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.
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.
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