It is Sir John Major who is suffering from fantasies over the EU, and I can see why. He wants to blank out that it was our exit from the ERM in 1992 that set up twelve years of strong economic growth; not EU membership as he claims. In fact since 2004 our living standards have fallen and never recovered.
Does he think we have any hope of resolving the housing crisis unless we can control our borders by leaving the EU? Does he imagine it will be possible to maintain a cohesive society by ending wage compression and reducing the pay gap without doing so? How are our SMEs going to provide the jobs we need without removing the tourniquet that EU regulations impose upon them? And how does he think we are going to protect ourselves once the EU has absorbed GCHQ, MI5 and MI6 into some new central incompetence? Indeed Brexit may well set up a new devaluation with all the consequent benefits we enjoyed after the exit from the ERM.
Sir John is disingenuous in comparing 45% of our exports that go to the EU with 7% of theirs coming here; apples and pears. It is irrelevant how much they export to the rest of the world; we are looking at the bilateral position here. And that shows a goods deficit of £89 bn last year; over 5% of GDP just with the EU alone! They are bleeding us dry; a veritable haemorrhage of jobs. Even in the worst, worst case scenario where they raise the maximum WTO tariffs against us and we do not retaliate, the percentage barriers are small compared to the likely benefit of devaluation. Britain will still be attractive to inwards investment, and the small increase in import prices is a small investment to make for the subsequent growth. Food prices in fact are likely to fall as we come out of the CAP and CFP. If we do raise import tariffs in retaliation they will provide much-needed additional fiscal revenues as well as promote import substitution.
There is no leap into the dark here. We know exactly what life will be like after we leave. On Brexit all our trading arrangements, security deals and laws will remain unaltered by default. They won’t change unless somebody changes them, and the EU cannot risk the consequences of trying. The only change is that we will save a net £12 bn or so from our membership fees, and that is after replacing all of the payments that Scotland and others receive. The point is that we do not need any new deal with the EU. We will not be dependent on the EU in any way. We can simply walk away if we do not like anything Brussels may propose.
Sir John is however right on one point; that we have a choice between Great Britain and Little Britain. He has just got it the wrong way round!
And here’s a further reflection which I did not include in the letter. The devaluation from the ERM exit in 1992 was worth about 8 or 9%. As I write we already have a 4% devaluation consequent on the announcement of the referendum, so we should certainly get 8% or so after it, and if the maximum tariffs the EU can apply on average are 5%, we are bound to gain either way, even with a 10% maximum for motor vehicles and agricultural produce. But we could go further. Suppose we raised 10% tariffs against against motor vehicles ourselves. We may have to apply those globally, but we import very few vehicle from outside the EU. Most Japanese cars are made here anyway, so it would probably only affect the Koreans. Suppose we then said to both the Koreans and the continental manufacturers that we will not raise any tariffs on spare parts and components worth less than 10% of the value of the whole. They would then have a strong incentive to set up final assembly plants here, creating lots of new jobs in the UK as well as enabling them to continue tariff-free trade to us!
As for the rest we could be very selective (not forgetting steel, of course). We produce lots of good cheese in this country so that would be a good target, but not much wine which would not.
As regards steel, this is clearly a special case as a result of Chinese dumping. The global steel market will not ‘get back to normal’ until there have been significant reductions in capacity. Most commentators agree that a global economic recovery will not be sufficient. But whose capacity should be up for the chop? Why should it be ours? Even the Chinese themselves are now restricting imports, along with the Americans and many others, but we are not allowed to do so by EU rules.
Logic would suggest that the least efficient plants should go first. But that does not take account of ongoing investment and technological change. So I am bound to conclude that the ideal solution for the UK is to create a temporary closed market in steel – neither imports nor exports being allowed until the global market stabilises and UK capacity being set to supply UK demand. Whether the existing capacity is nationalised or nationally recapitalised, like the banks, it should be allowed to set prices within the market to enable it to be profitable overall. That market would of course have to be regulated, and the best basis for that would be a cap-and-collar profit regulation regime combined with quality inspections. By that I mean setting a range for profitability, perhaps 5% =/- 2.5%, so that if average profits went outside that range national prices would have to be adjusted according, other factors being equal. Such a regime would have to be applied on an industry wide basis of course so that new entrants with more efficient processes could still have an incentive to replace older suppliers who could not keep up.