A REASON often given for another referendum is that we should not become isolated. We are told that we need the comfort and benefits of the single market and its customs union, need to belong to a family of European nations, and be allowed the choice of our own path. This is an inversion of economic reality.
It’s one of the few common grounds in economics that the dynamic gains from different peoples being free to trade different goods with each other are a good thing. Unfortunately the politicisation of trade fits well with the stance of the Scottish Government; apparently it offers control, the option for politicians to design change and create a “relationship of equals”. But this is balderdash.
Let me explain with respect to oranges, clothing and biscuits. I choose these because in Scotland we do not grow the first, but we make some of the second and produce a lot of the latter.
First oranges; in the EU this really means Spanish oranges; Spain produces half of all those in Europe with Italy, Greece and Portugal producing the other half. The UK produces none. External tariffs and quotas change through the year; designed to hold prices up at harvest time. A window early in the year allows import quotas for South African oranges to reach our tables. Council Regulation No 2658/87 of the Common Customs Tariff applies (if you must know) and there are similar regulations for every fruit and vegetable you have ever eaten. The EU thus isolates itself from international markets by building a giant wall to control incoming fruits.
And who suffers? Among consumers, the poorer people in the UK, subsidising wealthy Spanish orange growers and paying more for food than they need to. Among workers, think about Dundee marmalade, higher prices mean cost engineered products and fewer jobs. Among producers near to but outside the EU; Moroccan, Tunisian and Egyptian orange growers unable to employ pickers, packers and supplier trades for their production. The single market thereby catalyses a different trade; in human beings heading away from North Africa to Europe and the splendid isolation of its self-protected benefits.
What about textiles? The EU country of origin rules on part-made goods show how special interests with an incentive to “do deals” on their own behalf have entered the “single market” on their own self-serving crusades. A core ruse is to target any “non-originating product” – say a basic textile – that then gets re-worked, added to, or finished either in the EU or elsewhere. You only have to look up HMRC’s Notice 828 (Section 2) on tariff preferences to drown in detail that destroys shared trade. If you are a true masochist you can enjoy Notice 830, 831 and 832 as well.
A percentage rule is applied to work out tariffs, based among other things on the overhead costs absorbed; as in “cost of power, fuel, catalysts, solvents, plant, equipment, machinery and tools used in production, ignoring the origin of these items themselves” and “profit and research and development”. These calculations are all done, with extreme difficulty, slowing all trade before a tariff can be calculated or a quota rule applied.
Just imagine what obstacles a Borders woollen clothing manufacturer might face to dress the twinset and pearls middle classes of the New Town with a natty suit of Scottish Shetland and Cashmere wool mix, Indian cotton lining, Chinese buttons and Vietnamese braiding. Is it any wonder a good twin-set costs hundreds of pounds and you can get the same thing in Hong Kong for a third of the price?
And who suffers? The skilled small traders and their skilled staffs who could treble their turnover if their prices were keener; and the less well-off who see their jobs and wages curtailed by powerful professionals increasing their salaries to support their, and their wife’s, imported sartorial lifestyles. Meanwhile, EU nations become isolated as Asian consumer markets grow rapidly on the back of keener prices; EU jobs and exports are killed off by competition from their own importing rules because EU firms learn nothing from global trade pricing.
And what about biscuits? Import duties are charged depending on how much milk fat, milk proteins, starch or glucose, or various forms of sugar are used in a set of defined “composite agrigoods”. That provides more than thirteen thousand possible import tariffs across 504 recipes. That’s right, the EU has categorised all composite agrigoods into coded recipes; some bureaucrat, somewhere, defines all foods. Then it gets worse, you have to calculate the tariff. The process goes something like this.
Each recipe has a three-digit number. A 7 is added as a fourth digit on the front. Another table lists additional tariff rates based on these, now four, digit numbers. Note rates, plural, there could be three of them: a combined one and one each for flour and sugar. You write these down. You then go to another table and collect a new eight digit code for the product to create a new 12-digit number. This also has a tariff rate to which you add the first of the additional tariffs you wrote down. You then add, or take away, as appropriate, the sugar or flour tariffs (or both).
No customs organisation across all 27 states can possibly administer such a crazy system efficiently and the incentive for corruption is rife. We must remember that these recipes are applied not only to imports, but are used to define and monitor all internally produced goods with any international content as well – just in case the EU in its glorious isolation finds some non-EU trader keen to swamp the market with something new. Again, free trade is distorted; it should come as no surprise that the Canadian free trade deal nearly stalled over simple commodity imports like flour and eggs.
I am doubtful whether my Abernethies, Shortbread petticoat tails, Nairn oatcakes, Tunnocks Tea Cakes and Broughty Ferry cake are that critical to my well-being that they deserve such regulatory treatment, especially as it adds to their prices to me and denies me buying new different delights from around the world. Think how often these brands are labelled “traditional”; they should really be labelled “same old stale recipe protected by stalled trade and shrunk in size by import rules”.
Who benefits from the EU “family’s” approach to trade here? Well, big market players who can deal with these complexities and who keep small innovators from playing. Where are the composite agrigoods from Africa and Asia; home of maize and rice, herbs and exotic spices with many street markets piled with sweets and cookies? Locked out, while Nabisco sells us mass-produced Oreo’s from Pennsylvania or builds a new factory in Sheffield, processing subsidised EU wheat and sugar beet.
Then consider that the small innovator might be in the Sudan, Uganda of Nigeria; the guy who finds a new way of blending mealy meal with glucose and milk protein and then finds he cannot sell it beyond his village because some well-paid Eurocrat has defined and designed what he can do. What does he, and the workers he might employ, do? They too give up and head for a rubber boat to cross the Mediterranean.
This is where the economic lessons of free trade are being ignored by Scottish politicians who live in a world where political horse-trading is the norm. Exports are of course good and give us money to spend. But imports always give us new knowledge; and for every pound we pay for imports there is a pound out there in the world that will want to come back and buy our exports. Both flows matter.
EU protectionism makes us poorer. Europe is literally locking itself away from the world through its approach to free trade and the trend in the figures confirms this.
We are departing on an adventure of unknown complexity where interests and incentives will clash, adjust, and sway back and forth. The volume of media chatter and political noise around Brexit will be high, but do not expect much enlightenment. In Scotland particularly, insight will be thin, the hunger for subsidy colours every mind.