A history of successby Kwasi Kwarteng / November 16, 2016 / Leave a comment
In 1963, Charles de Gaulle, the French President, vetoed Britain’s application to join the European Economic Community (EEC). “England [by which he meant Britain] in effect is insular,” he said. “She is maritime, she is linked through her exchanges, her markets, her supply lines to the most diverse and often the most distant countries.”
The idea of Britain as a trading nation with an international scope went back at least to the 17th century. The East India Company had been founded in 1600, three years before the death of Queen Elizabeth I. It was also around this time, during the 1620s and 1630s, that English immigrants started to colonise North America.
In 1963, Britain’s colonial heritage was widely understood. The North American colonies, India, large parts of Africa, Australia and Canada had all played a role in the country’s seaborne economy for centuries. Joining the EEC in 1973 marked a departure in some ways from the pattern of international trade which had been established from the beginning of the 17th century. Over time, Europe became the principal market for British exports, a state of affairs which still prevails today, when 44 per cent of British exports go to Europe, and 56 per cent of our imports come from there.
The significance of European trade to Britain in recent decades has been a consequence of British membership of the single market. Were Britain to leave the single market, British trade patterns would change. It’s not necessarily the case that older trading patterns would re-establish themselves but there is little doubt that trade with non-EU countries would increase as a proportion of British trade.
The best policy for Britain, if it is to leave the single market, is one which favours free trade. Some politicians, who are fixated on continued British membership of the single market, emphasise the potential rises in costs of products such as French wine, or German cars. Yet, in such circumstances, non-EU products would be cheaper once the external tariff of the customs union had been removed. Australian wine, New Zealand lamb and other products will cost less to UK consumers.
The champions of the single market constitute a powerful network of politicians, lobbyists, manufacturers, farmers and bankers. They have all benefitted from membership of the single market and the EU customs union. It is perfectly logical for them to defend the status quo, but we must remember that 80 per cent of the world’s GDP is outside the EU.
Powerful producer interests are nothing new in British history. Tariff debates, from the time of the Napoleonic wars to the Second World War, have always provoked passionate discussion. The Corn Laws, which imposed tariffs on grain imported into Britain, were established in 1815. They were designed to keep prices high in the interests of domestic producers. These laws raised food prices, and were deemed necessary for the protection of British landowners and agriculturalists. In the debates on this issue, Benjamin Disraeli suggested that repealing the Corn Laws would lead to the loss of three million jobs. By coincidence, this was the exact number of jobs that Nick Clegg once suggested could be lost if Britain left the EU.
At the beginning of the 20th century, the most controversial issue was again tariff reform. Having repealed the Corn Laws in 1846, Britain embarked on half a century of free trade. At the beginning of the 20th century, however, new political forces came together to advocate what was called “imperial preference.” This was the proposal for a tariff regime designed to protect British industry from foreign competition.
Joseph Chamberlain, the Birmingham manufacturer and politician, was the most charismatic figure in this push toward protectionism. His stance was popular among the grassroots of the Conservative Party. Protectionism was hailed as a means of fostering cohesion within the British Empire and of consolidating Britain’s position as a world power. It was widely believed in Britain that Germany and the US had forged their path to economic greatness by an aggressive policy of protectionism. The controversial McKinley tariff of 1890, for example, had raised import duties to an average of 49.5 per cent in the United States.
Today’s world is different. Leaving the single market would not exclude Britain from global markets by high tariff walls. On the contrary, as many people have pointed out, global tariffs have never been lower. Today’s circumstances have never been more auspicious for a country aspiring to engage with global commerce.
Free trade has never been more popular. Ironically, the largest protected market today is the European customs union. A customs union, after all, is an area with significant interest in excluding goods produced outside its membership. In the context of 2016, it is the customs union which is a lingering anachronism from the mid-20th century. The fears expressed about leaving the single market, which forms part of the customs union, are legitimate. They severely underestimate, however, the potential opportunities which exist for trade with the rest of the world.
EU output is a rapidly dwindling share of the global economy. In 1973, the counties that now constitute the EU represented about 33 per cent of global GDP. Today the figure is 20 per cent. This trend is likely to continue. European leaders have long been fully conscious of the need for the EU to reform. It was in 2000 that the Lisbon agenda was adopted, which aspired to make the EU “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” by 2010.
Needless to say, the single market, for various reasons, simply hasn’t delivered this vision. Ongoing problems with the euro, very high public debt levels, particularly in Greece, Spain and Portugal, and a banking system which continually seems to be on the verge of crisis, especially in Italy and Germany, have all been obstacles to European economic growth.
It is against this background of economic uncertainty that EU advocates are suggesting that the EU will “punish” Britain for having had the audacity to leave their club. Since Britain currently constitutes about a sixth of the GDP of the EU, a trade war between Britain and the EU would be self-defeating. Those who believe that the EU will punish Britain are asking us to believe that the EU will wage war with its largest potential trading partner for the sake of politics, contrary to its economic interests. More than 250 years ago, David Hume spoke about the “Jealousy of Trade.” He wrote, “I shall therefore venture to acknowledge that, not only as a man, but as a British subject, I pray for flourishing commerce of Germany, Spain, Italy and even France itself.” The great philosopher recognised in the 1750s that trade wars would result in a bad outcome for everyone.
Economic theory and the present international bias towards free markets point to a policy of free trade being the most suitable for post-Brexit Britain. I would suggest that we have to assume Britain will leave the single market and the customs union, and essentially open itself to free trade from the rest of the world. Producers benefitting from our current arrangements will no doubt howl in protest. There may well be transitional costs, as we move from one set of rules to another. This is inevitable. It is part of the evolutionary nature of trade.
History suggests that new patterns would establish themselves quickly, and with less pain than one might expect. The great thing about British history is that very little is completely new. The Continental System was pursued by Napoleon with the intention of harming British commercial interests. The Berlin decree of November 1806 forbade the import of British goods into European countries allied with, or dependent on, France. Some French satellites, most notably Portugal, refused to be part of the blockade. Russia was also ambivalent about Napoleon’s decree. This was a contributing reason for Napoleon to invade that country, with disastrous results, in 1812.
The embargo had mixed effects. Historians estimate that British exports to Europe fell by about a quarter to a half, compared to pre-1806 levels. Yet trade increased sharply with the rest of the world. The belief in impending catastrophe, if Britain leaves the single market, assumes there would be no other demand outside the single market for British goods. History suggests, however, that EU demand for British goods would simply be substituted by demand from outside the single market. Since 80 per cent of GDP is outside the EU, it is perfectly reasonable to imagine that demand for British goods from the rest of the world EU will pick up the slack.
Trade wars, embargos, and high tariff walls are a worst case scenario. Given the mutual advantages derived from a liberal trade policy, and the integration of the British markets with those in the EU, it still seems unlikely that any trade conflict will emerge. Mention of the Continental System in the early 19th century is simply a reminder of how trade patterns have been fluid and highly adaptable in the past. The metaphor of the cliff edge, where Britain leaves the single market and simply has no other market for its goods, is not realistic. It is unlikely that a sharp reduction in trade will occur just because Britain leaves the single market. We will not suddenly find we can’t sell our goods elsewhere. Our exports to the EU have declined over the past 10 years as a proportion of our total exports, from 55 per cent in 2002 to 44 per cent in 2015.
It is certainly the case that British involvement in the EEC, and subsequently the EU, has been a dominant feature of the development of British trade in the last few decades. Yet the role of the EU will diminish. It would probably decline even if Britain stayed in the single market, simply as a continuation of the trend over the past 10 years. The historic vote to leave the EU on 23rd June 2016 provides an additional incentive for greater involvement with international trade outside the EU. This is an opportunity which should be grasped with enthusiasm.
On the 17th of January 2017, Prospect hosted a roundtable discussion with the contributors to: Brexit Britain: the trade challenge. This report is designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. The discussion was chaired by Tom Clark, Editor of Prospect. Participants included Tasmina Ahmed-Sheikh MP, Miriam González and Vicky Pryce.
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