THE IMF REPORT

In its June report on Britain, the IMF has focused on Britain's referendum on EU membership. Despite being more concise, more readable, and easier to understand than one of George Osborne's efforts, even so, the report has a number of clangers and clearly has Osborne's fingerprints all over it.

 

The Executive Summary is usefully one page long. It defines the alternatives to membership as being becoming members of the European Economic Area (EEA), 'bespoke arrangements', and 'defaulting to the World Trade Organization (WTO) trade rules'. It states that there will be 'tradeoffs between freer access to the EU market and independence from the obligations that come with membership of the single market'. It asserts that: 'Studies that find net gains, or only very small losses, tend to assume the potential for rapid expansion of trade from new trade agreements with other economies or a substantial boost to productivity from reducing EU-sourced regulation. While theoretically possible, in practice the effects on output are unlikely to be sufficiently large to make the net economic impact of exiting the EU positive', as those studies 'tend to assume the potential for rapid expansion of trade from new trade agreements with other economies or a substantial boost to productivity from reducing EU-sourced regulation. While theoretically possible, in practice the effects on output are unlikely to be sufficiently large to make the net economic impact of exiting the EU positive'.

 

The report does openly acknowledge that: 'The economic consequences for other countries would mainly be negative, albeit smaller than for the UK, and concentrated in the EU. Within the EU, losses would vary widely, reflecting variation in trade and financial exposures to the UK. Ireland, Malta, Cyprus, Luxembourg, the Netherlands, and Belgium would likely be most affected.'

 

Therefore, from the outset, the report's flaws are clear. It simply assumes that there will be a reduction in trade with the EU, without explaining from whom consumers alternatively source their demand for goods, and that the reduction in trade is harmful to both Britain and the EU. This is because, we are to believe, that the EU will refuse to roll over existing trade arrangements, albeit with some modifications (for the Common Agricultural Policy or the Common Fisheries Policy, for example), even though there would be adverse consequences for the EU countries of not doing so – as the IMF acknowledges. Meanwhile, Britain would be allegedly unable to increase trade with other countries via new free trade deals and so would suffer a fall in output.

 

To move to the main text, the report ups the ante by alleging that 'the balance of evidence points to notable downward economic risks to the UK economy' stemming from 'reduced trade access' which 'would be magnified if exit from the EU were also accompanied by restrictions on migration'. It asserts that the prospect of deregulation gains are low as Britain is supposedly relatively unregulated already and 'Nor does it seem likely that the UK could quickly establish trade agreements with other countries to substitute for those it has currently via EU membership. The likelihood is therefore that output and employment would be lower should the UK leave the EU than should it remain'. In the short term there would be uncertainty as the 'untested exit process could be damaging for investment, consumption, and employment; the exchange rate could act as a buffer, but not by enough to offset the negative effects on demand and output.'

 

The report rehashes the Osborne/Treasury line that 'The single market is more than a free trade agreement (FTA) or customs union – the intent is a zone in which there are no barriers to the movement of goods, services, capital, and people', emphasizes the EU's trade deals with other countries, and also 'prospective agreements under negotiation with a further 67 economies, including Brazil, Canada, India, Japan, and the US, with the aim of not only removing tariffs, but – more importantly – opening up markets in services, investment, and public procurement. These markets are 10½ times the size of UK GDP.'

 

These prospective trade deals are all pie-in-the-sky and the intended deal with the USA has run into serious trouble stemming from the proposals to allow US corporations to sue if they feel that they have not properly been given contracts. In any event, what matters is not bits of paper about trade deals, but the ability to compete. The most important market is the home market.

 

The report plays up that 'The process for negotiating withdrawal and a new agreement under Article 50 would set off a complicated process that would run through the European Council, European Commission, European Parliament, and Council of the European Union' and that it is unclear whether a new agreement would need unanimity as it 'would depend on the nature of the agreement'.

 

This is hogwash. The renegotiation process should be relatively straightforward, although it would require a British government to have some guts. The first thing would be to offer to the EU to roll over the existing arrangements, albeit with some modifications, and to require the EU to state within a few weeks whether they are agreeable to this in principle. If the EU is agreeable in principle, then detailed technical negotiations can proceed in good faith. If the EU is not agreeable, then there is no need for technical negotiations as we will be defaulting to the WTO rules in the absence of any bilateral agreements. The report itself states Britain 'would be able to set whatever level of import tariffs it wished, but would also face higher export tariffs on some goods and would not have access to the single market', unless Britain made 'a bespoke arrangement with the EU'.

 

Revealingly, regarding trade arrangements with other non-EU countries, the report admits that the British government 'views that it is not possible to apply the principle of “presumption of continuity”,' and hence Britain 'would not be able to ensure continuity by right, and agreements in which it participates via EU membership would be subject to renegotiation'. It is the British Tory government that is asserting this, not the other countries. The Tories are acting against British interests.

 

The report reworks some of the Osborne/Treasury allegations especially about immigration. For example, it alleges that 'Firms that trade externally are likely to have more advanced practices and be more productive. Hence, arrangements that support trade, such as EU membership, also boost productivity'. It does not occur to the IMF that the reason why firms export is because they are already more productive and successful. The IMF is peddling a fundamentalist free trade ideology.

 

Free trade does not necessarily make firms competitive. For example, Britain could enter into a free trade arrangement with India. Would this mean that British steel producers with their green charges, higher electricity costs, higher wages etc. would now be more productive and able to compete with India which uses coal fired power stations, has no green charges, few health and safety regulations, and far lower wages? Of course not. Such a free trade arrangement with India would result in the British steel industry being wiped out. Free trade means that a firm competes, goes out of business, or survives in a truncated form; it does not guarantee that a firm will be competitive. The interpretation of 19^th century free trade theories is wrong.

 

The report even alleges that 'there is little evidence that EU immigrants have caused job losses and lower wages for UK citizens … the evidence seems consistent with the notion that EU migrant labour has allowed UK firms to better match workers to jobs, allowing them to work more efficiently and boosting demand for labour overall'. As far as the IMF is concerned, immigration is an unqualified good thing. This is total bunkum. The IMF completely ignores the strain on public services, the housing shortage, etc. The IMF's convoluted threadbare reasoning strays well beyond its economic remit. They are peddling a Ponzi argument.

 

It is with the issue of the balance of trade deficit that the report does a spectacular belly flop. Given that the IMF once used to advocate sound economics and that countries needed to live within their means, one can only assume that Osborne and the British Treasury have been central to the drafting of this spectacular.

 

The report states 'The UK runs a trade deficit with the EU, whereas it maintains a small surplus with the US and Japan. This deficit is mostly in goods; the UK runs a surplus in services. However, whereas the value of the UK’s exports to the EU is 13 percent of UK GDP, the value of exports from the rest of the EU to the UK is 3 percent of rest-of- EU GDP. Expressed in nominal terms, a quarter of UK imports come from Germany; Germany, France, and the Netherlands account for nearly one-half of imports originating from the EU. Spain, Belgium, Italy and Ireland are also significant trading partners. However, when exports to the UK are expressed as a share of the GDP of the source country, the UK market is most important for Ireland, Malta, Cyprus, Belgium, and the Netherlands'. This is, of course, all a play on statistics. The scale of the imports from Germany should be noted.

 

The report proceeds to claim that 'the financial sector is highly exposed to a loss of access to the single market'. As with the débâcle of Britain rejoining the Gold Standard at pre-war parity in 1925, the interests of the City and bankers have priority. Banking is deemed more important than manufacturing.

 

The report refers to Patrick Minford (one of the Economists for Brexit) and compares his computer models and simulations with those of others. It quietly attacks the suggestion that Britain reduces all tariffs to zero upon leaving the EU and that all production be shifted 'entirely to services, at the expense of agriculture and manufacturing'. It speculates on the consequences of tariffs being imposed on British exports and the prospects of zero tariffs being applied to imports, but does not delve into the consequences of tariffs being imposed on imports, despite the size of Britain's balance of trade deficit. Crucially, it continues (italics the English Rights Campaign own emphasis): 'A permanent reduction in export demand would be associated with a permanent depreciation in the real exchange rate, to eventually restore the current account balance to equilibrium. This would cause imported goods to become more expensive. Exports would be more competitively priced, but not by enough to fully offset reduced export demand from higher trade barriers. Losses would likely be accentuated to the extent that reduced trade brought reductions in productivity and foreign investment. Restrictions on inward migration would also damage not just labour supply but, potentially, skill levels and efficiency'.

 

As it happens, in addition to responding to the Osborne/Treasury reports, the English Rights Campaign recently reiterated the positive effect of bringing the balance of trade with the EU back into balance (see the English Rights Campaign item dated the 15^th June 2016). What the IMF has said is biased, economically and logically illiterate, and is the key item of the report.

 

The exchange rate has failed to redress Britain's balance of trade deficit over the last 30-odd years. Even when sterling fell after the 2008 crash, the fall was insufficient to redress the deficit or return Britain to growth. After the exit from the Gold Standard in September 1931, sterling fell 30% within months; yet still Britain suffered from a trade deficit and it was only tariff reform that restored growth. First, the Abnormal Importations Act, passed in November 1931, allowed import duties of up to 100% on certain goods (in practice, the maximum imposed was a duty of 50%); then, decisively, the Import Duties Act was passed, which placed a 10% tariff on all imported goods apart from those specifically exempted (mainly raw materials, food and Empire primary produce). In April 1932 the nominal rate was doubled to 20% on all items apart from some specifically omitted. By the end of April 1932, only 30% of imports were free of any duty. By the end of 1932 most manufactured and semi-manufactured goods were subject to a 20% tariff with some at a 33⅓% tariff. In 1935, the tariff on iron and steel was increased to 50% to force the European cartel to agree to a quota to be imported into Britain, and the measure was reversed back to the original level of 33⅓% within a few months when agreement was reached. The effect of the tariffs was dramatic. In the 1929-32 slump, output fell in Britain in 1931 by 5.6%. In 1932, Britain's per capita incomes increased by 0.2%, and by 2.5% in 1933, and by 6.3% in 1934. As producers concentrated on supplying the home market, Britain boomed.

 

The IMF report assumes that a depreciation in sterling is sufficient to eliminate the balance of trade deficit, although it does aver that there might be a reversion to WTO rules. It openly assumes that this rebalancing of the economy will be achieved alongside 'restrictions on migration'. In which case, the increase in output, extra exports and/or import substitution, can only be achieved by increased productivity in that the same national population will produce more, and firms will be required to use their existing workforce more efficiently and/or invest in more productive machinery. Despite what the report avers, this is all to the good.

 

What is impossible is for British industry to eliminate the trade deficit with the existing workforce without both a major increase in output (GDP growth) and an increase in productivity and efficiency. If Britain's deficit with the EU is taken to be a ballpark figure of £80billion, then, by definition, British production will increase by £80billion to bridge that deficit. Either we will export £80billion more, or import £80billion less (because we are now buying British goods rather than foreign ones) or, more likely, a combination of both. Those who would now benefit from these extra sales would, in turn, having more to spend, buy more from others, who, in turn, would do likewise. Thus output will increase further (Keynes made much of this multiplier effect).

 

Despite what the IMF says, if the trade deficit is eliminated, then Britain will boom. That is an arithmetical certainty. The government deficit will melt away as increased tax revenues pour in and the Osborne austerity policy will become redundant (it should be noted that Labour prefers to remain in the EU and have Osborne's austerity policy). Britain does not need 'rapid expansion of trade from new trade agreements with other economies'. It is the home market which matters and that market is totally within the domain of the British government. The policy to be pursued on regaining control, is a policy of eliminating Britain's balance of trade deficit. Increased demand from the home market will increase Britain's GDP growth rate.

 

The debate on EU membership is not a debate between free trade economists, engrossed in their computer models and interpretations of 19^th century economic theories to the exclusion of reality and common sense.

 

The whole basis of the dire predictions of a recession is false. Any lost trade with the EU, if there is any, will be more than replaced by increased demand from the home market. The IMF report is both biased and illiterate.