Economic integration delivers expected results

When Britain joined the EEC (European Economic Community or 'Common Market') in 1973 the expected benefits were all based on the theory of free trade and the process of 'Trade Creation'.

If trade barriers are removed then countries can take full advantage of comparative advantage. Countries specialise, trade more and as a result not only do the costs of goods fall, but everyone is better off.

As the EEC became the EC, then the EU the process of greater integration has continued and the pattern of UK trade has changed.

In 1973 the USA was Britain's largest trading partner. At some point in the recent past France overtook the USA as our biggest trading partner (I missed that too) and now it is Germany. France will be crestfallen, but who cares?

Recently a government economic adviser claimed that the benefits of joining the EEC were pretty weak and only based on trade. According to him the benefits have been as weak as expected.

The Daily Telegraph has details of the changing trade pattern here

EU debate - in or out?

As previously highlighted the debate on the UK's membership of the EU is becoming a major issue. In recent days there have been lots of contributions to the debate in anticipation of the Prime Ministers speech on Europe due on Friday.

One thing most people say is that Britain is a trading nation and they hope the UK can remain a member. However they then go on to make various conditions, saying it must be in the UK's interests to remain and depending on their viewpoints these conditions vary in strictness.

For economists the question is about the gains from trade. The lower the barriers to trade the more everyone benefits. There are various grades of economic integration and how far a country goes along this path determines what benefits they get. In order these steps are:

Free Trade Area  - free trade in manufactured goods only as a rule
Customs Union  - common external barriers with free trade inside the union
Common Market - Customs union plus freedom of movement for labour and capital within the Common Market
Economic and Monetary union - Common Market with one currency, eliminating the need for exchange rates
Political Union - One country

There are variations on these. The important point is that as countries allow greater integration they gain more benefits, but there are also some costs which include loss of domestic political control and in some cases the loss of the ability to pursue independent economic policy.

It would be useful to review the economic costs and benefits of EU membership now so that you can tell the political from the economics points that will be made in the next week or so.

A BBC article is here - there are many others

Economic nationalism is still there

Virtually any economist will tell you that free trade is the best thing for the welfare of all. Some will tell you that it has to be be free and 'fair' trade.

What is certainly true is that consumers benefit from the lower prices due to competition caused by free trade. European consumers have certainly benefited massively from cheaper goods made in China in recent years.

Of course there are losers as well as winners in this process. Many of those who made goods now supplied by the Chinese have lost their jobs and some firms have closed down. The knowledge that these resources are now released to be used in more profitable areas of the EU economy is of little consolation to the unemployed.

Governments are not good at practising what they preach. While a government claims to support free trade they are nervous about the votes of those adversely affected in the declining industries. They act to protect them and slow the transition, or even stop it.

One way of defying free trade is to claim a competitor is 'dumping' goods on the market. That technically means they are selling the goods at a price below the cost of production. The motives for a country doing this would be to raise domestic employment or to destroy the industry of another country in order to then monopolise that market.

The EU has just announced a tax (called a tariff or duty) on Chinese ceramics. Around half the cups, plates etc sold in the UK are made in China. The duty can be as much as 58.8%!

The EU is allowed to do this as an interim measure while the matter is investigated. The World Trade Organisation (WTO) can intervene but that takes a couple of years. Sadly the EU is quick to suspect dumping, usually due to complaints from EU firms and it is rarely true. The Chinese, in this case, are simply cheaper.

The attached article reveals a surprising number of cases where the EU has acted to restrict trade. In this case there seems to be more opposition that support for the move within the EU itself.

The Yahoo article is here

Who won the banana war?

The EU is well known for its protection of agriculture. Farmers in the EU have benefited from taxes on agricultural imports that have made more efficient farmers from outside the EU uncompetitive within the EU.

So perhaps it is surprising to learn that the EU has also protected farmers in the Caribbean. They did this by putting a tax on bananas grown in countries that were not former colonies of EU countries benefiting mainly former UK and French dependencies in the West Indies.

Other countries, such as Costa Rica and Venezuela complained to the World Trade Organisation that this was unfair. Their plantation grown bananas were, according to them, bigger and better quality than the small Caribbean bananas and were being unfairly disadvantaged in the EU market.

For more than twenty years this dispute raged on and now the EU has agreed to lower the tariffs on bananas. (Details are in the linked Daily Telegraph article.)

So who has 'won'. Well the non-EU colonies have greater access to the EU market, so they have a victory. The other big winner is the EU consumer who will now be able to buy bananas more cheaply as tariffs fall and competition in the market will increase.

However the tariff is not abolished, just reduced. So EU consumers will still be paying more than they could do for  bananas and so there is a continued welfare loss due to the tariff that remains.

The clear losers are Caribbean banana growers. They are high cost, small producers who operate in conditions that produced lower quality and smaller bananas than other countries. They will probably find their incomes will fall. Fortunately sugar cane is the best crop to use for making bio-fuel and the Caribbean is ideally suited to produce that leading to a rapid expansion of that industry.

A victory for partial free trade anyway.

The Daily Telegraph covers the story here

The EU Budget - should it rise?

The Government suffered a defeat in the House of Commons because some members wished to see a cut in the spending of the EU. 

It would be tempting to say this was because they disagreed with cutting public spending and preferred instead to see higher spending to boost economic activity. Interestingly the Labour Party supported an amendment to cut the EU budget despite opposing cuts at home. The Conservatives who rebelled may have done so to give the UK a stonger bargaining position to oppose the rise in the EU budget.

The European Commission (the group of appointed officials who run the EU) wanted a 6.8% rise in the EU budget and were backed by the EU Parliament. The committee of governments - the EU Council - only agreed a 2.79% rise.

The BBC show how the budget is spent here

There are a number of issues, among them:

The EU spends 32% of its budget supporting farmers. 

The EU spends 36% of its budget supporting poorer areas of the EU

The EU budget has risen every year since 2000 

A few countries are large net contributors to the budget - this includes the UK

All EU countries have had to cut expenditure since the recession to balance budgets

The debate about UK membership of the EU may depend on how fair our contribution to the EU budget is seen to be. Iain Duncan-Smith (Works and Pensions Secretary) said he could see the UK 'thriving' outside of the EU over the weekend - it's not clear if he or Michael Gove had the brain they share at the time. But there is a lot at stake.

A strong EU with a large budget could help to stabilise Europe and provide economic management of the continent. However many oppose this view and prefer nation states to run their own affairs.

Both visions may be unrealistic. No nation can stand alone, but the political integration needed for the EU to be the economic manager of Europe is unacceptable to most at present.

For a view on why the EU budget should be raised read The Guardian article here

The debate of EU membership is really coming back

In 1975 the UK held its first ever referendum on whether it should stay in the EU (then the EEC) which it had only joined in 1973. 67.5% of people voted to stay and the Home Secretary of the day, Roy Jenkins, said that it had 'put the uncertainty behind us'.

While there have been people who have called for withdraw, such as UKIP, no mainstream politician has given it serious consideration. Today it appears that the inept and intellectually challenged Education Secretary Michael Gove believes the UK should leave (with support from, among others,  the giant brain of Iain Duncan-Smith).

I have a balanced and tolerant view of Mr Gove, but there is an economic argument for leaving the EU and that debate must now be had. The result will determine nothing less than the economic future of the UK.

The argument for joining the EEC in 1973 was that of trade creation. Barriers to trade would be eliminated between the UK and the other members and the amount of trade and specialisation would increase making everyone better off. This is classic stuff and exactly the sort of thing economists advise countries to do if they want to grow up to be big and strong.

Along with the lowering of trade barriers came political co-operation. This has included a European Parliament and a European Court. EU law supersedes UK law. This is what people like Michael Gove and UKIP object to, it restricts the ability of the UK government to act.

So is there a case for leaving the EU? Well actually yes. The result will depend on the terms of leaving. The ideal solution for the UK would be to get the same deal as Greenland when it left. That put Greenland in the same position as Norway - a part of the single EU market, but not a member.

Norway gets all the benefits of specialisation and trade, but pays nothing towards the running of the EU, has no say in the rules and gets none of the political benefits of a single European voice.

The Greenland option is going to be very hard to stop politically. The question to be decided is 'Do you want Britain to be a simple economic partner of Europe, or a political partner in Europe?'

Under starters orders.  This is going to run longer than the debt crisis!

The Mail (who else?) report Gove's views here

What has this got to do with the price of fish?

The report linked below states that the UK cannot supply enough fish from its own waters to meet demand. It uses the idea of a day in the year when we have eaten our years supply of fish - in 2012 that is August 21st.

Of course it does not work like that, each day Britain consumes, on average, about one third more fish than we catch.

The situation is complicated by quotas, which are aimed at preserving fish stocks.

Read the article and consider:

1. What should happen to the price of fish in the UK as a result of this 'excess demand'

2. Is it bad to import fish?

3. What happened to the fish? Britain used to be able to catch more than enough from her own waters.

BBC article is here

Why we joined the European Union

When Britain joined the European Union (called the 'Common Market' in the UK at the time) it did so because it wanted to be a member of a free trading area.

It turned out not to be as free as we thought, but in 1993, thanks in large part to an initiative by the Blessed Margaret, a 'Single European Market' was created. Here labour, goods and services and capital had complete freedom of movement.

So anyone who is an EU citizen can work anywhere in the EU, a firm can sell their services anywhere in the EU and the people can put their money in any EU bank they like.

This encourages specialisation and trade, as a result everyone is better off. It is also encourages competition and will drive down prices because barriers to entry in the market have been reduced, benefiting consumers.

The Premier League at last lost a case where they had prosecuted a pub in Portsmouth for using a foreign decoder to watch football matches. It took the European Court to rule on this matter and today the High Court had to agree that the pub landlady should get her money back. The ruling - the exclusive deal with Sky contravenes Single Market legislation.

So the EU is not all bad!

The BBC covers the story here

When is a single market not a single market?

Barriers to entry in a market allow firms some monopoly power and that gives them the chance to raise prices. produce at lower quality and earn excess profits. This is not good for the consumer and most countries attempt to prevent it through Competition Law. As the European Union is a 'single market' that means Competition Law is a European and not a national matter unless a firm operates only in one country.

The '1993' rules of the EU make it clear there can be no barriers to firms, workers or capital between member nations. All firms are free to operate in any other member state and all citizens of the EU can work where they like within the EU.

To illustrate this before 1993 a computer manufacturer had to produce 11 different models of the same computer to meet local regulations and a British lawyer could not appear in a court in Germany or Italy. The 1993 regulations said that such barriers were illegal.

However in many countries not all of these regulations were adopted. The Spanish banks continue to charge non-Spanish customers a higher interest rate, insurance companies are denied access to the Irish market and domestic broadcasters deny the right of foreign broadcasters to sell their services in the UK.

Yesterday the European Court ruled that the Premier League had no right to deny broadcasters other than Sky and ESPN to sell access to their broadcasts of football matches. To do so breached the 1993 EU regulations and EU competition law.

This is an example of the law removing a barrier to entry in the market. The result will be that more firms will enter the British market, competition will increase and everyone will have cheaper access to broadcasts. (Although the ruling is complicated and will take some time to work through.)

The actual case involves showing Premier League football in a Portsmouth pub. Of course Sky and the Premier League will protest, it will affect their profits, but the winner is the consumer. Just 38 years after Britain joined the European Union it is about to get one of the benefits it was promised!

 The BBC covers the story here