Wednesday, May 03, 2017

Unilateral free trade is the way to go for both EU countries and Britain

Published by The Conservative

How to make the EU popular again?

In the course of the last year, the UK has been “threatening”, according to some, to go for the so-called “Singapore-option in case the EU would be inflexible during the negotiations on the UK’s exit from the EU and on its trade status after the exit. In particular, UK Chancellor Philip Hammond has suggested that the country may cut taxes in retaliation for the EU complicating Brexit.

First of all, it should be questioned what would be so bad for the EU in case Britain would do this. A stronger UK economy – which would bethe result of the UK government relaxing the tax burden on those who are creating wealth – would logically also benefit the economies ofmainland Europe, as these trade extensively with the UK. The proverbial “German car manufacturer” would be able to sell even more cars tothe British than before. It would also put pressure on EU governments to lower their own corporate tax rates.

Secondly, the UK has already been lowering its corporate tax rate before the Brexit vote, as a result of international competition. This happens amid similar corporate tax cuts or plans to do so as a result of global competition by the likes of Finland, the United States, Belgium, theNetherlands, France, Japan and Italy. Even German Finance Minister Schauble has promised to cut corporate taxation, oddly enough not longafter w  arning the UK not to do so in the context of Brexit.

In short, the UK may or may not have lowered its corporate tax rate after Brexit. What’s however much more related to Brexit and where it may indeed lead the UK to the “Singapore route”, is trade policy. Britain will be able to decide its own tariffs and it will be able to conclude trade deals on its own, as this power will be transferred from the EU level after the UK will have left the customs union, which may happen only some time after the UK’s EU exit, likely in April 2019, given how Britain needs to adapt its own customs bureaucracy first.

One of the main characterics of Singapore is its policy of unilateral free trade, to a great extent at least, something it has in common withHong Kong and South Korea. Whereas there are many things that could be improved in Singapore, starting with its lack of free speech even when it comes to the city state’s economic policy, its trade openness is clearly the core factor having contributed to its enormous economic growth during the last 50 years.

So why are so many people against unilateral free trade?

Many people feel it is somehow unfair to allow market access to businesses when they are coming from countries that do not offer the same kind of market access in reciprocity. China, for example, obviously does not practice free trade. Instead, it has a corrupt protectionist state-driven economic model. That model is however already a massive step forward as compared to what China was before it opened up to theworld in 1978. If the West had kept its door shut until China somehow magically would have converted to Western liberalism, no 700 millionChinese would have been lifted out of poverty and no cheap products would have been enjoyed by Western consumers, helping them to cope with the ever expanding tax and regulatory burdens.
Then – Europe’s and America’s protectionist populists may remark – Western openness to China surely has eroded the West’s manufacturing base, hurting the middle classes badly? That’s an incorrect assessment. The problem is not so much that businesses have chosen to move to countries where people are still willing to do the hard work needed to produce some basic materials and that this has destroyed jobs in theWest. The real problem is that due to the burdensome tax and regulatory policy choices of the West – also in the U.S., where the corporate tax rate has risen to 35% - not enough new jobs have been created. While China has been experimenting with elements of capitalism, the Westhas been lured into adopting elements of socialism, despite the evidence of the massive failure of this model of development in Russia and many other countries.

When one would take it to its logical conclusion, then the more reciprocity is inserted into trade policy, the closer we would move to theworld’s common lowest denominator and to the level of openness of Zimbabwe and North Korea.  

Surely, some middle way should be found, some may say. In order for companies to grow into world players, they may need some state protection first, the thinking goes, and when they have grown up it’s fine to stop protecting them. Here’s how to deal with this argument: while it’s true that some companies do benefit from protectionism,  one should look at the total cost to the economy.

First of all, protectionism makes sure that consumers are faced with either less choice or higher prices of products and services. Secondly, companies that do import bear the brunt– and these days it’s getting harder and harder to distinguish between “importers” and “exporters”, given the ever more complex cross-border supply chains in many industries. Protectionism really distorts market processes, effectively reducing economic prosperity. To deal with the restrictions, companies need to find second rate service providers or pay more for certain goods than they would have otherwise. In orthodox economics, one needs to look at the interest of the consumer, as the French (!) 19thcentury economist Frederic Bastiat has so eloquently pointed out. Why? Everyone is a consumer, plain and simple.

Perhaps then unilateral free trade would mainly be good for the strong in society, some may object. Also this has been refuted by evidence. Open Europe’s very first research paper back in 2005 concluded that EU protectionism mainly hurts society’s poorest members, given how they spend the highest percentage of their income on food and clothing, as compared to wealthier income groups. Food and clothing are precisely the kind of items made more expensive as a result of the EU’s protectionism.  
Then isn’t this a geostrategical matter? Shouldn’t the European Union – or Britain after Brexit – shield off its agricultural markets and shower it with subsidies just because food is such an important thing? We wouldn’t want to have our food supply being shut off by Russia, would be? Also here the facts reveal the obvious: When New Zealand opened up its agricultural sector at the beginning of the 1990s, food production tripled. In contrast, while their counterparts in New Zealand are thriving, Europe’s dairy sector has become ever less competitive. That’s no surprise, given how they are forced to operate in the context of the EU’s plan economic model for agriculture. Protectionism precisely is what undermines the vibrancy of our agricultural sector.

Opening up trade unilaterally isn’t only about slashing tariffs on imports to zero these days. It’s about allowing goods to be imported easily, making the process of inspecting them at the border as smooth as possible. It’s about allowing services and goods providers from other countries to offer their services in a convenient way, getting rid of the unnecessary bureaucracy to buy a car in another country or to buy insurance from abroad. It’s about a predictable, open and smooth process for immigration. While the differences in levels of wealth in today’s world may still be too big to allow completely unrestricted migration, there is no reason why people who apply for a work visa shouldn’t get a quick answer or why the process shouldn’t be fluid for businesses. 

Brexit offers an opportunity to go for unilateral free trade, also to the EU:

With Open Europe, we’ve pointed out that the UK has massive opportunities to boost its trade after Brexit, suggesting it should prioritise China, India, Pakistan, Bangladesh, Israel and Nigeria. These opportunies are just as great for the EU27, however. The EU should stop trying to overload the trade agreements it’s trying to negotiate with all kinds of technical standards and understand that countries won’t be lining up to trade with the EU if it insists that they need to take over EU regulation first. Also, the UK or the EU should try to convince protectionist countries like China, who will not accept a complete opening of their markets, to at least open certain sectors of its economy or adapt its regulations for a specific sector so to allow foreign companies to provide their services to the Chinese. If EU-US trade talks for the “TTIP”- deal would be revived, why link opening of agricultural markets – a thorny issue everywhere in the world really – to the opening of other markets, which countries typically are more keen to open?  

Also with regards to opening up internal trade, there is much the EU27 can still do. It should learn from Brexit and realize that a member ofthe club is leaving because the club hasn’t been focusing on its core job: to scrap barriers to trade between countries. To buy a car in another EU member state or to be able to enjoy the services from a foreign airline or foreign telecom operator is not something that often provokes protest. Every time the EU is facing opposition, it’s because it is organizing fiscal transfers, because it’s imposing conditions linked to these fiscal transfers or because it’s sticking its nose into possibly most sensitive topic in every country in the world: immigration. If only the EU would become what it was sold as to the British in the 1970s – a mere free trade arrangement – it could be popular again. The EU’s insurance market hasn’t been opened up. Its attempt to boost the free flow of services got stuck more than 10 years ago. Why not have only a limited number of EU countries having their services markets opened up for each other, avoiding the approval by the likes of Germany, who really get nervous when hearing the idea of tolerating someone qualified for something with a non-German degree? And if the EU would keep on failing to close large scale trade deals, why not allow single member states to try their luck? Iceland, Norway and Liechtenstein are part of theEU’s single market but can close their own trade deals already anyhow.

In conclusion: A new push is needed to reinvigorate Europe’s sclerotic welfare states and more trade openness really is the way to get this going. As multilateral trade deals and grand bilateral trade agreements have proved to be truly hard to close, unilateral free trade hasn’t beenproperly tried in Europe. With Brexit, the UK has the chance to do so and EU countries can be inspired by the success of this.

Monday, May 01, 2017

Granting Britain all of the EU’s benefits is in the EU’s interest

Published on E-Sharp
Right after the UK voted to to leave the EU, many in Brussels didn’t believe it would actually happen. Some claimed the UK wouldn’t even trigger article 50. But the British government did and was supported in doing so by an overwhelming majority of Parliament. Some others thought there should be bad consequences for the UK.
By now, things have calmed down somewhat. It’s accepted that Britain will leave, safe for an unlikely major change in British politics. Many have said the UK shouldn’t be punished, understanding that in a world where EU relations with the United States, Russia, Turkey have deteriorated, it would be foolish for the European Union to have a bad relationship with the UK, whose economy is about as big as the economy of 20 EU member states combined.
Still, up till today, the prevailing idea in Brussels and the diplomatic corridors of the 27 EU capitals is that, after Brexit, the UK should have a deal which is “less good” than the one it currently has as an EU member state. If the UK would still enjoy the same kind of market access, so the thinking goes, other member states may be more likely to follow in its footsteps and leave the EU as well.
This reasoning is completely wrong. If the UK would get less market access to mainland Europe and if there would therefore be more restrictions on trade between the UK and the EU27, this would cause economic damage on both sides of the Channel. How could the European Union become more popular when it would just have caused job losses in mainland Europe, damaging the ports of Zeebrugge or Rotterdam, or the German car industry, all because of a weird political strategy of the European Commission? The Commission is typically blamed for all kinds of things it shouldn’t be blamed for, so it can rest assured it will be blamed for something it is actually responsible for.
Furhermore, it is also assumed that because the damage on the British side may be greater than on the EU side, this would somehow increase the EU’s “bargaining power”. Also this is at odds with reality. If 50.000 jobs would be lost in her country as a result of a nasty Brexit divorce, German Chancellor Angela Merkel wouldn’t get away with it just because 100.000 jobs would be lost in the UK. The latter is politically irrelevant in Germany.
Another assumption is that the EU27’s great asset in the negotiations is the ability to restrict access to trade for the UK’s financial services industry to the EU’s single market. Again, reality is different. For a start, the EU’s so-called “financial passport” isn’t as relevant for the different UK financial sectors. With Open Europe, we looked into this and concluded that it is pretty important for the banking industry but much less important for insurance firms, simply because the EU’s insurance market hasn’t been opened up, so there isn’t much to lose. For asset management, the importance of access to the EU is only averagely important.
Among politicians, there is an obsessive focus on the interests of exporters, given that they typically are much better in lobbying politicians than consumers. EU27 politicians forget that any restrictions for UK financial services exporters translate into damage for EU27 consumers, who would be stuck with less choice and less competition. Equally, UK restrictions on EU manufacturers’ access to the UK market would hit UK consumers hard.
An important aspect here is that the customers of the UK’s financial services industry are typically governments, who are funding themselves through London. But also many major infrastructure projects on mainland Europe – bridges, football stadiums, etc – are funded through the City of London, which really is a giant pot of cash lying just next to the EU27. Studieshave pointed at the importance of city of London for the economies of mainland Europe. How intelligent is it to restrict access to this? 
Then, what is the EU for, some may say, if the UK would get all the benefits of the EU without being a member? Amongst others newly elected French President Emmanuel Macron have stated that "you cannot enjoy rights in Europe if you are not a member - otherwise it will fall apart." What he doesn’t get, however, is that the point of the EU is to safeguard open trade, not to reserve it to its members. Restricting trade access goes against the heart of everything the EU stands for. The core mission of the EU is to open up trade internally and towards the world. The EU Commission’s DG Trade department is focused on closing deals with third countries not to restrict trade, but to open it. Once the EU goes down the road of actively pushing for more restrictions on trade, then the EU will be doomed. Not when it makes sure the UK keeps a lot of trade access, as this benefits EU consumers.
Without dismissing the major economic challenges the UK faces, it should be clear that EU27 countries really are on welfare. They are on welfare in economic terms, given their ageing populations, crippling tax, debt and regulation burdens and shaky banks with bad debt. They are also on welfare in security terms, given the troubling state of their armies, intelligence services and unsatisfactory integration of minorities.
If there is one mistake the EU27 should avoid, it is to let Brexit go off the rails and complicate the process with all kinds of grand strategies which then backfire. An interesting example of that is Commission officials reportedly having leaked the content of a dinner between Theresa May and Jean-Claude Juncker in a bid to paint the British government as an unreasonable negotiation partner. Rumour has it that, in response, May’s team gladly instigated a media offensive against the EU Commission, the perfect opponent in any British electoral campaign. Juncker had to openly state that the leaks were a “mistake”. This can serve as yet another example of how the European Commission really shouldn’t wade into politics.
The EU27 should learn from Brexit and realize that a member of the club is leaving because the club hasn’t been focusing on its core job: to scrap barriers to trade between countries. To buy a car in another country or to be able to enjoy the services from a foreign airline or foreign telecom operator is not something that often provokes protest, apart from maybe the grumbling surrounding the EU’s posted workers directive, which would make Western-European businesses uncompetitive – an incorrect claim, given that it’s very high national social contributions which are to blame.
Every time the EU is facing opposition, it is because it is organizing fiscal transfers, because it is imposing conditions linked to these fiscal transfers or because it’s sticking its nose into what possibly is the most sensitive topic in every country in the world: immigration. If only the EU would become what it was sold as to the British in the 1970s – a mere free trade arrangement – it could be popular again.