Perhaps no one can beat Boris Johnson’s vow to help Turkey become a member of the EU for the sheer rankness of the hypocrisy. Johnson did, after all, do more than anyone else to use the prospect of EU membership to scare UK voters in the EU referendum campaign. But Liam Fox’s recent speeches, veritable paeans to free trade, come a close second.
In Manchester this week, echoing his comments at the World Trade Organisation in Geneva, Fox claimed to “remake the intellectual and philosophical case for free trade” while warning against “shadows of protectionism and retrenchment”.
That is rich, coming from the trade secretary whose first act will be to erect a customs border between the UK and its incomparably bigger market (the EU customs union, which Fox wants to leave, takes close to half of British exports, and more if you count in the markets with which the customs union has free trade agreements).
This week’s discussion of British auto manufacturing’s worries that Brexit will increase trade frictions is a good illustration of the huge challenges Brexit presents and the naivety that characterises the government’s approach to solving them. Nissan’s chief executive, for example, has warned that its investments in the UK may be unviable if Brexit leads to trade barriers with the EU’s single market.
The government’s response has been that because German automakers export a lot of cars to Britain, the EU would refrain from imposing tariffs on UK exporters, and instead grant Britain continued zero-tariff trade after Brexit. Aside from the simplistic policies (the assumption that the car industry will determine Berlin’s positions regardless of its other considerations; and that Berlin will determine the EU position, regardless of other countries’ positions), this betrays a poor understanding of the economics and institutional functioning of cross-border trade.
Even on the narrow point about cars, note that while Germany does indeed sell 800,000 a year to the UK market, British-based car plants sell more than that to the EU. About 57 per cent of the cars made in Britain, or 900,000 cars, are exported to the rest of the EU. (Again, add more for the trading partners, such as Turkey and South Korea, to which market access is secured through a deal with the EU customs union.) So while trade barriers in the car trade between the UK and EU would harm German exporters to the UK, it would bring them new advantages in the even larger market inside the EU currently held by British-made cars.
Fox and other Brexiters reassure us that the EU would not dare to introduce tariffs on UK goods. They seem to harbour the illusion that it would be for the EU, not the UK, to initiate the erection of trade barriers. But this is to get the situation completely backward. It is after all the UK that will leave the customs union, not the EU. And as a member of the WTO, the UK will then be under an obligation to impose the same external tariff on every WTO member with which it does not have a comprehensive free trade agreement. That means the UK, as a consequence of putting itself outside the customs union, will legally have to impose the same tariff on cars (and other products) on the EU. It does not have the freedom to choose whether or not to “retaliate”, whatever the EU does. What will this tariff be? Fox himself promised the UK will uphold its current tariff “schedules” in the speech to the WTO. But that is a commitment to impose the same as the EU’s common external tariff, or 10 per cent, on cars.
(The UK could of course unilaterally impose a zero tariff on everyone, but then good luck trying to get others to grant market access to a UK with no further concessions to grant in return. The EU is also obliged by the WTO not to give the UK better terms than those available to all WTO members — again, that means the common external tariff — until the two parties agree a comprehensive free trade agreement.)
Finally, Fox and many of his colleagues seem to define free trade as trade with zero tariffs. But that is an alarmingly old-fashioned view of trade barriers. Tariffs have not been the biggest obstacle to international trade since the 1980s, and today aiming for zero-tariff trade and nothing more is to place the bar awfully low. It would not deal with the huge costs to trade from having to clear customs and comply with rules of origin, which are significant even if there are no tariffs to pay.
Then there is the cost of multiple product standards, the elimination of which is the rationale behind the European single market, in which countries agree on harmonised rules, regulations and standards precisely to make it no more expensive to sell across borders as within them. Reintroducing any of these frictions will hurt British auto manufacturing hard, given how many times its supply chain crosses borders (just like the reduction of such frictions is why eastern Europe’s trade with Australia soared after EU accession). Not only are nearly four out of five cars exported, but many of the components are imported and may have crossed borders several times. The average UK content of a “British-made” car is only about 40 per cent, according to the industry’s trade association.
To commit this act of protectionist vandalism while singing the praises of free trade is to add insult to injury.
- France’s central bank chief looks kindly on the idea of the “European Safe Bonds” we described in a recent Free Lunch. (Hat tip: Open Europe.)
- New York Fed researchers observe that workers’ real wage growth naturally slows as they grow older. How much can America’s changing demography explain slower aggregate real wage growth? Quite a bit, they find.
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