Monday, January 11, 2016

The wrong reasons to vote Leave OR Remain - Post number one

There are some intelligent, polite and constructive voices among those who are arguing for British exit from the EU, and some intelligent, polite and constructive voices among those who are arguing that we should remain. I have friends on both sides of the argument, and nothing I am writing here is meant to imply that everybody on either side is foolish.

But although the referendum has not even been formally called yet, I have already heard enough silly, oversimplified, paranoid or fear based arguments from some people on both sides to last me a lifetime. A regular contributor to the comments section of this blog recently wrote something along the lines that the best asset of the "Remain" camp was UKIP and much of the "Leave" campaign, and the best asset of those wanting to leave was the "Britain in Europe" campaign. He had a point.

So in the interests of trying to raise the standard of debate in a balanced way, I have been thinking of trying to run a periodic series of blog posts where I try to answer two of the most egregious and ridiculous arguments which have recently been deployed in the EU debate, one on each side.

The idea of picking out and trying to demolish a daft "leave" argument and a daft "remain" article in the same post is that if I were to publish them separately, each side's supporters would probably read and like the post which fit their preconceived ideas and ignore the other. But by putting them together I'm hoping that people who can easily see that I've taken apart a silly argument put by the other side, might just begin to see how the argument on their own side which I have criticised might look, not just to the other side but to people in the middle.

And the first two items to debunk have really selected themselves. Interestingly both of them made, to a significant extent, the same mistake from opposite viewpoints - that of treating trade relations as though they were a zero-sum game with a fixed cake to be shared around.

The idea that a better general trade deal, or reform of the EU, might generate much more money or a better outcome for ALL partners and increase the size of the cake does not appear to have been understood by the authors of either of the items I am about to respond to.

One was a cartoon which was tweeted last week about the World Trade Organisation, which I received with the tag line

"See the problem?"

(To which the answer "Yes, the people who wrote, liked and shared this don't understand the first thing about international trade.")

And the other was a provocative article by a Dutch writer called Joris Luyendijk which appeared in the Guardian this morning, called "It's time for Europe to turn the tables on bullying Britain," which appeared with a cartoon of the EU depicted as a larger than life "Superman" figure evidently threatening to thump a smaller figure representing Britain, with the caption (a quote from the article,)

"The best way forward for Europe is to threaten to hit the English as hard as we can."

The confusion between Britain and England is quite intentional, incidentally, as Mr Luyendijk argues that Scotland is mostly pro-Europe while Wales and Northern Ireland don't matter much.

So the English are to be openly threatened using language like "we would strangle or crush the English" and "cutting England down to size." with one of the threats deployed being to actively encourage the Scots to hold another referendum and secede from the UK.

There are few peoples in Europe who respond well to threats and none of the four nations of the United Kingdom are among them. So that's the English threatened and insulted,  the Welsh and Northern Irish told that they are insignificant English patsies, and I don't think those Scots who are either Eurosceptic (there are some) or support the union ( as 55% of those who voted in the 2014 referendum did) will have cared for the tone of the article either. It started by accusing the second largest net contributor to the EU budgets of "going through the wallet" of the other members and went downhill from there.

Other tactics to be deployed to "crush" the English include telling the customers of the financial institutions in Europe to base themselves in an EU country instead because

"It is strange enough that Europe’s financial centre lies outside the eurozone, but to have it outside the EU? That would be like placing Wall Street in Cuba."

For a journalist who used to write a blog about banking Mr Luyendijk is either astonishingly ill informed about where Europe's main financial centres are, or there is something seriously the matter with his cognitive powers.

As of September 2015, on the Global Financial Centres Index, London was not just the top financial centre in London but just pips New York to be number one in the world,  and guess which country hosts the only other European financial centre in the world top ten, and the third highest ranked European centre as well?

Switzerland. Which is outside the EU.

(The second financial centre in Europe on the GFCI measure is Zurich, the world number seven, and the third in Europe and thirteenth in the world is Geneva, one rank ahead of Frankfurt.)

There is exactly the same problem with Luyendijk's argument that "Clearly multinational corporations from China, Brazil or the US cannot have their European HQs outside the EU".

Oh really? it took me about five minutes to discover that major US multinationals with a European HQ in Switzerland include Hewlett Packard, JP Morgan Chase, AMD, Proctor and Gamble, Philip Morris, DHL, Dupont, and many more - do I really need to go on?

There are so many counterproductive, ridiculous, or just plain wrong arguments in this egregious article that I could spend hours pulling it to pieces. One has to wonder if the author is not secretly being paid by Nigel Farage to produce "false flag" articles deliberately intended to make people vote "Leave" or is doing so on his own bat because he personally wants rid of us: he admits that other EU citizens might "ask if this referendum is actually a once in a lifetime opportunity to cut the English loose."

But the final point I want to make is that in several places he seems to share an unspoken and possibly unconscious assumption with the cartoon on the other side of the argument which I will come to shortly - that discussions on the future of the EU (or world trade) are a zero sum game in which any gain for one country must be at the expense of another. Hence the allegation that David Cameron's attempt to reform the EU is like an attempt to steal from other members:

"why merely kick a man while he’s down if you can go through his wallet too?"

This is complete and utter nonsense: David Cameron has argued that the reforms which he is seeking will benefit the EU as a whole, not just Britain, which is the very point the article wrongly accuses him of not making: it also accuses him of ignoring issues like the "Strasbourg shuttle" of the European parliament between Brussels and Strasbourg and the need to reform the Common Agricultural Policy for which British Conservatives, including ministers in David Cameron's government, have been calling for years.

So that's a very silly argument which purports to serve the "Remain" side dealt with. What of the "Leave" side? Last week one of the people I follow re-tweeted this cartoon which had been drawn for "Leave.EU" with the words

"See the Problem?"

Oh dear, oh dear, oh dear.

I resisted the temptation to tweet back "Yes - you're an economic illiterate."

One person did tweet back "Yes, it's a terrible cartoon." He was right.

Gary Barker who drew this cartoon, anyone else who was involved in creating it, everyone who shared it and everyone who "liked" it should be forced to spend at least an evening writing out with a quill pen a thousand times the words

"There is no such thing as a fixed International Trade Cake.
World Trade is not a zero sum game."

If the negotiations which take place at the World Trade Organisation (WTO) bore the least resemblance to a group of people sitting round a table and dividing up a fixed or limited cake, or if they were a series of bilateral trade negotiations rather than a multilateral negotiation on the "most favoured nation" principle, this ridiculous cartoon might bear some faint resemblance to reality.

They are not, and it does not.

First, the whole point of the WTO is to remove restrictions on trade by all countries against goods and services from all countries.

Second, the intended result of this is that the amount of trade grows in size and all countries benefit.

So the WTO is not about lots of countries fighting for a share of the same fixed cake. It's about trying to agree ways to make the cake bigger so that everyone benefits.

That's the one serious issue with what the cartoon appears to imply, and the easiest to explain. But there are other serious problems with it.

When the EU negotiates a trade benefit, either bilaterally and directly with a country such as China or India, or in multilateral negotiations such as the General Agreement on Tariffs and Trade (GATT) or World Trade Organisation talks, that benefit is automatically available to all EU nations.

It's not a case of going to the USA and having one negotiation to drop US restrictions on their import of German-made plastic in exchange for one consideration, and then a separate negotiation to try to get the US to also drop restrictions on US imports of British plastic in exchange for something else.

It's a case of offering the third party access to the whole European market - a very valuable offer - in exchange for which Britain, Germany and all the rest of the EU members get access to theirs.

So there is no question of the sort of difficulty fighting for the cake shown in the cartoon.

There is a "one-size-fits-all" problem in deciding what the EU's negotiating priorities should be - and this is the germ of truth in arguments which people like Dan Hannan regularly make suggesting we would be better off using our own WTO seat rather than negotiating through the EU. This, however, has to be offset against the immense combined negotiating leverage of being able to offer access to a single market of 503 million people.

My personal opinion is that this extra leverage makes the trade negotiating power of the EU greater than the sum of individual members states by enough to offset the "one size fits all" issue.

My final issue with the cartoon relates to a concept called "most favoured nation" which unfortunately my profession have done a terrible job of explaining.

Sadly economists like myself have been really bad at finding simple ways to explain in accessible language which anyone can understand some of the basic concepts which underpin many aspects of modern economies.

An example is the "most favoured nation" principle which is a fundamental cornerstone of the way  GATT and the WTO  operate.

Here is the definition of this term in Wikipedia: if you understand it, then you probably have multiple degrees in Economics as I have, or you have a very remarkable mind.

Let's see if I can explain it a bit more clearly.

"Most favoured nation" status is a trading relationship which countries can agree with their trading partners and all GATT and World Trade Organisation members offer to all other members. And it means that when two countries or trade blocks agree a trade deal, they have to offer the terms of that deal to ALL the countries with which they have negotiated "most favoured nation" trading status.

Which means that if the USA and EU agree that they are each going to scrap all tariffs and quotas on importing steel from each other, they also scrap them on steel imports from all "most favoured nation" partners - which means all countries in the WTO.

Now, to any intelligent "Leave" supporter who has made it this far without giving up on me in disgust, there is something for you here if you want to work out how to put the strongest possible  "leave" argument.

Most favoured nation status is far more important than all this incessant banging on about how we would be better off exercising Britain's own WTO seat rather than (as we usually do at the moment) being represented through the EU.

That's why one option if Britain leaves the EU is called the "WTO" option - it is because the "Most Favoured Nation" rules mean that if we left the EU, though we would have to negotiate terms of access to the EU single market which might not be as favourable as we have now, we would not have to start from scratch in negotiating terms with everyone else.

All EU members including Britain are also full members of the WTO.

Britain has a permanent representative to the WTO with the rank of ambassador: this post is currently held by Julian Braithwaite who blogs about his work: here is a blog post he wrote about World Trade and the WTO last month as the WTO's tenth ministerial conference was starting.

Granted, he "doubles up" this job with acting as ambassador to UN and other international organisations based in Geneva but part of his office is to ensure that the UK has a direct channel of communication to find out what is going on at the WTO for which we are not dependent on the EU.

And although the UK and other EU members usually find it convenient to make representations through the EU rather than individually, Britain's full WTO membership in our own right predates that through the EU. The vast majority of the time Britain chooses to be represented through the European Union because we think that will be more effective but if we thought the EU was barking completely up the wrong tree we have ways to make our position known.

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