Yesterday, Dominic Raab opened our mini-series on the rewards of leaving the EU by arguing that Brexit would lead to more jobs. Of course, the higher employment he predicts is only one part of the economic picture – if we left the EU, what would the impact be on prices?
Both sides of the referendum campaign know that this is a potentially crucial question. The pro-EU campaign have tried their hardest to suggest that the EU reduces prices in the shops – one of their headline messages is that prices are “£200 cheaper per household” per year thanks to the EU. However, the facts don’t bear out their rhetoric.
The pro-EU campaign’s source for this claim is an LSE report, published last month, on the impact of the EU’s Free Trade Agreements with non-EU countries. It finds, not surprisingly, that striking agreements which allow countries to sell into the EU without being hit by the EU’s own tariffs on trade reduces the price we pay for goods. But that isn’t a reason to cheer Brussels to the rafters – after all, it was the EU itself which put these tariffs in place to begin with.
The LSE study did not look at the overall cost of the EU’s remaining tariffs, just at the benefits of removing them – therefore the £200 figure is in fact a glimpse of how much cheaper prices would be if the EU hadn’t erected trade barriers in the first place, or if we weren’t in the EU. It’s the trade equivalent of the myth about “EU money” – when people talk about the Brussels “giving” the UK cash in the form of grants or a rebate, but in fact we are only getting a percentage of our own money back, having contributed billions to begin with. If I take your wallet, remove a hundred pounds and give you back a fiver, you’d punch me, not thank me – and rightly so.
While the EU has signed some Free Trade Agreements with some nations (you can see the full list here, from Akrotiri and Dhekelia to Turkey), as Raab pointed out yesterday they still only cover a relatively small proportion of the world economy. So while we are expected to be grateful for a few agreements which reduce the impact of EU tariffs on prices by £200, the large majority of the globe still faces barriers in selling its goods to us.
The protectionist policies of the EU affect a wide variety of imports including industrial products, clothing and, of course, food. (The dizzying array of different tariffs and the products to which they apply, from hand-made riding crops to sugared cherries, can be studied online.) Given that the bulk of the global economy, and the vast majority of global economic growth, is outside the EU and subject to these barriers, it isn’t hard to see that they have a knock-on effect on the British economy and a direct impact on the pockets of British consumers. In 2014, Ryan Bourne of the IEA demonstrated that from 2007 to 2011 EU food prices alone were six per cent higher than the world market level – and between 2002 and 2011, EU consumers suffered an average mark-up of 15 per cent on their food bill.
So would we gain from leaving the EU, and escaping its trade barriers? Yes. As Professor Patrick Minford, Professor of Economics at Cardiff Business School, wrote in his recent book:
“…by removing the tariff and non-tariff barriers erected by the EU on its behalf, the UK would at once benefit from a large fall in import prices, a direct and obvious benefit to consumer living standards; we estimate this at around 10 per cent.”
A reduction of import prices by ten per cent is a massive benefit – far outstripping the £200 per year generously granted by the EU’s limited exemptions from its own trade barriers. Added to the multi-billion saving to the Exchequer from no longer paying exorbitant EU membership fees and an increase in employment over and above that seen in recent years, such a Brexit bonus would bring welcome relief to millions of households who find themselves hard-pressed to get by. Despite the economic recovery, the cost of living remains a powerful issue – we could help to address it in a major way in a short period of time by freeing ourselves from the EU and instead choosing a path of free trade with the outside world.
There’s one more, not inconsiderable, added benefit, too. The exit of the UK, the world’s fifth largest economy, from a protectionist regime would make a major contribution to alleviating poverty in the developing world. The EU provides exemptions to its trade barriers for some of the world’s least developed countries, but there are still billions in poverty who suffer the effects of restrictions on trade with us thanks to Brussels’ rules. It’s absurd that while our politicians preach compassion and sign aid cheques, we are still a member of a body which restricts trade with many of those we seek to help – and British consumers have to pay more as a result, too. By leaving the EU we would help others and help ourselves at the same time.