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FLIGHT Howard 2

Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.

For me, the most important arguments for Brexit are the restoration and preservation of our democratic system and rule of British law; the need for control of our borders to avoid being swamped with migrants; and our security, best provided for by NATO, as is, and without disruptive plans for a European Army – to be released by the EU Global Strategy Foreign Affairs and Security policy committee on 24th June.

But, over the last few weeks, the Government has swamped the media with doubtful and blatant propaganda intended to frighten voters that a Brexit decision would cause economic havoc.  Virtually all of this is based on dubious assumptions, starting with the Treasury’s “dodgy dossier”.  The range of forecasts for the effects of Brexit on the economy is from -6 per cent to +10 per cent (from Tim Congdon).  The likely impact could be modestly negative in the short term, but substantially positive in the longer term.  It appears, however, that the deluge of Government “fear propaganda” has had some impact on voters.  Economic self-interest, while ultimately less important than matters of principle, is an understandable motivation.

There have been powerful economic responses by Allister Heath, David Davis, and Peter Lilley, different in their focus but, essentially, complementary.  They share important points:

  • That the EU runs a massive current account surplus with the UK (£107 billion in 2015), and so it is in the economic self-interest of the EU, and particularly Germany, to agree a sensible trade deal with the UK in the event of Brexit;
  • That the UK is a sufficiently large and important economy to have the clout to negotiate a deal appropriate for it;
  • And, that being locked into the job-destroying, mismanaged EU, with the Euro wrecking Southern European economies is damaging to the UK economy and constrains our trade with the agile, globalised world.

In short, the UK would be better off out, in terms of jobs, wages and growth, and the cost of leaving would be smaller than its benefits.  The core economic arguments of “Remain” are that leaving would erect damaging barriers to trade: whatever the specific post Brexit “Deal”, this is unlikely to be case.

Heath argues that the UK should seek to adopt an interim EEA solution, remaining in the short term in the Single Market, while withdrawing from agricultural and fisheries policies, justice, home affairs and the customs union.  This would pacify essentially unjustified City concerns and would save money.  We would have to follow substantially fewer rules. We would, moreover, have our own voice at the various global bodies driving regulation rather than be in receipt of them from the EU.  We would also be able to sign free trade deals with countries, such as China, where the EU has proved incompetent.  Exporters to the EU would still be bound by EU regulations, but these would not need to apply to the 94 per cent of UK businesses not exporting to the EU.

Davis goes further.  He argues, persuasively, that once we vote to leave we then negotiate a new relationship with the EU, dictated by what is in the best interest of both sides.  He makes the realistic point that in the event of a Brexit vote the tone of discussions would switch inevitably from antagonism to pragmatism, as is invariably the case in politics.  The core of a sensible deal would be free trade with the EU, where tariffs would hurt the troubled EU economies.  The deal would be one to suit the UK’s unique circumstances; not merely copying the Norway or Swiss arrangements.  We could then get on with increasing our trade with the rest of the world.  We would be free of EU Government and bureaucracy and only need to opt in, as others do, to programmes suitable to our own interests.

Peter Lilley is the only sitting MP with first-hand experience of negotiating a trade round and of implementing the European Single Market (as Secretary of State for Trade and Industry).  He makes the point, rightly, that the importance of trade deals is grossly exaggerated.  Countries succeed in exporting, with or without trade deals, if they produce goods and services other countries want.  Furthermore, tariffs between developed countries now average low single figures – small beer compared with movements in exchange rates.  The most worthwhile trade agreements are with fast-growing, developing countries, which still have high tariffs.

Our net £10 billion contribution to the EU is equivalent in cost to tariffs averaging seven per cent; if we left the EU with no trade deal, our exports would face tariffs averaging only 2.4 per cent.  EU membership has not helped us negotiate free trade deals with the rest of the world; rather, EU membership has prevented us negotiating our own deals.  The EU has delivered nothing with China, India, Australia or Brazil.  With all 28 EU members having a veto, trade negotiations take for ever, and often exclude so much.  Bilateral deals are simpler, quicker and more comprehensive.  We would not, however, have to renegotiate from scratch existing EU deals: under the “principle of continuity” in international law, we can adapt existing EU treaties to the UK. We should start this before leaving the EU.

Negotiating continued free trade with the EU simply means keeping zero tariffs.  The Single Market is not a closed shop accessible to only a privileged few.  Every country has access to it with or without tariffs as applicable.  If we remain a member of the Single Market, as a member of the EEA or otherwise, UK businesses would be bound only by EU regulation in respect of exports to the EU.  Otherwise, American and Japanese exporters benefit as much as German or British firms from the harmonised rules.  The context is that British exports to the EU have grown less rapidly since the Single Market than they did before, largely because the Single Market is more developed to facilitate the export of goods than services, while the UK economy is 88 per cent services.

For the City, the most important export earner, investment management, is already mostly immune.  The UK- managed retail Funds based in Luxemburg, and hedge funds and private equity funds, which are mostly structured as Guernsey companies, listed on the London Stock Exchange, will enjoy the Alternative Investment Fund Managers Directive later this year.  Most of the big investment banks already have offices in continental Europe which could front deals if needed.  80 per per cent of insurance exports are to North America and Asia: for these markets, avoiding the costs and complications of Solvency II would be a valuable cost saving.  The key point is, however, that the rest of Europe needs the services of the City of London and the money it procures for them more than the City needs the EU, which counts for less than 30 per cent of the UK’s exports of financial services.

In the event of Brexit, William Hague argues for a British strategy of cutting taxes and regulation – reducing Corporation Tax to 10 per cent; abolishing the European Working Time Directive; adopting US rather than EU Regulations; declaring unilateral free trade with much of the globe and accepting immigrants to fuel economic growth!

34 comments for: Howard Flight: The economic case for Brexit

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