Tuesday 3 November 2015

Oral evidence, 3 November 2015.

Witnesses

Professor Patrick Minford, Cardiff University, and Dr Stephen Woolcock, London School of Economics and Political Science, gave evidence.

Chair

Gentlemen, welcome. Thank you very much for joining us. Perhaps you will introduce yourselves for the record.

Professor Minford

I am Professor of Applied Economics at Cardiff. Thank you for inviting me. I have written quite extensively on the European Union, including the first edition of a book in 2005 called “Should Britain leave the EU?” I am about to bring out the second edition next month.

Chair

Perhaps roughly connected with why you are here. We are drawing on your expertise.

Nadhim Zahawi

What is the title this time?

Professor Minford

It is the same—it is a second edition.

Dr Woolcock

My name is Steve Woolcock from the London School of Economics. Thanks very much for the invitation; it is an honour to be here. I teach international political economy and international trade at the London School of Economics. We submitted a joint written submission. My bit was the trade part of that—that is my area of expertise. I will obviously try and cover the other aspects in the written submission.

Chair

Many thanks indeed. Perhaps I can ask Mark Hendrick to begin our questions.

Mr Hendrick

Good afternoon, gentlemen. Could I start by asking you both how effective you feel the EU is at leveraging its economic weight in pursuit of its foreign policy goals?

Dr Woolcock

I will have a go at that one. I think you have to define foreign policy goals in terms of whether the aim is to maintain an open trade and investment system, for example. Is it to maintain stability in international financial markets? Is it to promote sustainable development in neighbouring countries—so, in Africa and the Middle East? Those all have security implications and foreign policy implications. Perhaps climate change as well is an area where there are security interests at stake. So how effective is the EU in promoting these policies? It varies. In terms of maintaining an open trade and investment system, I think it is effective. In terms of financial markets, as we have seen, it is not so effective, although you have to bear in mind that most of the competence issues in financial regulation still rest with the member states. In terms of promoting sustainable development in neighbouring countries, it is effective, but it could be more effective—and I think probably more effective in the trade field than in terms of the provision of aid. In climate change, I think the EU provided leadership in the whole debate on climate change at a time when no one else was providing much leadership. Those are very general points. The other area, I suppose, where trade may support or provide leverage in foreign policy is in terms of—if I can put it this way—providing the bedrock for bilateral relations with other countries. That brings us on to the whole question of bilateral relations between the EU or the UK and third countries, and the whole question of trade and investment agreements. The way I would characterise it there is that in the academic debate we talk about club models; so in other words, multilateralism has been rather superseded by what is called a club model—in other words, this is TTIP, TPP, EU-Japan, and RCEP in Asia. Those are all clubs, and it is the big clubs that will tend to influence outcomes.

Professor Minford

I don’t really study foreign policy, so I haven’t really got much to say about this. Issues of foreign policy in the UK-EU relationship, which is what Mr Avery was talking about, are different. There, I think that the key thing for us is to remain friendly with our allies, and they will still be allies. The economic interests and political interests will still be the same, so I don’t really see many implications of leaving for any of these foreign policy areas, and that is the bit I would focus on, really. They key thing for us is our relationship with the EU and what sort of relationship we want. Having defined that relationship appropriately, I think we can then go on to rebuild the same alliances and the same common interest policies as we have now. As for the broader policies of the EU in the foreign policy area, I haven’t got any comment.

Mr Hendrick

Can I ask you both a question as a follow-up to that? Clearly, Britain as a country has many aims in terms of trade, economic stability and helping with international development and climate change. Do you feel that Britain as part of the EU and adding to the weight of the EU would be more effective in pursuing those goals, or would a UK outside the European Union be equally effective, and could we do both while remaining inside the European Union, so that we would get the benefit of both worlds? That is a slightly leading question, but I would like to hear a response from each of you.

Dr Woolcock

As I suggested, the EU’s effectiveness in different policy areas varies and I think that, in terms of maintaining an open trading system, for example, the UK would have less influence in maintaining an open trading system. My argument is that the larger clubs shape the rules of the game. The UK can still play a part, but it would be a smaller part because it has a relatively small economy, and that was discussed earlier. That is in trade and investment. In finance, the UK still has quite significant leverage in the IMF, the G20, the Financial Stability Board, the various technical standards-making bodies, the Basel Committee on Banking Supervision, and so on. The UK sits on all those, so we could have more leverage and have in the past. On climate change, I think we would have less impact because, again, if you take the analogy of the size of the market, the UK does not really pollute very much, so it is not so crucial in international climate change negotiations by itself. On trade and development, the UK has made quite a significant contribution, maintaining 0.7% of GDP for foreign aid, but if that is not linked in with what is happening in trade, you have issues of coherence, so it may not be as effective.

Professor Minford

I realise this is the foreign policy committee, so you are very interested in foreign policy, but I have to say that the UK’s main national interest is to have a thriving economy and to control its own affairs. The reason this whole issue of the EU and a Brexit has arisen is not because it is just a question of combining and sitting at the same table and having foreign policy influence that is at stake; it is how far we control our own affairs when being a member of the EU, which is committed to becoming a much more powerful state in its own right and has qualified majority voting which controls many of our own decisions. Mr Delors said in 1988 to the Trades Union Congress that it won’t be long before 80% of British laws are decided in Brussels. That is what has thrust this issue into the centre of the stage. Besides that, the question of whether we have more or less influence on joint foreign policy making with the EU is fairly small potatoes. Really, the question from the point of view of our national interest is that if we are outside the EU for other reasons, we will still be there as allies and with common interests with all these other players. No doubt we will co-ordinate with them just as we do today. The seat at the table won’t be there, but there will be other tables at which we will be sitting.

Mr Hendrick

You think we will have the benefits of the club without being members of the club.

Professor Minford

I don’t think the benefits of the club; I think foreign policy has always been conducted by self-governing nations to maintain and pursue their own interests. I come from a foreign policy household. I was trained to believe that foreign policy was about pursuing the national interest for your own citizens as best you could. Obviously the question then is whether you want to be governed by someone else or be a common ally in some alliance with them. Of course, the answer to that question is what lies at the heart of the matter. To answer it we have to answer the question, “Do we want to be part of the EU or not?”

Mr Hendrick

Well, we have some common interests.

Professor Minford

Of course we have shared common interests, but that is not what the whole issue is about. When it comes to foreign policy, we will always have shared common interests with all our allies—the EU, the US and many other players on the international scene.

Nadhim Zahawi

I hear what you say, professor, but we have previously taken evidence on trade deals, for example. Having the ability to collectively negotiate being a much more powerful economic unit delivers a better deal than, say, a deal that Iceland can cut with China or that a smaller country would be able to cut. Is that affecting our economic wellbeing?

Professor Minford

Rather like foreign policy, this is another completely irrelevant issue.

Nadhim Zahawi

It is not irrelevant because—

Professor Minford

Let me explain why it is irrelevant. You asked me the point—

Nadhim Zahawi

Sure, but can you stick to economic wellbeing?

Professor Minford

I am exactly going to talk about why what you just said is totally irrelevant. The fact is, if we are an independent self-governing nation, we will join countries like Japan, Singapore or the US in the world trading community. We will be a small nation of slightly over 30 million workers in a world market of 7 billion people. One of the things that comes out of applied trade is that when you are in that position, trade agreements are totally irrelevant to you because you are part of a global market and you are a very small player in that market. This is known—you may not have come across it before—as the importance of being unimportant. If you are unimportant and very small, you cannot influence the price of the goods that you trade. You are part of a huge market of 7 billion people, right? And we are only 30-plus million. Therefore, as part of the world trading environment, we will not have any influence on the prices of the goods we sell. Our job is to be competitive and to produce good goods and good services, and, on the whole, we do. Thanks to the liberalisation of our economy since the ’80s, we now have a very competitive economy. We are now a nation of entrepreneurs and shopkeepers.

Nadhim Zahawi

Professor, I get that. I have sold across the world.

Professor Minford

I want to just make the point that you do not seem to have understood, which is that these trade agreements are totally irrelevant. They will not make any difference to anything. We do not need any trade agreements. We need to get out of a protectionist trade arrangement—namely, the EU customs union. Everyone says how wonderful it is to be in the EU but they forget that it is a highly protectionist organisation, not just in agriculture, but also in manufacturing. It is infinitely preferable to be in the global market under conditions of free trade. That will give us huge gains. The trade issue, far from being a great negative in terms of leaving the EU, is a huge positive. People think that it is terribly negative because you cannot negotiate these trade agreements, but they have totally misunderstood the irrelevance of these trade agreements to our situation in the global market.

Nadhim Zahawi

I get your point. So why do countries sign bilateral trade agreements?

Professor Minford

Well, often large countries sign bilateral trade agreements. The EU is currently negotiating a huge trade agreement with the US. The fact is that people sign trade agreements when they are very large because they are large and have monopoly power. If you are small, you do not have monopoly power. You have no incentive to sign the trade agreement. I am not saying that there will not then be trade agreements, but some people say that if we leave the EU, we will have to rush around and sign a lot of trade agreements. I do not agree. We may sign the odd trade agreement if it is particularly significant—I think we will sign an agreement with the EU, mainly because the EU needs to sign an agreement with us because it sells us so much stuff at inflated prices. The great irony is that it can only possibly be in your interest to join a customs union if you sell people a lot of stuff—much more than you buy from them—within the union. We are in the opposite situation. The EU will have a strong incentive to negotiate a trade agreement with us. That will probably be the main trade agreement that we will negotiate after we leave. It will be an agreement to give them some access to our market.

Nadhim Zahawi

So we do need to sign trade agreements.

Professor Minford

They need us to sign a trade agreement. I have costed us leaving the EU on the basis that we sign no agreements. I think as a matter of practical life, there will be some trade agreements that will be signed.

Nadhim Zahawi

For what reason?

Professor Minford

Because of vested interests, Mr Zahawi. The reason for trade agreements is due to individual vested interests. They are not due to the national interest. I was talking about the national interest.

Nadhim Zahawi

Whose vested interests?

Professor Minford

If you look at the EU, a lot of people are queuing up to say that we should not leave the EU because they have a vested interest in EU protectionism.

Nadhim Zahawi

In whose vested interest is it to sign trade agreements for the United Kingdom outside the EU? That is my question. Can you answer that question for me?

Professor Minford

I am trying to answer it, but you don’t seem to understand the answer. The point is that the vested interests for us staying in the EU, inside the biggest trade agreement we have signed in the last 40 years—

Nadhim Zahawi

With respect, that is not what I asked you. You said that you signed trade agreements outside the EU. We have now moved outside the EU. We are outside and you said that we signed trade agreements because of vested interest if we stand alone. In whose vested interests do we sign those trade agreements? Please answer that question. I may be stupid, but just answer that one.

Professor Minford

You didn’t listen to my answer. I said when we leave the EU—

Chair

Professor, I think he is persuadable—

Professor Minford

Let me try to answer it again. When we leave the EU—we are in the world now where we have left the EU—there will be a lot of very upset vested interests who were gaining from being in the EU.

Nadhim Zahawi

Like who?

Professor Minford

The car industry, for example—

Nadhim Zahawi

How much do they invest in the UK? Professor Minford—some parts of the City. Any industry that currently gets protection from the customs union will be a vested interest and be very upset when we leave. Therefore, we are very likely to have to be in the process of negotiation because those vested interests will say, “We want transition agreements,” and the EU itself, which sells us stuff in those industries in a big way, will also want an agreement. Quite unlike what many people say, which is that we are going to be so badly off outside the EU we will have to sign trade agreements in the national interest, I say the very opposite. We would be better off where we didn’t sign any trade agreements, but lots of people will be pressing us to sign agreements—both the vested interests that are losing and the EU itself.

Nadhim Zahawi

Just to be clear, the vested interests, for example, if we are outside the EU, would be like the automotive sector in my constituency in the midlands, which is now producing a car every 20 seconds. It would be harmed in some way and will therefore want us to sign trade agreements. That is correct, right?

Professor Minford

Yes, when you abandon protectionist agreements, the people who are protected don’t like it; they get damaged. In practical terms, I think it is inevitable that we will sign various agreements to give transitional protection to various industries. A lot won’t change immediately after the—

Nadhim Zahawi

Because they matter to the UK and the UK’s economic wellbeing.

Professor Minford

Whenever one changes policy environments, some people lose. We have a tradition in this country of trying to compensate losers, so as to get consensus. I think that tradition will prevail in this case. I think we will try to negotiate transitional arrangements that help these people to move to a more dynamic future.

Nadhim Zahawi

Like the automotive sector?

Professor Minford

Including the automotive sector—parts of the automotive sector. Some parts don’t need it, by the way.

Chair

Professor Minford, I understood that the usual purpose of trade agreements would be to reduce the barriers you might face between two independent small entities within a trading system who have a mutual interest in trading—that you would enter into agreements in order to try and reduce the barriers between the two entities, rather than manage protection within them. The usual purpose of trade agreements is to try and open trade from where we, as a market of 30 million labourers, or whatever, would then be seen to protect ourselves from competition outside, because the vested interests inside the United Kingdom would be working to protect our internal markets.

Professor Minford

If we are talking about two small nations—would they sign a trade agreement? From the point of view of each of their national interests, they should each, from their own internal point of view, abandon their tariffs because it’s self-harming. Because the reason for those tariffs is some internal vested interest that has asked for protection. So sometimes you get a situation where two small countries come together and find that they can trade one vested interest off and therefore improve their own situation.

Chair

That is about as far as my economics goes; I can just about get there. In terms of the politics and the facts of trade agreements, it is impossible to get to that perfect situation and then just abandon the barriers completely. The trade agreements are a route to reducing those barriers progressively. They begin to address the politics of protectionism within countries, so they are routes to begin to sweep the barriers away. I buy the free trade argument. I think no barriers is best of all, but they exist.

Professor Minford

Yes. The point here is that if the UK was to leave the EU and go to free trade—just abandon the EU’s tariff and simply unilaterally go to free trade, which would be its best policy barring vested interests, which would not necessarily like that—there would be no point in it engaging in any trade agreements with anybody, because it would already have reduced all its own self-harm from its own tariff barriers. If you are a small nation, a tariff barrier has the effect of self-harming you. You create inefficiencies in your own economy. You don’t affect anybody else. You raise the prices at which other people sell to your consumers by putting a tariff between them and the world market, but when you abandon the tariff you lower the price to your consumers and make your consumers and your economy better off. If we had already gone to free trade, there would be no point in any further trade agreements. In that sense, they are irrelevant. But of course you are quite right. In the real world we probably wouldn’t go to complete free trade, and therefore anything we could do to persuade our own vested interests to abandon certain sorts of protection would be good.

Chair

May I ask Dr Woolcock to comment on the discussion we have just had?

Dr Woolcock

Professor Minford has given you the economist’s position, which is perfectly legitimate. This is a liberal free trade position, which is in line with British ideology—the history of British liberalism.

Chair

At least for 150 years, anyway.

Dr Woolcock

From the 19th century. Unfortunately, trade agreements don’t quite work that way today. Most trade agreements are based on reciprocal commitments between parties, meaning that your negotiating leverage in an agreement depends on the size of your market and how open your market is. So if you have a large market that is relatively closed, like China’s, you have significant negotiating leverage. If you have a relatively small market, the UK is still an important economy, but it is very open, so that means you have very limited negotiating leverage. The EU has a bit more, but it is also fairly open. On why countries sign agreements, I have sat through many discussions on the Transatlantic Trade and Investment Partnership with NGOs. Why do we negotiate TTIP? The reason is that with tariffs down to very low levels—2% or 3%—it is about non-tariff barriers. So 80% of the benefits from TTIP—by analogy, probably more in the case of the EU-Japan agreement, because of the nature of the Japanese market, and the TPP agreement between the US and Asia—will come from removing non-tariff barriers to trade. This gets to what Professor Minford is talking about in terms of regulation. But these agreements are really geared to facilitating trade. You have standards in terms of health, safety, environment and food standards that differ between the economies. What the parties to these agreements are trying to do now is to facilitate trade by negotiating how you can find equivalence between the different standards. This is why trade negotiations are taking place today. That is the main focus of the effort. There are always vested interests in trade, and some of the major trade agreements that have been negotiated are, because they are between large economies, very effective in removing some of those vested interests. If you look at the liberalisation commitments under tariffs, we are talking about 98% or 99% of tariff lines being liberalised. Even in agriculture, there has been significant liberalisation in some of these major agreements. It is perhaps unfortunate in terms of the multilateral system, but the agreements have taken over from what was previously multilateralism. One final point is that the agreements are only specific binding agreements. You can still trade, liberalise and open your economy, but you do not have any guarantee that you will not face discrimination in the Chinese or Japanese market.

Chair

Nadhim, do you have an immediate follow-up question?

Nadhim Zahawi

Dr Woolcock answered it; it was about one tariff.

Andrew Rosindell

We would all like to see a day when we do not need to have trade agreements and when we have a proper free market globally, but that is not happening now. Surely the main point is that by not being in the EU, the United Kingdom could have whatever trade deals it chose to have with other countries around the world, harnessing the Commonwealth, the English-speaking world and the global market, which includes the future markets of our country. Being in the EU restricts us from having the freedom to do just that. With the trade deficit we have with the EU, the only loser if the EU tried not to trade with us or put barriers up to trade would surely be the EU itself. I don’t know whether Professor Minford agrees with me, but we have the ace card and the upper hand in this.

Professor Minford

Yes. Let me come back to that, because the key point is that by leaving the EU, we abandon a customs union. My old mentor, Harry Johnson, fought in the 1975 referendum campaign. He tried to explain to the British people that it was not a great idea to join a customs union because it is highly protectionist, but he got nowhere. He did not get his point across. The issue has come back now, 40 years later, and is central to the whole thing. What people are saying is that if we leave the EU it will be disastrous, because we will lose leverage, blah, blah, blah. The truth, however, is that we will move, if we have any sense, to a liberalised economy fundamentally under free trade. It is not in our interests not to have free trade, for the reasons that Mr Rosindell has pointed out. It pays us to be a global player under free trade. It pays us to sell our goods to other people in the world market and to take their goods at world prices. That will lower our cost of living. We have done a simulation of leaving the EU, and the first thing that comes out is an 8% drop in the cost of living on day one, because of the move from EU prices to world prices. That is really worth having and means that we are then in a world in which we do not actually—we can sign lots of extra trade agreements. We will definitely be forced by the EU for the reason you gave—that they sell so much to us—to have some sort of agreement with them. The last thing they will want us to do is to walk away without some sort of so-called free trade agreement with the EU, because they are so dependent on our market, relative to our dependence on theirs. They are selling us stuff at inflated prices on a massive scale compared with what we sell to them on inflated prices within the customs union. There will definitely be that trade agreement with them, because they will push for it, as you rightly said. Otherwise, as I have argued already, we do not need to do trade agreements with anyone else. Frankly, we can take the world price. If we do a trade agreement with, say, New Zealand, it will not affect the world price we get; it will affect what New Zealanders have to pay for our goods. We sell the stuff at the world price and New Zealand consumers, if New Zealand puts a tariff on it, have to pay more. It is really a problem for them, not for us. I am sure we will do trade agreements; I am not doctrinally against trade agreements. I am merely saying that they are not necessary for our wellbeing in terms of leaving the EU. They would be a nice add-on for people like the New Zealanders who, if we could do something with them, would help their own consumers.

Yasmin Qureshi

Currently, we are in the EU, so we are where we are. At this point with what we have got, to what extent do the EU’s current priorities for international trade reflect the UK’s national interest? Do they act as a multiplier for our economic influence in the world? Or are they effectively putting constraint on us? I am talking about the current situation in the EU.

Professor Minford

We have done that calculation.

Chair

Professor, let’s hear the more traditional view.

Professor Minford

I will let my colleague Dr Woolcock speak.

Dr Woolcock

The UK has been part of the customs union and has formed part of the single European market. You have this framework agreement. Over the past 15 to 20 years, UK preferences have been more or less aligned with the rest of the EU. In that sense, the EU reflects UK preferences. I think the UK has been fairly effective in shaping EU trade policy. It has been one of the key players in making it more liberal, helped by enlargement to include some other countries. You could make the case that on agriculture the UK may have been a bit more liberal, but broadly speaking I think it is in line with UK interests.

Yasmin Qureshi

Taking away the economics of it, how influential has the UK been in determining priorities for the EU’s economic diplomacy?

Dr Woolcock

It has had a major impact. The UK has been very effective in shaping the detailed debates within the Trade Policy Committee within the Commission, and shaping views and opinions within Europe. It has been one of the main protagonists in promoting an open trading system that some people would like to see, supported by other countries. I’m not sure I can say any more than that.

Yasmin Qureshi

Those who favour us staying in the EU often say that if you are in the EU you are able to influence what is going on. From what you have just said, it seems that up to now Britain being in the EU has been able to have a positive effect, and effect changes in the EU.

Dr Woolcock

Yes, I think so. In your previous session you asked quite a lot of questions about what might happen in future, which are quite difficult to answer. I would make the case that the UK will have more influence being a member of this bigger club. The rules of trade and investment are set through negotiations. For example, one of the core elements in TTIP is regulatory co-operation between the US and the EU. If the UK is not sitting at the table, part of the EU, in those negotiations about how you reconcile different domestic regulations, the UK will not have any influence on those. Okay, the UK can be a price taker but it will have to adopt the regulations that have been agreed between the EU and the US. It can still trade but it will not have any more influence on the outcome. It would have much more influence if it were within the EU.

Professor Minford

May I come back on that? I love this fact that we have this great influence on the EU and make it a much better place. It may be true; it may make it more liberal. The question you originally asked was, what is the cost for the UK in this arrangement? That is the thing that worries me. I have already answered Mr Rosindell by saying that the customs union itself is extremely expensive to us. The regulations that are increasingly put on us in labour and financial markets are onerous to us, cost us serious resources and hold back growth. Many of those regulations are not in line with free market principles. When you add all these things up, it may be that we have a force for liberalism inside a fundamentally illiberal EU political and economic philosophy, but the costs to us are very large. It may be great for us to contribute to the wider world interest by making the EU a more liberal place, encouraging trade agreements and so on and so forth, but being in this particular club comes at a huge cost to us. The club itself wants to have more and more control over what we do, and its control doesn’t seem to be in our interests.

Mr Hendrick

What, in your view, would be the optimal framework for the UK’s relationship with the EU, if it chooses to withdraw its membership? I am looking particularly at the so-called Swiss or Norwegian models, which people have talked about.

Dr Woolcock

An optimum model, if the UK withdrew?

Mr Hendrick

Yes, if there is such a thing.

Dr Woolcock

Let me try to build a scenario from my previous point. The point I was trying to make is that it is not that the EU is imposing regulations on the UK. There are health, safety and environmental standards that all countries have to comply with. If the UK left, we would still have to comply with those standards, and we would have to show compliance with those standards if we wanted to export to the US or any other market. Incidentally, one estimate of the non-tariff barrier costs—not the tariff-equivalent costs—of entering the US market is 20%. If the UK didn’t negotiate a bilateral agreement with the US, its exporters would be at a 20% disadvantage to the EU if the EU was able to negotiate an equivalence agreement with the US, in terms of market access. Sorry, that was a bit technical.

Mr Hendrick

I am looking particularly at the relationship between the UK and the EU, rather than the US. I will come to TTIP later.

Dr Woolcock

The point I am trying to make is that the UK would still have to adopt the same standards—either EU standards or some other international standards. The optimal way would be to keep the European standards, because we have at least had some role in influencing them.

Mr Hendrick

Exactly.

Dr Woolcock

If you are looking at other options, the Swiss option is a bit closer than the Norwegian one. Switzerland negotiated a bilateral agreement with China. That is the scenario, if you like. The UK could negotiate a bilateral agreement with China. You need to look at the details, though, and it calls for some caution, because the Swiss negotiation with China was about not really much more than existing World Trade Organisation commitments on services under the GATT agreement. It didn’t get any more than the existing WTO commitments. It got nothing on investment, public procurement and the non-tariff barrier measures. In other words, all it got was a tariff agreement and some provisions on intellectual property. That is an illustration. Maybe the UK would have more leverage, but it is difficult to say. You can’t really predict what the UK would be able to get outside the EU, but if you look at what the Swiss got, it wasn’t very much.

Professor Minford

May I have a quick go on this one? I have already answered it in terms of your question, Mr Blunt, but I will answer it again. Dr Woolcock is a great expert on trade agreements, and that’s wonderful, but, as I said earlier, they are totally irrelevant to the UK in this respect, because he is talking about trade agreements between large blocks—large monopoly suppliers. My answer to you, Mr Hendrick, if you want to hear the answer—maybe you don’t want to hear it.

Mr Hendrick

I think you have forgotten the question.

Professor Minford

You asked me what we should do if we left the EU, but you don’t want to hear the answer.

Mr Hendrick

No, I asked you to look at the Swiss model and the Norwegian model—how they are small countries trading with the EU.

Professor Minford

Yes, I was going to answer that question. I was going to say that we don’t want either model. I did answer this in response to Mr Rosindell. The model we want is the model of a standard, self-governing country. I do not know why everyone seems to assume that we have to become a small dependency of the EU even when we leave the EU.

Mr Hendrick

We’ve got that, but we are also trying to say that in order for the Norwegians and the Swiss to trade with the EU, they have to comply—certainly in Norway’s case—with the acquis communautaire and many other rules and regulations. As a former MEP, I have worked on directives and rules that must be complied with in order for a country to trade. Are you saying that the EU is suddenly going to drop all the requirements to comply with certain standards on food quality, air standards and rules on how services operate just because Britain chooses to leave the EU and behave differently to other nations such as Norway or Switzerland?

Professor Minford

About 9% of our GDP is exported to the EU. On that 9%, yes, we would obviously comply with all the standards, because every exporter has to comply with all the standards of the country it exports to. So yes, but that is 9% of our GDP. If you asked me whether we have to have all the regulations of the EU in order to sell that 9% of our GDP to the EU, I would say no, because the other 91% of GDP will be free of those regulations and will operate according to the regulations that we, as a self-governing country, think are good for our industries. There is absolutely no reason for them to be the same as the EU’s—none at all. If the EU insists on certain things it wants in those exports—standards and whatever they might be—then obviously if you export to the EU, you have to do it. By the way, our trade with the EU is contracting as a share of our total trade, whereas our trade with everywhere else is expanding.

Mr Hendrick

It is still significant.

Professor Minford

Yes, it is 9% of GDP. Are you telling me that the other 91% of the economy has to comply with everything in the EU in order for us to export that little 9%? I say to you: where does that come from? 126 Mr Hendrick: Dr Woolcock?

Dr Woolcock

On all exports, if you are exporting to other markets, you have to comply with the standards that are expected in the other markets, so it would apply to all exports.

Mr Hendrick

But in some cases it is mutual recognition rather than harmonisation.

Dr Woolcock

Yes, but that still has to be negotiated. You could certainly say that yes, okay, the UK standards on health, the environment and safety could be lower. If that is what the voters want, you could do that.

Chair

Mark, do you want to move on to the TTIP question?

Mr Hendrick

Related to that, how significant will TTIP be for the political relationship between the US and the EU? How would the UK fare outside an EU-TTIP arrangement?

Chair

I think that is probably for Dr Woolcock.

Dr Woolcock

In terms of political relations, TTIP is partly a political agreement—it is driven by political motivations—to consolidate transatlantic relations at a time when the US is negotiating the Trans-Pacific Partnership in order to consolidate US relations with the Asia-Pacific region. Were the UK not part of TTIP, it might have some sort of political impact or knock-on effect, although I am not quite sure what. I would look more at the economic impact, which would be that UK exporters into the US market and UK financial service exports into the US market would face a disadvantage compared with the rest of the EU. It won’t happen overnight, because TTIP is going to take some time, but if it is successful, exporters from another part of the EU would have a preference—that is what these agreements are—over the UK, so the UK would then have to negotiate an equivalent agreement in order to match those preferences. As we have heard from the US negotiator, the US would no doubt negotiate with the UK, but other, bigger markets may take priority.

Mr Hendrick

If we were outside the EU, presumably the residual regulations and standards we would be left with would be the ones we had when we were in the EU, and we would have to negotiate on a similar basis to if we were within the EU anyway. What do you believe are the prospects for a successful conclusion of TTIP?

Dr Woolcock

It will be concluded because there is too much political capital invested in it, but my own view is that it is going to take some time for TTIP to really be fully implemented. If you look back at EU-US efforts at deepening market integration, they have come in fits and starts, so it will take some time before it has any real impact.

Mr Hendrick

If the UK were excluded from TTIP, do you think it would risk falling behind the transatlantic curve on setting standards and regulations?

Dr Woolcock

Yes. The approach to dealing with these trade-facilitating regulations will be shaped by the EU and the US in this regulatory co-operation, so the UK will have no option but to follow—either export according to US standards or export according to EU standards.

Mr Hendrick

And those standards are very important, as we understand from the EU context, in that they are often aimed at promoting health and safety—for example, the crash testing of cars sets standards in terms of ensuring passengers have a good chance of being safe when there is an accident. In a free market world scenario, what sort of a global market do you think might exist if we did not have the sorts of standard being set through TTIP, between the US and the EU?

Dr Woolcock

Well, this gets to the whole globalisation debate and whether globalisation is a race to the bottom in terms of standards—health and safety, environmental and social standards. The case for TTIP and these other agreements is that they set an international level below which there will not be pressure. In other words, the downward pressure resulting from globalisation and competition between economies would be stabilised on the basis of what the Americans call a democratically agreed set of social standards.

Mr Hendrick

If we had our own trade agreement with, let’s say, China, outside the EU, how effective do you think we would be in ensuring that goods and services bought from China—such as children’s toys—that were not covered by the sorts of standard we would like to see were safe and reliable?

Dr Woolcock

The UK could still prohibit the importation of unsafe products, according to whatever the UK standards were. If you had health and safety standards for children’s toys, you could still prohibit imports.

Mr Hendrick

But we would not necessarily have the economic power to exert the influence needed for things to happen politically within China, to change the way their market operates.

Dr Woolcock

On the particular case you mention, yes, because the Chinese have done this anyway—they have shifted into accepting those kinds of international standard. In an area where China has not yet quite adopted international standards, it would probably be much harder to get them to shift and change. One such area is Government procurement. I think it would be very difficult for the UK to get any kind of fair treatment in the Chinese procurement market outside the EU.

Chair

Finally, may I bounce my own thesis off both of you? The United Kingdom’s unique selling points, as it were, are things such as legal services, financial services, education services, culture and media, and perhaps pharmaceuticals. Those are all things with a global market, rather than a regional one. Is it possible, if we are outside the European Union, for us to pursue a much more aggressive and specialised agenda around those industries and services, in terms of trying to get entry to other markets? I suspect that Professor Minford would say that we don’t need to.

Professor Minford

May I come back on this, seeing as Dr Woolcock has told us a lot about why we need to have all these trade agreements? Economically, they are pretty small potatoes. The main thing is to have products that people want, as you rightly said, such as pharmaceuticals. You gave a good list of industries in which we are very competitive. People are falling over themselves to buy our products. That’s what you want in a global market. You need to be a highly competitive economy producing a lot of interesting products, so your 30-odd million people get good prices in world markets because they have got good products. The key thing for me is that we should be part of that global market. We should be able to compete in it because we are buying inputs from a global market, not from a protected EU market that is excessively expensive. By joining the global market and getting out of the customs union, we make ourselves much more competitive. We are then indeed in line with our comparative advantage, which is to produce the things you listed: high-tech, skilled labour-intensive products. That is where our comparative advantage lies. At the moment, what is happening—this is the big cost to us from all this trade protectionism that comes from the EU baggage—is that a lot of our industries are protected inside the EU, so our comparative advantage is distorted into industries that we are not very good at. That is the key thing. In a global market, we can focus on the industries that we are good at and make sure they are highly competitive. As I said earlier, we really don’t need trade agreements. I am not against them. I am perfectly happy for other people to have trade agreements, and there may be minor things that we need them for. But, of course, the US is our oldest trading partner. We already have massive trade with the US in the products you are talking about. The EU has much less trade with the US than we do. If you include the whole service area, we are already deeply integrated into the US market. For us, TTIP is a minor extra element in the story.

Dr Woolcock

I don’t disagree. Of course we need goods and services, and we need to be able to produce them competitively to be able to sell them. I am not saying that free trade agreements are the only thing.

Chair

Perhaps I can illustrate with the example of trying to sell insurance services into India. Are we better off trying to negotiate entry for British insurance companies with the heft of the European Union, would we be better on our own, or are we able to survive by not even attempting to broker agreements with India but hoping they will buy British products because they happen to be the best?

Dr Woolcock

As I said, trade agreements only ensure that there is not unfair treatment of UK or EU suppliers. It doesn’t mean that the UK insurance industry can’t go to industry and try to sell services to the Indian Government. If the insurance sector is regulated in India in such a way that precludes foreign investment, that’s where the benefit of a trade agreement comes in. The EU would have more leverage in trying to get a negotiation with India in order to get India to agree to foreign investment in the insurance sector.

Chair

How does the United Kingdom get past the vested interests of the Indian insurance industry? Let’s presume it’s woefully inefficient—I don’t know whether it is or it isn’t—but let’s say it’s far less efficient than our own. However, they can buy Indian politicians in order to deliver the regulations in order to protect them.

Professor Minford

This is a really good example of what I have been trying to say all evening. It is a matter of massive indifference to us whether Indians inflict harm on themselves by refusing to buy our insurance services or not. Our insurance industry is world-competitive. It is not infinitely large—it has a definite, limited size—but it is in a nation of 30-odd million workers. If the Indian economy decides not to allow British insurance, plenty of other people will be ready to buy it. It’s a global market. The insurance industry in the City of London is the world’s biggest market and it deals with every part of the world. It is not dependent on any one country to sign a trade agreement with us. This illustrates perfectly my point that the insurance industry is going to survive fine, whether or not India wants to liberalise. Obviously, we would all prefer it if India liberalised; it is good for India. From our point of view, the big issues are do we want to be part of a global market with free trade, or do we want to be inside the EU, inside a customs union, with highly restrictive policies and extremely tough and excessively interventionist regulative policies? That is the big issue that completely dominates all this detail of trade agreements once we leave this organisation.

Mr Baron

May I return us to the World Trade Organisation and the concern expressed by those who worry about leaving the EU that punitive tariffs could be imposed on the UK by the EU? We know it is not in their interests to do so. We run a large trade deficit with the EU and I doubt whether they would be allowed to do so. Article 50 of the Lisbon treaty makes some sort of arrangement post-exit. But there is a concern out there—not a widespread concern but a concern all the same—that the EU could retaliate in some form with massive punitive tariffs. May I take your view on that? My understanding is that the WTO says that most favoured nation status means that you keep the tariffs as they are at the level of other countries. With the States, for example, it is more like—

Professor Minford

That would be my understanding, but Dr Woolcock is an expert on this.

Mr Baron

I would be interested in your view: in the worst-case scenario, what could the EU do to us?

Dr Woolcock

No, the UK is a member of the WTO and the EU is a member of the WTO. The EU would have to offer MFN tariffs to the UK. There is no tariff, of course, with the EU at the moment. As far as MFN tariffs are higher, there may be an increase in tariff.

Mr Baron

Right, but can you give us a scale, if you don’t mind?

Dr Woolcock

It depends on the products. EU tariffs on agriculture products can go up to 14%; shoes 14%; cars 8%. The MFN tariff would be significant in some sectors. More importantly, tariffs are coming down. You could negotiate an agreement, as I was saying earlier. Most preferential trade agreements have negotiated away most tariffs. Non-tariff costs will come in. If the UK is not part of the EU—not part of the customs union—if it has different tariffs, it has to prove origin status. If you are exporting from the UK to the rest of the EU, you have to prove originated status. The costs of proving that can be 5% of production costs. You have border control costs, which can be 3% or 4% of production costs. So there are significant trade costs that are probably more important than the tariff issues. There are some other issues that would need to be considered. The UK could simply keep the existing tariff, but then there is no point in leaving the EU. There is, for example, a Government procurement agreement that has been negotiated within the WTO. That would have to be renegotiated. It is based on bilateral commitments between the EU and the US, and the EU and Japan, and the other signatories to the Government procurement agreement. The UK would have to renegotiate that and try to get the equivalent access that the EU has. For example, sub-federal level procurement in the US is a big issue and that may be difficult to negotiate.

Professor Minford

Well, I have costed the whole business of leaving the EU on the assumption that we have no agreements with anybody, and the EU just applies to us the MFN tariff and any non-tariff barriers it wants. Of course, what then happens is that we leave and become a normal country outside the EU, which is something that many countries are, and we then face world prices. That is immensely better than being inside the EU’s wonderful tariff wall, because that protects too many bad industries, compared with what we would have if we were out there in the global market, selling the things we are good at. Our comparative advantage would be enormously liberating for us. It would stop us thinking of ourselves as a regional player, which we are not, and would give us the mindset of a global player facing world markets. We are a small global player, so all we’ve got to do is produce things that are good that we can sell for high prices to anybody around the world. As I said, the world is a very big marketplace, so if somebody wants to put extra tariffs on us, again, that makes no difference to my calculations. As you rightly said and as I believe, the EU will want to sign an agreement with us, because that is in its interests, because they sell us so much stuff at inflated prices, net. They will want to. The boot will be entirely on the other foot to what most people say. Instead of us going cap in hand to the EU, saying, “Please sign an agreement with us,” they will come cap in hand to us, saying, “Please sign an agreement with us, because we want to sell to you.”

Chair

Professor, on that note, we do not want to keep you here as long as Hillary Clinton was kept by the Congressional Committee, so I thank you both very much indeed. It is always stimulating to have your evidence, Professor, and Dr Woolcock, thank you very much. Your expertise is very much appreciated, so thank you so much from all of us to both of you. Oral evidence: Costs and benefits of EU membership for the UK's role in the world, HC 545 24