Written Submission
to the
United States International  Trade Commission

The purpose of investigation 332-409 is to analyse the impact on the US economy of including the United Kingdom in a Free Trade Agreement with the United States, Canada and Mexico. In the course of that investigation, the ITC may wish to make assumptions about the effect on the UK economy of UK withdrawal¹ from the European Union.

In filing this written submission, Global Britain aims to provide information that might be relevant in framing or in refining such assumptions. Global Britain also discusses briefly some of the probable geo-political consequences (apart from the immediate economic impact) of the UK withdrawing from the EU and joining a Free Trade Agreement with her North American allies.

In order to accept an invitation to join a Free Trade Agreement ("FTA") with the United States, Canada and Mexico, Britain would have to withdraw from the EU.

NAFTA (North American Free Trade Agreement), whose current members are the USA, Canada and Mexico, is a free trade zone with floating currencies in which each country is free to negotiate its own trade arrangements outside NAFTA. Canada is currently negotiating an FTA with the European Free Trade Association (Iceland, Norway, Switzerland, Liechtenstein); Mexico has concluded an FTA with the EU, which is awaiting ratification².

In its trade mode, the EU is currently a 15-member customs union with a single external tariff, a single internal market, a single external commercial policy, a "single" currency presently covering 11 of the 15 member-states, a single agricultural policy and a single fisheries policy. In theory, and to a lesser extent in practice, "national" commercial policies have disappeared, each EU member state having replaced them with the EU-wide common commercial policy.

NAFTA is heavily outperforming the EU in global markets, gaining market share, while the EU as a whole is losing market share. Germany, France and Italy, the key mainland EU economies, are experiencing severe losses in global market share; in contrast, the UK is experiencing only a slight loss in global market share³. NAFTA is enjoying sustained economic growth with low unemployment; the EU (with the exception of Britain) is not.

British trade with NAFTA is growing; British trade with the EU is stagnant⁴. Inward and outward direct investment involving the UK is overwhelmingly with North America⁵. Structurally and cyclically, the British economy is convergent with North America and has been for several years; its divergence from Continental Europe is widening. So, sterling tracks the US dollar, not the euro. Britain has a structural deficit on its trade in goods and services with the EU and a structural surplus with North America⁴.

The two-way trade and investment links between Britain and North America are as close as ever⁶. Consequently, an improvement in the British economy results - other things being equal - in a beneficial impact on the North American economy.

Implicitly, the scenario being examined by the ITC postulates two separate courses of action, which would probably run in parallel.

The first stage is British withdrawal from the EU. We believe that this, in itself, would have a permanent beneficial impact on the British economy, for the reasons set out below (Chapter E). It would also confer economic benefits on continental Europe and Ireland. Since the UK is the biggest single export market for goods (the USA is second) for the other 14 EU countries¹¹, an improvement in the British economy results - other things being equal - in a beneficial impact on the rest of the EU economy.

In withdrawing from the EU, Britain would continue to enjoy close and favourable trade and investment links with the remaining EU Member States. We explain why in Chapter F below.

The second stage is Britain joining with the three North American countries in an FTA. This also, we believe, independently of Britain withdrawing from the EU, would have a separate permanent beneficial impact on the British economy, for the reasons set out below in Chapter G.

The combined beneficial impact on the British economy due to (a) withdrawal from the EU; and (b) entering an FTA with the three North American countries, would benefit the North American countries in general and the US economy in particular.

Global Britain believes that British withdrawal from the EU would have a beneficial impact on the British economy. That view is shared by many others⁷.

The beneficial impact on the British economy would come from direct savings on the British contribution to EU Institutions (currently running at £11 billion gross, equivalent to 1.3% of British GDP). Half (£5.5 billion) is returned to the UK, mainly as agricultural subsidies; the other half is spent on subsidising Britain‰s EU competitors and on the EU bureaucracy⁴.

In addition, British consumers would be able to buy food at world, not EU prices, reducing the price of imported basic foodstuffs and processed food products by 20%, according to a recent NIESR report⁷.

There would be significant further indirect economic benefits as a result of the British economy freeing itself from the pernicious effect of "eurosclerosis": the highly-regulated, highly-expensive, high-tax high-spend regimes associated with the European Commission and the core Continental European economies. These benefits are difficult to quantify, but there is little doubt that the gains to the British economy from avoiding the impact of eurosclerosis would be substantial⁷.

Minford/Jamieson estimate the cost of acceding to further convergence with the Continental model at 7% off (British) GDP and an extra 2 million unemployed by 2005 - even if Britain did not join the Single Currency⁷. Leach estimates the minimum annual present net cost to the UK of EU membership at around 2% of (British) GDP; this minimum net cost could double or triple, were the UK to further "converge" on the Continental model⁷.

Whilst Minford/Jamieson and Leach differ on detail, it is clear that their computations of the orders of magnitude that net costs prospectively represent as a proportion of GDP are similar and substantial.

In addition, by staying outside the single European currency, the British economy would not have to bear the changeover costs of replacing the £ sterling with the euro. Recent estimates range between £35 billion (4% of UK GDP)⁸ and over £100 billion (12% of UK GDP)⁹. This would be a non-recurring cost, spread over half a decade or more.

As well as this non-recurrent cost, the UK would avoid the on-going, permanent, recurring macroeconomic costs associated with the loss of ability to run an autonomous monetary policy, estimated recently by the Bank of England¹⁰ to be a "baseline" 1.16% of GDP.

It is true that being in a single currency area results in savings (compared to not being in such an area) on currency transactions within the area. But for Britain, with more than half its overseas trade outside the EU, and a highly efficient banking sector, such savings are estimated to be mere fractions of one per cent of GDP. Such a benefit would be far outweighed by the costs of joining. So there would be an unambiguous net economic cost or disbenefit to the UK of joining the euro that, on a ten-to-fifteen year view, might be as high as, say, two whole percentage points of GDP.

As we explain in the next chapter, British withdrawal from the EU would not result in the imposition of tariff or non-tariff barriers on EU-UK trade.

There is no realistic prospect of the British economy becoming de-coupled from the European Continent, if Britain were to leave the EU. There might be hard words; there would be gradual shifts in trading patterns; but mutual self-interest would ensure that two-way trade and investment between the UK and the remaining EU would continue to be as free as it is now.

This would be so because, bluntly, the Continental EU Member States need the British market more than Britain needs the Continental EU market.

The Continentals need free access to the British market firstly because it is their biggest single export market: bigger, from their point of view, than the US market¹¹. They need it, secondly, because they enjoy a large, perennial structural trade surplus with the UK⁴. They need it, thirdly, because they have invested massively in the UK, and continue to do so: not, by definition, to gain access to the Single Market, but to gain access to the English-speaking world, to escape from their over-regulated domestic markets and to benefit from the comparatively dynamic British economy, now the fourth biggest in the world. Any discriminatory measures the remaining countries of the EU imposed on Britain would damage their own investments in Britain.

Thus, if Britain withdrew from the EU, it would be overwhelmingly in the remaining EU members' economic interest to continue to have untrammelled trade and investment access to the business-friendly British market. Such access would be jeopardised if the remaining EU members tried to "punish" the UK for leaving their customs union by discriminating against British exports of goods, services and investment. Such discrimination would be in breach of the WTO rules and inevitably provoke countervailing discrimination from the British.

At the very worst, the remaining EU members would have to grant a UK outside the EU no less favourable treatment than that enjoyed already by other trading partners such as Switzerland (a similar percentage of whose trade in goods is with the EU as Britain's)¹², or indeed the US (which has increased its goods exports to the EU "14" [excluding Britain] at a faster rate than Britain has herself)¹¹ or Mexico (with which the EU has just concluded an FTA)².

In short, no-one in his right mind is going to de-couple the Continental economy from the world's fourth biggest economy and fourth biggest international trading nation, which also happens to be home to the world's single biggest international financial centre, the City of London.

The USA-Canada FTA, then NAFTA, appear to have benefited each of the countries concerned. In Europe, the participating countries in the European Free Trade Area ("EFTA" - Iceland, Norway, Switzerland, Liechtenstein) are, on average, wealthier than EU countries, and amongst the wealthiest in the world¹³. In other continents, regional trading arrangements based on free trade rather than customs unions are the norm. Theoretical and empirical evidence strongly suggests that FTAs are economically beneficial.

There is no reason to suppose that an FTA comprising the North American countries and the UK would not benefit the economy of Britain, as well as those of its North American partners.

The recovery of British sovereignty from the EU would bring significant military and political benefits, as much for Britain as for her North Atlantic allies, since British interests tend to be more convergent with those of North America than with those of the major Continental European countries which set the EU agenda.

British withdrawal from the EU would signal the beginning of a fundamental re-arrangement, in which the USA would be closely involved, of the post-war European settlement. British withdrawal would not be an isolated event. Several other EU members would be likely to follow the British example, starting with Denmark, Sweden and perhaps Ireland. Those Central and East European countries which presently - in the absence of any alternative - aspire to EU membership might prefer instead to combine membership of NATO with membership of an enlarged grouping comprising NAFTA, EFTA and the UK.

British withdrawal from the EU would come as an immense and profound shock to the EU, to the Franco-German "core" and the other Member States. Such a shock would trigger a fundamental re-assessment of the EU's aims and modus operandi, for the first time in its 44-year old history. The outcome, in our view, would be a more flexible and hence more stable Europe, more prosperous and better able to cope with a fast-changing world and with an unpredictable Russia to the east.

Outside Europe, British withdrawal from the EU would be welcomed by many of her Commonwealth allies who felt badly let down when she joined the then EEC in 1973 and whose interests still tend to be in conflict with those of the EU. A revitalised Commonwealth whose most powerful members, Britain and Canada, were members of an expanded North Atlantic FTA, would be an additional ally in the cause of promoting global free trade and democratic freedoms.

Lord Pearson of Rannoch
Ian Milne
London, 16 March 2000

[12] Switzerland 56.4%, UK 58.0%; OECD Series A, quoted in a Written Answer in the House of Lords on 10^th November 1999. P> [13] In 1997 GNP per capita @ PPP, Switzerland ranks at number 3 (behind the US at number 2); Norway ranks fifth; Denmark, the wealthiest EU country, ranks seventh - World Development Report, 1998/99, The World Bank, www.worldbank.org