‘Free trade may be desirable but don’t fear a hard Brexit’
Chief reporter Martin Shipton examines the arguments of Professor Kent Matthews of Cardiff Business School, who says Wales has nothing to fear from a hard Brexit
IN the run-up to last year’s EU referendum, some of the most vociferous advocates of the Remain cause were university-based academics.
They were worried about losing out on research grants and the possibility that setting up future projects with universities in EU countries may in future be more difficult.
Most of all they were worried about a significant loss of income from foreign students who may be put off coming to Britain by Brexit.
As things have turned out, the loss of foreign students is proving more damaging than had been feared, with the word spreading – rightly or wrongly – that the main reason for the Brexit vote was an increase in xenophobia.
Only yesterday, Aberystwyth University partly blamed Brexit for putting 150 jobs at risk. It’s the third Welsh university in recent months to have announced job losses after a fall in income from foreign student fees.
Yet at Cardiff Business School there are academics energetically making the case for Brexit. Professor Patrick Minford’s views are regularly aired, but now his colleague Professor Kent Matthews has written a post on Cardiff University’s Brexit Blog suggesting that, contrary to the fears expressed by Carwyn Jones and others, a hard Brexit could actually have a positive outcome for Wales.
He writes: “The Jeremiahs would tell us that the UK would fare badly and Wales even worse if Brexit meant non-access to the single market. Why? Because 61% of Wales’ exports go to the EU – which is around 13% of the economy directly affected – which compares with less than 50% for the UK as a whole.
“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 rules. Wales will face the Common External Tariff that other nonEU 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 2.3% for manufactures – roughly 70% of all exports – 10% for automotive products, through to 42.1% for dairy products.”
A bigger threat, argues Prof Matthews, is non-tariff barriers, that will emerge a few years after Brexit. However, he states, an even bigger threat to the Welsh manufacturing sector will be the loss of EU Customs Union protection, which means they would face competition from suppliers from outside the EU. Additionally, the loss of EU protection, without off-setting Treasury compensation, would in all likelihood eliminate Welsh hill farming.
So far, so bad. But the academic claims that mitigating factors could provide a silver lining.
He writes: “First, we know that the tariffs do not come into play until the completion of Brexit, which could take up to two years.
“Second, the 10% or so depreciation of sterling against the euro has improved the immediate competitiveness of the export sector and increased orders. This will cushion the effect of tariffs when they are imposed.
“Third, the complexity of supply chains will make it harder for EU companies importing components from Wales to substitute in the shortterm, which means that Welsh exporters have up to two years to explore alternative markets.
“According to standard trade theory they will divert trade to world markets at world prices. Indeed Welsh exporters will face lower world prices when they lose EU protection. The depreciation of the pound will cushion the impact but in the longer term they will have to raise productivity and move up the value chain to compete effectively.
“Finally, we know that non-tariff barriers impose much higher costs on trade than tariffs, but since the UK is currently in the Single Market, the EU cannot use non-tariff barriers to restrict Wales’ goods exports into Europe in the near future.”
Prof Matthews claims that the effect of not having free access to the Single Market on the rest of the Welsh economy will depend in part on how the manufacturing and agricultural sectors respond to the prospects of tariff impositions.
“The depreciation of the exchange rate has seen a strong improvement in competitiveness of the export sector in Wales,” he writes. “While data of the production sector, which includes manufacturing, for Wales does not as yet exist post-Brexit, it would be reasonable to assume that the improvement in competitiveness will stimulate export orders in Wales, help to find new markets, and also promote tourism.”
Prof Matthews goes on to suggest that the cost of living in Wales could actually go down, thanks to the import of goods from non-EU countries with which the UK will be able to negotiate new free trade deals.
He writes: “Critics of the hard Brexit strategy concentrate their arguments on the potential losses to producers but fail to see the potential gains to consumers.
“The removal of non-tariff barriers and the common external tariff on imported agricultural goods following the completion of Brexit 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% over the long term. Wales being one of the poorer regions of the UK would benefit enormously.”
In conclusion Prof Matthews states: “Since the instant downturn in the economy following the vote for Brexit failed to materialise, the pundits have been revising their forecasts for the economy upwards, led by the IMF and the Bank of England.
“The consensus forecast is closer to 2% for 2017. What is driving this buoyant forecast is the reaction of the exchange rate and the assumption of a hard Brexit policy being adopted. There is no reason to believe that Wales will not share in this robust growth outlook. Indeed research using an econometric model for Wales suggests that the local economy is more responsive to UK exchange rate shocks.
“A free trade agreement with the EU may be a desirable objective for political reasons but if it is unattainable, Wales has nothing to fear from a hard Brexit.”
In putting forward his thesis, it seems that Prof Matthews is underplaying the negative impact of tariffs and non-tariff barriers on Welsh exports, while overestimating the potential benefits of importing cheaper goods from overseas.
Negotiating free trade deals is a lengthy process which can take a decade or more. The potential future benefits will seem entirely illusory to farmers and companies who find themselves bankrupted by new impositions placed on them by what until now has been their biggest export market. And new trade deals will only be made available to us by countries that see a value in signing up for them. In some cases this could involve undermining goods and services produced in the UK.
It could also involve countries demanding free movement of labour by their citizens into the UK. What a huge irony that would be, given the decisive nature of the anti-migrant vote last year.