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Tuesday 6 August 2019

Brexit

Nothing to fear

Is no-deal really a cliff edge? There are hopes of a new start in food and the farming business

By Catherine McBride

It is often said that leaving the EU without a trade deal will be like jumping off a cliff – an emotive phrase that is repeated verbatim without real scrutiny. Some politicians claim there will be shortages of food, medicines and even fresh water. But would it really be such a disaster?

Looking at the evidence, I don’t see a cliff edge.

After 46 years of free trade in the EEC/EU, through the process of comparative advantage, goods and services have naturally gravitated to the most efficient EU provider and they will not move back. So while British Leyland will not be resurrected, the financial service industry will not be moving to Frankfurt.

Most EU and UK goods and services are high quality, branded goods with low price elasticity, so their sales will be less impacted by tariffs or increased transport costs. UK and EU goods are sold all around the world, in some places with very high tariffs and even luxury taxes. More Porsches, for example, were sold in China last year than in the whole of the EU, despite completely free trade within the EU but not with China. The UK will continue to buy EU-branded products for the same reasons that the EU will continue to buy ours: consumer preference.

Similarly, many EU and UK agricultural goods are branded and unlikely to have precise substitutes or to be affected by tariffs. This includes the £2.6bn worth of wine that the UK imports from the EU each year and the £1.4bn worth of whiskies that the UK exports to the EU. There are also branded cheeses, cured salmon and dried pork. All will continue to be consumed either side of the channel after Brexit – just as they are sold all over the world.

It’s milking time for the rows of Holstein cows at Clayland Farm in Balfron, Scotland

As for homogeneous agricultural products; according to the Department of Environment, Food and Rural Affairs, the UK supplies 106 per cent of its own dairy products, 100 per cent of its lamb, 90 per cent of its chicken, 80 per cent of its beef, and between 85 per cent and 108 per cent of its cereals – depending on the weather. However, the UK does import about 40 per cent of its pork and almost 50 per cent of its fresh vegetables from the EU.

After Brexit, homogenous agricultural products like pork could be supplied more cheaply from outside the EU. Alternatively, the UK could imitate the Netherlands’ vertical greenhouse technology and produce its own vegetables. The UK does export about 70,000 tonnes of lamb to the EU each year and that would be adversely affected by high EU tariffs. But as we import 620,000 tonnes of pork, any price distortion caused by tariffs would simply encourage the UK population to eat more lamb and less pork. Britain is a net importer of beef, largely from Ireland but also a small amount from the rest of the world (due to tight EU quotas).

The biggest one-day livestock market in Europe takes place annually in Lairg in Scotland

Equally, the supply of medicine should not be the problem often threatened. Most medicines trade tariff-free globally, and the UK sells more boxes of medicine to the EU than we buy from it. The pharmaceutical industry is dominated by large multinationals that transport and store medicines all over the world. There are one or two medicines imported from the EU that can’t be stored easily but special arrangements are already in place for them.

Some companies have claimed that the UK market will be too small for new medicines, but the near monopoly of the National Health Service makes the UK a larger market than many more populous countries with fragmented healthcare providers. Certainly, there is no centralised buying agent amongst the EU countries. Pharmaceutical companies are more worried about patent protection than transport issues.

Some businessmen claim to worry about the lower value of the pound but multinational companies transmitting pounds back to their home markets can hedge their currency exposure, and UK companies with earnings from outside of the UK have generally seen their revenues increase. The low pound since the Brexit referendum has also been good for UK exporters. The Office for National Statistics reported recently that the UK has experienced 38 consecutive months of export growth. Sure, a lower pound makes imported goods more expensive, but it also encourages local industries to produce import substitutes.

Many UK companies are worried about the loss of unlimited supplies of cheap labour when we leave the EU. With high levels of unemployment in many EU countries and relatively high UK wages, many EU27 nationals have joined the UK workforce. This increased supply of labour has meant that local workers have lost their collective bargaining power and find it harder to get pay rises. Wages for the bottom quartile of the workforce have been stagnant for more than 10 years.

This is bad for the UK economy: a low-wage economy is a low-growth economy, as many employed people have little money for discretionary spending. Additionally, with unlimited supplies of labour, there is no incentive for businesses to invest in capital equipment if workers are cheaper. Limiting the labour supply will force more capital investment, staff training and higher wages which will on balance be good for the economy.

History, too, should reassure those fearful of Brexit.

When the UK abandoned the Commonwealth to join the EEC, the UK was not only Australia’s largest trading partner but that country’s whole economy was centred on providing products for British tastes. Losing access to the UK market forced Australia to look for new customers and develop new products to suit them; from wagyu beef to dragon fruit. Australia, thanks to worldwide demand for hummus, is now the largest exporter of chickpeas in the world. It has had more than 28 years of economic growth. Similarly, New Zealand’s award-winning wine industry grew and matured out of the loss of the UK market for their lamb and their government dropping all farming subsidies.

Stefanie Schaumburg from Germany checks the grapes she’s harvesting at one of New Zealand’s many vineyards

In other words, Brexit represents a massive opportunity for the UK. The world outside of the EU is developing at an extraordinary rate. The ASEAN+3 Macroeconomic Research Office expects that two-thirds of all middle-class people will be living in the Asia-Pacific region by 2030. Two thirds by 2030! That is only 10 years away. Many emerging countries are already at the stage of development where white goods and cars are essentials rather than luxuries, where they have extra cash to spend on entertainment and holidays as well as money to invest in pensions. In some areas, many emerging markets are ahead of the UK. This is especially true of smart phone use, e-commerce and digital payment systems, where they have jumped straight to the latest technology without hindrance from protectionist incumbents. If you have never had a high street, you don’t need to worry about preserving high street shops.

One area with huge potential for UK trade with these markets will be in media and entertainment – books, magazines, e-magazines, television programmes, movies, music, webcasts – all produced in the universal language, English, and all accessible through a mobile phone. Get creating!

So that cliff edge is nothing to be afraid of; think of it as a launch pad instead.

 

Catherine McBride is Head of the Financial Services Unit at the Institute of Economic Affairs

Further reading

For a good paper making the case against a deal with Europe: 30 Truths About Leaving on WTO Terms by the Rt Hon the Lord Lilley and Cllr Brendan Chilton (Global Britain)

The CBI has commissioned a 200-item check list for those preparing for Brexit without a deal, What comes next? The business analysis of no deal preparations