An Article written by Professor Kent Matthews:
Carwyn Jones the First Minister of Wales has described a no-deal Brexit as ‘catastrophic’ and would cause ‘serious, long-lasting, economic and social damage’. I am sure the First Minister believes his own words and like many others, he focusses on what he thinks the country will lose in the short term rather than what it will gain in the long term. Politicians have very short term horizons. The Bank of England, HM Treasury and the other Jeremiahs would also tell us that the UK would fare badly and Wales even worse if Brexit meant non-access to the single market and loss of protection within the Customs Union. Why? Let’s examine their argument. It is true that 62 per cent of Wales’ exports go to the EU, (which is around 14 per cent of the economy directly affected).
However, a Brexit without a Free Trade Agreement with the EU means that the UK will be treated the same as other Most Favoured Nation countries exporting to the EU under World Trade Organisation (WTO) rules. Wales will face the Common External Tariff that other non-EU countries face in trading with the EU.
Of course, this does not mean that Welsh exporters cannot sell into the EU. It means that they will face tariffs ranging from 2 – 4 per cent for manufactures and miscellaneous manufactures (which is roughly 20 per cent of all exports), 10 per cent for automotive products, through to 42 per cent for dairy products.
Perhaps a bigger threat is non-tariff barriers (NTBs) in the form of new product standards that may emerge a few years after Brexit. Clearly, Welsh exporters currently meet all NTBs and this could not be an impediment for border hold-ups in the immediate future. OK, they may change product standards and regulations in the future but this imposes costs on manufacturers within the EU as well, and will be a move not lightly taken. But clearly any exporter to a country must meet the quality standards expected from that country and that will be true for trade with the rest of the world as for the EU.
Other border hold-ups could be related to customs ‘paperwork’. But here again, computerised technology allows for goods to be cleared at ‘arm’s length ‘rather than at the port of entry. So the Armageddon scenarios painted by the establishment of lorry tail-backs on both sides of the Channel is well over-blown. Most of the traffic at Fishguard and Holyhead is meat that comes into Wales from Ireland for processing and packaging and onward shipment through the channel ports. There should be no discernible effect on inward traffic from Ireland.
But perhaps the biggest threat is to the Welsh manufacturing sector that will lose Customs Union protection, which means that they would face competition from suppliers from outside the EU. Additionally, without offsetting Treasury compensation the effect on Welsh hill farming would be particularly severe.
So is this where the First Minister and others see the big costs coming from? These are the costs to producers that potentially threaten jobs in Wales. However, let’s get things in perspective. Agriculture, forestry, and fishing constitute a mere 0.7% of Wales’s Gross Value Added. Indeed Welsh farmers will face competition from cheap food imports. But, outside the Common Agricultural Policy (CAP) we will have the opportunity to restructure our agricultural industry from lamb and cattle production to conservation, land maintenance and reforestation and to support our farmers in other ways.
Yes the manufacturing sector will face new tariff costs in their exports to the EU but they will have also benefited from the 11 per cent devaluation against the euro since the Brexit vote. Yes they will face stronger competition from manufacturing outside the EU, but they have the cushion of the 6 per cent devaluation of the real effective exchange rate to help them with competitiveness, and investment to improve productivity and move up the value chain.
Costs and Benefits?
But is it all costs and no benefits? There is a well-accepted principle in welfare economics that an outcome is considered to be welfare superior if the gainers from an economic strategy can compensate the losers.
The effect of not being in the Customs Union on the rest of the Welsh economy will depend in part on how the manufacturing and agricultural sectors respond to a no-deal outcome.
If we use this opportunity to move to a free trade economy, the negative effects of increased trade costs with the EU and increased competition from the rest of the world would be outweighed by the positive effects of lower cost of living from cheaper food prices from agricultural imports and other imported goods. The effect of the real purchasing power released from a drop in the cost of living will show up elsewhere in the Welsh economy, providing opportunities for other sectors of the economy to grow.
Potential gains to consumers and lower cost of living – a major benefit
Critics of the no-deal strategy concentrate their arguments on the potential losses to producers but fail to see the potential gains to consumers, and through them, the gains for the rest of the economy.
Being outside the Customs Union means the removal of the common external tariff on imported agricultural goods. This will have a major effect on reducing the cost of living in the UK, even allowing for the rise in imported prices following the depreciation.
The gains to households from the removal of trade barriers to the rest of the world could reduce the cost of living by as much as 8 per cent over the long term. Household income in Wales is 20% lower than in England and in the Valleys it is more than 25% lower. Wales being one of the poorest regions of the UK would benefit enormously.
How much will Wales benefit overall? That’s hard to say, but the Economists for Free Trade (EfT) use the Cardiff World Trade model to estimate a UK wide rise in GDP of 4% from a no-deal Brexit. Other benefits arise from freeing industry from EU red-tape and halting unskilled immigration that have depressed unskilled wages for UK workers and provided a subsidy to unskilled immigrants in the form of the social wage. The EfT estimate that in the long-run the UK will benefit by a permanent rise in GDP of 7%. Clearly Wales will benefit and then has nothing to fear from a no-deal Brexit.