Brexit will be worth it

The European Union referendum, held on 23^rd June, was by far the most intense election in British history. Both sides in the campaign made extravagant claims, which were fiercely contested by the other side. Vote Leave’s suggestion of an extra £350m every week for the NHS, as a consequence of “taking back our money,” has been the object of particular scorn and anger from the Remain side. Similarly, the “punishment budget,” which advocated Neville Chamberlain style fiscal retrenchment, aroused anger and incredulity on the other side.

But, despite the passionate debate, we can be reasonably confident that some accommodation will be reached.

The EU is currently Britain’s greatest trading partner, accounting for some 44 per cent of British exports. The UK constitutes a sixth of the EU’s GDP. Everyone understands that it would be counterproductive for the EU to wage a trade war with a country which represents 16 per cent of the GDP of the EU. Britain is also the second biggest net contributor to the EU’s budget, while London is its financial centre, where 80 per cent of EU sovereign debt is raised. The economies of both the EU and Britain are mutually supporting. Talk of trade wars, embargoes and tariff walls is simply hysterical, and unhelpful.

So far, however, the economic indicators as to the consequences of the Brexit vote have been mixed. The pound has depreciated considerably. Yet the recession which was predicted to take place in 2016 by a majority of City economists has so far not materialised. It may well be that exports are boosted by a more competitive pound, but the overall effects of the Brexit vote will take months, if not years, to be understood.

Membership of the single market is now an object of wide discussion.

The single market itself is not a binary proposition. A country can have access to it, without actually being a member.

Indeed, a number of countries have successfully exported to the single market without themselves being members of it. The United States, Russia, New Zealand and, above all, China, have seen their exports to the single market grow faster than Britain’s exports to the same market.

It is often forgotten to what extent the single market is a synonym for the eurozone. With British membership, 77 per cent of the single market, in terms of GDP, is represented by members of the eurozone. If Britain were to leave the single market, this proportion would rise to about 88 per cent (2015 GDP figures). Britain leaving the single market could be seen as simply a logical extension of Britain’s refusal to adopt the single currency.

In the arc of history, Britain’s decision not to enter the eurozone could be seen as more significant than a British departure from the single market.

The single market is also part of the European customs union, which is a trade block enabling countries to trade amongst themselves without barriers. The corollary of such a union, however, is that it imposes a common external tariff on all goods entering the union from outside.

Let’s be clear. A customs union is a fancy phrase for protectionism. The argument about membership of the single market is always couched in terms of the producer interests—manufacturers, big banks and, to a lesser extent, famers—with the interests of the consumer almost entirely forgotten. The benefits for the consumer of leaving the single market are palpable. All sorts of goods from around the world would be cheaper for British households if that external tariff applied by the customs union is removed. Australian wine, for example, would be 25 per cent cheaper.

Producers naturally extol the virtues of the single market. For 40 years they have benefitted from the tariff arrangements made by our European partners. Leaving the single market and the customs union would make adjustments for them necessary.

We have had many of these debates before. By repealing the Corn Laws in 1846, Sir Robert Peel put himself against powerful producer interests of his day. The big agriculturalists and landowners made very similar arguments to those champions of the single market today. They said that jobs would be lost if tariffs on corn were removed. Disraeli suggested that three to four million jobs would be lost in agriculture. This isn’t that different from Nick Clegg’s claim that three million jobs would be lost if we were to leave the EU. Of course, we know that the Corn Laws were repealed and, by 1852, Disraeli said that “protectionism was not only dead, but damned.”

There is no doubt that some transitional costs may be incurred in moving from one tariff regime, represented by the customs union, to another. We can be confident, however, that an equilibrium will be reached in a relatively short time. Britain will then be in an even stronger position to trade successfully with the rest of the world.