the forces at work that cause these percentage shifts: Rise of European economies or decline of the British Empire? Cause or effect?

If we look at the second part of the graph where UK enters the EEC, Mr. Burrage postulates we should see a sudden surge in EU trade going forwards from 1973 due to the newly acquired EU inside advantage. Mischievously he wonders why he doesn’t see it. He will spend most of the 83 pages of his report barking up this same fruitless tree. Maybe it’s for the same reason we don’t see a marked drop in UK trade with the Commonwealth upon joining the EEC? I would argue it’s the wrong hypothesis to put forward: Politicians do not enable trade to start flowing simply by signing a trade deal with a lot of pomp and ceremony. If there were deals to be signed in 1973, Heath did this to protect trade with Europe that already existed. Certainly more so than wishful thinking EU trade would take off overnight! When Queen Victoria opened the Grand Union Canal between London and Liverpool, it was safe to assume trade would start flowing on it the very next day. If today a UK Prime Minister signs a piece of paper purporting to be some new Free Trade Agreement (FTA) with another country, you can bet your sweet bottom dollar he is already way behind the times. Nothing much will happen the next day. He’s just mopping up glory after the prior hard graft of private sector entrepreneurs who negotiated the deals in the first place. The ones who saw a new market opportunity abroad and jumped on it.

Politicians may proclaim it gives their country new ‘Insider advantages’ to sign a trade deal abroad, but more likely they are just making sure other politicians after the next election don’t cock things up for UK Plc. Afterall the government now depends heavily on the additional foreign reserves generated by this new foreign trade and resulting growth in Gross Domestic Product (GDP). Britain’s structural current account deficit remains a constant worry since WWII. The last thing politicians want is local industry lobbyists demanding higher tariffs on foreign imports. Cheap imports that threaten native manufacturing (or rather what’s left of it). Above all politicians fear new barriers to trade might jeopardize promised Foreign Direct Investments (FDI) that keep their precarious trade books balanced.

Let’s finally face our attention to the third phase highlighted in the above graph. This is the period where we see the rise of the BRIC economies of Brazil, Russia, India and China. This is not a period where the EU enters some sort of lethargic terminal decline after swallowing a bitter Euro suicide pill. Sure the EU was hit by global financial crises, but so was every other major western economy. So it’s this same law of GDP percentages at work again. One nation’s GDP percentage goes up, another’s goes down. This is not how lying Eurosceptic politicians like Dan Hannan MEP like to portray it. Even Civitas admits the EU will remain a high-value market to the UK for a long time. Even be it a slow-growing market (p39). It also admits, reading between the lines, that just looking at countries growth percentages can be “misleading” in terms of economic policy making. It is easy for small GDP economies to achieve double digit growth figures. For mature economies this is rather more difficult. We cannot infinitely increase the number of cars each EU family owns. Where would we park them? Same with white goods and TV sets. Which rooms do we put them in? We are being encouraged to consume less food to curb obesity and buy more durable consumer appliances to save the planet. Try telling that to a poor African who has nothing? Still 0.5% growth in an $18 trillion EU economy is an awfully big number to get a slice off. Nothing to be sneared at like Farage and Hannan tend to do! The relative maturity of the EU ‘goods’ market also explains why UK exports of ‘services’ to the EU have been growing at a relatively faster rate.They’re harder to saturate as they are instantly consumed. As ‘services’ is now the UK’s primary strength, we should be focussing our next phase of EU participation on the development of a ‘common market in Services’, not turn our back on it and on 500 M. cash rich EU consumers. The remaining surplus of our industrial and agricultural ‘goods’ production we can allways flog off to the emerging BRIC economies in a ‘ship and forget’ kind of way. They will love our E-numbers and EU quality marks as a sign they can trust over their local unregulated produce. Forget the bonfire of EU regulations after a UK brexit. Local markets need regulation too. Remember the Chinese rush on EU baby milk? There is nothing in EU treaties stopping us exporting this stuff, whatever kippers may tell you. Germany does it, Holland does it, Britain can do it too. There is no choice to be made here. We can benefit from the EU’s reputation of highly regulated quality, its bargaining power and multiple existing trade agreements with the rest of the world. Here we really can have our cake and eat it.

In Chapter 9 Burrage is rather dismissive of the EU’s formidable negotiating clout. Like usual no examples are given of trade deals signed by the EU that are sub-optimal or detrimental to the UK’s interests. In true kipper style the old bug bear of Switzerland and Icelandic trade deals are paraded and the childish ‘if they can, why can’t we?’ argument. If Burrage had studied economics rather than sociology he might have come across the Milton Friedman quote “There is no such thing as a ‘free’ lunch”. Well if we study these often quoted Swiss and Icelandic trade deals up close we soon come to realise that in trade dealings size really does matter.

In conclusion I would like to offer a more sober and balanced analysis of our EU inside advantage, than that of the notorious Eurosceptic right wing think tank Civitas. Mr. Burrage is to be commended for having a decent go at some form of quantitative econometric analysis of the UK’s insider benefits as a member of the EU. He does not fall in the trap of selectively quoting time x-axis lines and fiddling with Y-axis to distort trends like Eurosceptic Business for Britain or Hannan. He does however fall into the ukip trap of barking up the wrong tree.

What was signed in 1973 at the time of the UK’s accession to the EEC was IMHO reflective of what was already happening in the UK’s ‘real world’ changing trade patterns long before before the first referendum. We should forget about Heath and Wilson’s wishful musings of what might or might not happen to trade after Britain joined the EEC. The Civitas report showed increased EU trade had allready happened and was merely confirmed in treaties.

The same is happening all over again today with Cameron’s planned EU referendum. Presumed insider or outsider benefits are a side show at best. It is clear that Eurozone leaders are surging ahead in their next phase of integration regardless. Britain again feels left out on the side lines isolated and threatened. Again Britain is playing catch up, rather than leading. Again the UK thinks it has to protect something illusory. In 1973 it was the Commonwealth remnants of its old Empire, today it would seem Cameron is mainly concerned about Britain’s opt-out from the single currency. He is doing ukip’s bidding egged on by his Eurosceptic back benchers.

In the UK’s political climate of today it takes a brave man to admit that the UK’s real mistake was made way back in 1991 in Maastricht with Britain’s opt-out of the single currency. Cameron tries to put a brave face on it by trying to secure some form of ‘protection’ for his chums in the City. He knows the Tories have already dealt a lethal blow to UK’s manufacturing heartlands with an over valued Pound. He has lost the manufacturing plot to Germany who put the common currency to good use. He hopes to secure some obscure deal that might allow Britain’s current status as a global financial hub to survive a wee bit longer, some sort of Singapore or Hong Kong like free trade area just off the coast of Europe.

I am still optimistic that the majority of UK voters will remind him that there’s more to the UK than the City of London and that there’s a lot worse to imagine than ever closer union with our EU fellow citizens and a different coin in our pockets.

China FTA

PS for those who think with my conclusion about the Euro I have taken a complete leap into the dark, I advise the following additional reading about EU ‘Inside advantage’

UK would have fared better inside the eurozone by Martin Sandbu

or an interview with the same brave Financial Times journalist

 

 

 

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About lasancmt

Passionate about Identity Management Disgusted at #ukip and #brexit
This entry was posted in #brexit, EURO and tagged , , , , , . Bookmark the permalink.

9 Responses to Where’s the outsider advantage ?

  1. I think you may be missing the point and have inverted my question, i.e. is there any economic advantage to UK membership of political union vs leaving the EU and retaining single market access ? The point Burrage makes (in later sections than the graph you discuss) is that when he compares UK’s experience inside the EEC/EU with outsiders, he sees no “insider” advantage. Similarly, I wouldn’t expect any outsider advantage – leaving the political structures of the EU but retaining Single Market access will be neutral in economic/trade terms.

    Similarly with external trade, there has been an inversion of my original question i.e. what advantage do EU FTA’s provide over what UK could have negotiated on its own. Burrage looks at a whole range of Switzerland’s FTA’s (not specifically the China deal) and finds no particular advantage to the UK from being in the EU compared with Switzerland being outside. I’m also not expecting any immediate advantage to external trade if we Leave, but I do believe the UK would have the opportunity to do better in the longer term: partly because I believe being responsible for our own trade policy will be a spur to up our game (which, as you alluded – is needed) & partly because the EU’s just not that great at trade deals.

    So when you say “Presumed insider or outsider benefits are a side show at best” I agree, these are essentially neutral – fundamentally the Referendum is a political question, not an economic one. So lets have an end to “sky will fall” FUD of “Remain” and “we’ll save loads of money” claims from wilder elements of “Leave”.

    What I want is an honest debate – so please make your case on points such as why supranational is better than intergovernmental co-operation etc. If you keep banging the FUD drum, you still wont get democratic consent for the Europe you want, so if UK remains, it will still be the “awkward” state. Similarly, don’t assume that we on the Leave side are “isolationists” – we believe in trade, co-operation and democratic consent. I actually believe that path offers a better chance of peace & prosperity in Europe than the EU’s supra-national approach. Naturally, you’ll disagree, but that’s where the debate should be .

    • lasancmt says:

      ‘Your’ question Paul? Are you with Civitas? Anyway glad we agree that these questions are so much FUD; 98 pages of FUD to be precise and presumably a hefty bill for barking up the wrong tree. Sponsored no doubt by another eccentric billionaire who won’t have his life style affected by #brexit even if it all goes terribly pear shaped afterwards.

      Now the crux of the matter. My point you seem to have missed is that while leaving and negotiating eighty odd new FTAs will not immediately bring new ‘insider’ advantages; ripping up EU membership will give immediate outside disadvantages. New tariffs to name but one, but non-tariff barriers probably ten times more serious. Another Economic think tank calculated brexit would immediately create a 30 billion black hole in our exports. Now put this against dubious new insider advantages of the speculative new FTAs prime minister Farage would have to negotiate and sign if he had his cavalier way?
      http://www.gtreview.com/news/europe/brexit-scenario-export-uk-free-trade/

  2. 1) my question ? I was pointed at this article by Dario when I asked him my question – what are the positives or “insider” advantage of EU membership. I still have no answer to that question by the way. I thought it perverse that you turned round my question and the title of Burrage’s paper, but hey ho.

    2) you can try and score points by misrepresenting my view if you wish, but I was hoping for a more fruitful debate. Burrage’s paper, which is based on an analysis of actual trade history rather than speculative assumptions made on a biased premise (and yes both sides are guilty of this) strikes me as a balanced analysis, essentially concluding there is no insider advantage, which I believe you broadly concurred with – if not, please state where the insider advantage is, this is a genuine (and repeated) request for enlightenment !

    3) If you have evidence that the paper is sponsored by a biased source with money to spare, please share it. You should be cautious about casting such aspersions, particularly given the EU’s well documented penchant for using taxpayers money to promote itself (aka propaganda). Suffice to say I do not agree with your “ex-cathedra” description of Burrage’s work as FUD.

    4) Regarding FTA’s, I am more than familiar with this line of FUD, and the point has been countered numerous times in other debates, e.g. most of these treaties are signed by the UK as a signatory (particularly as the EU only became a legal entity with the treaty of Lisbon); legal basis and precedence for continuity, treaties have already been negotiated and non tariff barriers are eliminated by the existing regulatory regimes and mutual recognition etc. – essentially if trade is of mutual benefit, trade will continue – that’s a political reality. I’m sure you will take a contrary view, but rather than enter a fruitless debate about this, I’d like to explore another angle with you. Imagine the UK has voted to Leave, and that David Cameron sticks to his word that Leave means Leave (a very big if!) – the UK would be saying “we wish you well with your political union project, but it’s not for us; However we wish to remain friends and allies, and to pursue trade & co-operation, rather than political integration”. Would the EU follow its “high principles” (as expressed in the treaties) to promote good neighbourly relations, pursue free and fair trade and promote the abolition of barriers to international trade ? Or would it look to bully/punish the UK ?

    • lasancmt says:

      Paul, we can be short on your first three points; your fourth deserves a longer response.
      1. Thanks for clearing up how you got here. Also saw your bio on Twitter. We have a lot in common.
      2. As I explained before I have no stock in the amount of data trawled through by the author. I applaud the way Burrage eliminated the very poor countries that easily can distort stats with double digit growth and similar statistical prudence. However you missed my point he is barking up the wrong tree. Kippers and Euro sceptics can bark a capello for all I care, practice synchronised barking, it’s still serenading the wrong tree. If you accept that trade deals reflect the past reality and only mere hopes for the future the data do make sense. There was an inside advantage to consolidate joining the Common Market.
      3. If you look where Burrage works you can see this type of analysis is his day time job and you show naïveté if you think he didn’t get paid for it. Have you not read how Matthew Elliot has swindled tax payers by funding all sorts of dodgy research as long as it’s anti EU?
      4. This UK being co-signatory to pre Lisbon trade deals is interesting. Presumably your point is that they stand even after Brexit?

      You seem to suggest EU and UK could split amicably because the UK buys so many overpriced German cars for its City of London Gordon Gekko wannabes to drive around as status symbols ? That’s like saying there are no messy divorces because rowing parents allways think of the kids first. It requires a certain amount of empathy for the member states being left behind after brexit, something kippers and Eurosceptics seem incapable of. I wrote another blog about this called ‘Ukips revolving door policy on brexit‘. Just click on the link. In short I would expect a cold shoulder after brexit, not an open door free trade agreement. WTO rules give EU the options to increase tariffs where the same rules forbid UK from doing the same. A nugget of gold dug up by Dr. North 😉 Also non tariff barriers to trade which are much more pernicious will provide ample of opportunities to create this 30 billion pound black hole in UK trade another think tank recently warned about. And that was just year one after #brexit.

      Does that answer your question ?

  3. Still more questions than answers for me I’m afraid …

    2) Your theory that the benefits of trade precede the agreement of a preferential trade deal is “novel” shall we say. Fortunately, there is a much more logical and straightforward explanation that fits ALL the data presented in Burrage’s paper (especially noting where Burrage compares UK exports to Europe with 7 other founder or long-standing members of OECD :Australia, Canada, Iceland, Japan, Norway, Switzerland and the United States).

    In the period preceding the UK joining the Common Market (i.e., 1960-1973) UK’s trade with Europe shows a marked increase, but by less than the 7 OECD countries. In the period 1973- 1992 (the Common Market years), UK exports to the EU grew at a much more rapid rate than those of the 7 OECD countries. The distinct advantage the UK enjoyed in this period was not being subject to the same high external tariffs as the 7 OECD countries. This is exectly what customs unions are designed to do: promote internal trade and integration over external trade. In the period 1992-today (the Single Market years), this trend was reversed, with the 7 OECD countries outperfroming the UK in exports to the EU, reflecting the fact that tariffs worldwide have been lowered, removing the advantage of being inside the EU’s customs union.

    The Uraguay round within the GATT framework (concluded 1994) led to the major reduction in tariffs (thus eroding much of the EU Custom Union’s external tariff wall) and also resulted in the establishment of the WTO and an agreement on technical barriers to trade (in which article 2.4, established the supremacy of international standards on technical regulations, rendering the EU as subordinate). In the 21st century, Globalisation and the advent of a Global Single Market means that the “Little EU” is redundant – it is very last century.

    3) I get that you don’t like the conclusions that Burrage’s paper leads us to – but trying to smear the author without any evidence is not an adequate response. Trying to associate him with Matthew Elliott (a repeat offender on many matters, not just the EU) is a particularly poor attempt. This approach does you no credit.

    4) Perversely, while you reject Burrage’s paper for “an excess of data” you happily promote the Euler Hermes note which makes speculative assumptions RE future trade without any attempt to justify these assumptions. This is about as much as use as the annual illustrations provided for pension/investment funds, “at 4% growth your fund will be worth £X in n years time, at 8% growth it will be worth £Y etc”.

    Regarding future trade arrangements, I am well aware of the WTO rules pertaining to Regional Trade Agreements, non-discrimination and the fact that non-tariff barriers are the likely to be the major issue. Whilst the size of UK’s trade deficit with the EU does not give the UK the whip hand, it is also perverse to pretend that the EU has nothing to lose. Beyond the nominal £ value of imports/exports is the fact that modern enterprise involves complex supply chains; interrupting these could cause much wider damage. Also, the EU will not be able to simply disregard its own treaty commitment (articles 3.5, 8, 21.2). For all these reasons, what will emerge is a continuation of trading under current terms and regulations – no better, no worse.

    5) Finally, I am still waiting to hear a positive reason why the UK should commit its future to the Supranational Political Union of the EU. I note your comment that committing to the Euro might have a positive effect on UK manufacturing. This might be one way you could put a positive case – if I thought it was true I’d be tempted.

  4. lasancmt says:

    People like you and me Paul, we like to think about underlying causes of trends, we don’t accept that just because we see a past trend a graph’s future needs to be heading in the same direction ad infinitum. If it was that simple why are oil prices at their lowest since 2009?

    Simple kippers like Robert Kimbell see a developing country achieve near double digit growth while The EU may be limping a long at 0.5% and they say “were in the wrong club, let’s brexit”.

    To me that sounds like the most moronic thing to say, because with my business and economics background I’d like to see some market research first. What is it that these developing economies are buying; what do they need in their next 5-10 years of development? I look at their consumers spending power. For starters Commonwealth countries per capita GDP is about a tenth of our customer base in nearby EU markets. Take out developed countries like Canada and Australia the average per Capita GDP drops down to less than $900! This tells me two things. All that growth will be in areas like plant machinery, building materials, perhaps food stuffs. Are these the kind of that the UK has a big surplus of to export? No! UK is a net importer of food. I’m not saying the UK doesn’t successfully export Graham cream crackers or McVittees hob nobs; they’re not however exporters of the bulk animal proteins the developing country no doubt has a shortage of with their growing populations.

    Now Germany has carved herself a niche market reputation of exactly what developing economies need. Plant and machinery to create new local factories. That’s why their exports do well. They also have a nice side line in quality cars that no doubt will be bought by the emerging middle classes. That’s why the likes of Jaguar and Range Rover also do well in those same markets, even if luxury cars like that might attract punitive luxury taxes of 300% like they do in China.

    I hope the above explanation serves as a warning not to place too much trust in simple trade statistics. Without analysis they could lead to taking the wrong decisions like #brexit. That’s why all the work this Burrage has done is pissing in the wind against the wrong tree.

    Coming back to why remaining in the EU is the right economic bet for Britain. In the EU we have 500M. sophisticated customers with a spending power similar, ofter exceeding our own. They are right on our doorstep, not halfway around the globe. They have a disposable income to buy our cookies, our Minis and our Nissans in big numbers. They’ll even buy the occasional Range Rover, Jaguar, Austin Martin just like millionaires in developping countries.

    The question I keep asking myself is why is the UK so bad at exploiting this huge consumer market, this customs union they find themselves in smack bang in the middle.

    I can only come to one logical conclusion. British management is dumb and short sighted just like ukip politicians and Eurosceptic twitterers.

    • lasancmt says:

      Rereading this, I realise I still haven’t answered your question: Could the same economic benefits not be achieved by staying in the single market while stopping shy of further political integration? Without getting into the details, let’s keep calling this the Norway model as some do. I think you are right: By agreeing to roughly pay the same net financial contribution to the EU as Norway does, this would take some of the sting out of brexit for the remaining member states as well as for Britain itself. Trade would more or less continue unchanged in the short term. Eurozone integration could continue apace unhindered by Britain constantly applying the Emergency brake. Principles of freedom of movement of people and capital would survive. Punitive tariffs would be avoided. Britain might be granted observer status in EU meetings like Norway seems to have.

      The only problem I see, for the likes of ukip this halfway house is in no way enough. It would not meet their nationalistic aspirations. It would not stop immigration. They’d prefer to pay nothing and default back to WTO terms. They’d still want to block up the channel tunnel and regain control of our ‘boarders’ [SIC]. They’ll vote to leave, whatever Cameron brings back from his ‘renegotiations’. The Eurosceptic wing of the Tory party might be persuaded to back this fudged option for the sake of party unity. Some of them might even have read Dr North’s flexcit pamphlet and dream that in this enlarged EFTA they can be head boy or head girl again. They’d convince themselves they would soon start sabotaging that club from within like they did the EU. Yes, this is publicly muted on the EUreferendum web site! If things pan out this way, the option will probably get a new name: “Associate Membership”. As I said, for kippers it won’t be enough; they’ll vote against it. Europhiles won’t be happy either, but the option they’d prefer (full and active integration in Eurozone) won’t be on the ballot sheet. Will the combined propaganda might of the state be enough to sway the currently undecided 40% to back this halfway house? Too close to call if you ask me. If it ever comes to this sub-optimal choice, I could care less how the UK votes. In my opinion either choice will end in tears. The leave.EU option probably a bit sooner than the Norway option.

      My prediction for the future of the UK: They’ll vote to leave. Five years later Britain will be the sick man of Europe again. They’ll beg to be readmitted in a still prosperous Eurozone. This time they will get no opt-outs. Expect to be using the Euro within five years of whatever outcome of the Euroreferendum.

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