So, will hard Brexit 'turbo-charge' our economy? Part II
In a piece released this week , Patrick Minford and his co-author argue that the UK should unilaterally reduce trade barriers, because this would lower import prices. Moreover, by subjecting UK producers to unfettered competition from abroad, UK food growers and manufacturers would be forced to become more competitive, further lowering prices for UK consumers.
At first glance, this all seems rather plausible – but, as I began exploring in the first of this series of rebuttals, it is a dangerously simplistic argument that ignores how trade actually works and what matters for UK living standards.
Competition can indeed bring down prices, but competition needs to be fair. Some foreign firms from outside the EU can produce more cheaply because they pollute or treat workers in ways that we find unacceptable. If we unilaterally open up to all imports, we are exposing our domestic producers to competition from countries who undercut our environmental or labour standards. In the short-term that might put a lot of UK firms out of business (as Minford has acknowledged in the past) and cost many UK workers their jobs. In the longer term, it might also lead to reductions in wages due to lower demand for labour in the UK.
One of the great achievements of the single market has been to create a level playing field for fair competition across the EEA, ensuring that single market members do not undercut one another’s labour or environmental standards. We want firms to compete on efficiency and technology, not engage in a race to the bottom on holiday pay or maternity leave, or on emitting greenhouse gases.
Membership in the single market has opened up the UK to the competition of the other 27 member states, with their 450 million consumers, and has been beneficial both to UK consumers and to UK firms. There is evidence that it has brought down prices*, as well as giving our most productive firms and industries unrivalled access to a large and lucrative export market, especially for services. The single market does a lot to ensure that members have meaningful market access, for example by guaranteeing access to one another’s public procurement markets. Services are particularly important for the UK, as they make up more than 80% of our economy, and more than 50% of our exports by value-added.
Second, even if import prices were to decrease when measured in US dollars or Euros, they would have to make up the ground that has already been lost through Sterling’s depreciation. Since the Referendum, the pound has declined by 17% against the Euro and a bit less (13%) against the US dollar. The weaker pound has made imports more expensive, which has already fed into rising inflation. Rising prices from the Brexit-induced fall in the pound are already eroding UK living standards.
Finally, Minford assumes rather large benefits to increasing competition in the UK and getting rid of 'harmful' regulation. But the UK is already ranked as having among the most lightly regulated and competitive product and labour markets among advanced economies, by a wide range of highly respected international organisations, such as the OECD or the World Economic Forum. Even if there were a consensus in the UK that further deregulating our labour and product markets is a good idea - and there is not - it is hard to see how we would make many gains, unless we lower our labour and environmental standards to emerging market levels. But would we really want to go back to the toxic smog of 1952? Or to the days before workers had a statutory right to 20 days of paid holiday?
Even if there were a consensus or even a majority for undercutting EU labour and environmental standards, such a policy would be self-defeating. It would lock us out of EU markets, as the remaining EU-27 member states would be highly unlikely to agree to the kind of deep and comprehensive free trade agreement the UK government is seeking, if that meant exposing EU-27 members to unfair competition from our firms.
Minford’s view is overly simplistic in a final important way. The goal of economic policy should be to improve living standards. Paid holidays, a safe workplace, clean air to breathe and water to drink, access to top quality healthcare and education are all important for the living standards of UK workers and consumers. Cheaper goods are only one part of living standards – and it’s not even clear that Minford’s plan would deliver those.
*See Breinlich, Dhingra and Ottaviano, 2016, “How Have the EU’s Trade Agreements Impacted on Consumers,” London School of Economics Centre for Economic Performance Discussion Paper 1417.