Sovereign State Economic consequences

Harold Lind

Anyone who is convinced that Britain's membership of the EEC will bring about either a political millennium or a political catastrophe can stop reading now, since he is unlikely to be swayed by arguments about the economic consequences of membership. But let me say to that gallant band which has continued to read, how much I applaud your judgement. You clearly recognise the danger of allowing high-flown political phraseology to blind us to economic reality — a mistake made time and again by successive British governments, which goes a long way to explain our present desperate economic position. I believe that as a political force the EEC is a nullity, and will remain so until one country conquers or cows the remainder, which seems unlikely to happen in the immediate future. At the economic level however, the EEC system favours certain countries, and harms others. What is needed is as dispassionate as possible an assessment of whether the renegotiated terms leave Britain as an economic winner or loser, and if a loser, whether the losses will make a significant impact on Britain's chances of a prosperous future.

The first area for examination, because it can be dismissed relatively quickly, is that concerning tariffs on manufactured goods — an area which is often misleadingly described by EEC supporters as the European market for Britain's exports". The situation here is relatively simple. Inside the EEC, Britain, in theory, would impose no tariffs on goods from other EEC countries, and accept the negotiated common external tariff on goods from the remainder of the world. In practice Britain could impose a tariff or other form of limitation on all imports, as Italy has done, or on some particularly damaging import, as France has just done by banning all wine imports. The cost of unilateral action by a Common Market country would be the devil of a row with its EEC partners, as also with its major trading partners outside the EEC, and the threat of possible retaliation. Outside the Common Market, Britain would in theory be bound by a variety of trading agreements, such as GATT, Commonwealth trading pacts, possibly a renewed EFTA deal, and presumably some kind of agreement with the EEC (what form this agreement might take will be discussed in Ja moment). In practice Britain could impose a general tariff as it did in 1964, or particular import limitations, such as the various 'voluntary' textile agreements it has negotiated with low-cost producers. The cost of such unilateral action would be the devil of a row.with Britain's trading partners and the threat of possible reprisals. So much for those who talk glowing nonsense about the EEC as "a home market of 250 million people".

The only significant change in Britain's trading position in manufactured goods outside the Common Market, as opposed to inside it, would arise if the EEC placed a large tariff on British exports. This is the blackmail which the pro-Marketeers keep using on the British people to try to cow them into voting 'Yes' on the referendum, and it is implicit in the White Paper's threat that leaving the Common Market will lead to higher unemployment and worsening balance of payments. But the blackmailers appear to have overlooked one rather crucial point in their scenario of a spurned Europe blocking out British exports. This is that trade is reciprocal — any tariffs the Europeans put on our exports to them can, and presumably will, be placed on their exports to us. And the major losers in this kind of war would be the ones who were gaining most from the trade which was being strangled.

Since Britain ran a deficit with the other EEC countries in trade in manufactured goods (that is, excluding food and raw materials) of around £1,000,000,000 in 1974, it would scarcely be in the interests of the EEC countries to restrict this bonanza. No high-stakes poker school ever turns away a well-heeled rabbit. Whether it would be in the interests of Britain to have a generally higher tariff level on trade in manufactured goods between themselves and the EEC is a different question, and raises wider issues than can be discussed here. All that needs to be said is that if Britain would gain from such higher tariffs, the renegotiations necessitated by a 'No' vote in the referendum would make it diplomatically easier to impose them.

Among all the breaches of the tariff rules of the EEC, one principle alone has never been breached — no EEC member has ever charged less than the common external tariff on goods imported from outside the Common Market. As far as manufactured goods are concerned the inability to charge less than the common tariff has never worried Britain. The EEC is in general made up of efficient producers of industrial goods, and their overall tariff structure in this area is fairly low. The EEC countries have also proved reasonably generous in permitting the import of manufactured goods from developing countries — considerably more generous than many of us expected them to be, and probably at least as generous as Britain, in the light of its multifarious economic problems, would have been. But the picture for agricultural produce is completely different, and it is to this crucial area — the only one in which the EEC bureaucracy has made a major impact — that we now turn.

The details of the common agricultural policy are almost intolerably complex, and change literally from day to day with changes in agricultural prices all over the world. But the basic workings of the policy are fairly comprehensible, as are the reasons for its existence.

Most of the time since the war, European agriculture has produced relatively high cost food (that is high relative to the world price, as set by countries such as the US, Canada and Australia). At the same time agriculture was a far more important industry in Europe than in Britain — at the beginning of the 'sixties the proportion of the work force in the EEC employed in agriculture was almost six times the British, and although this proportion has since fallen rapidly, it is still three or four times as high, which makes European farmers a very important political group. Because of their numbers, European farmers could not easily have their incomes subsidised directly by the taxpayer, as is the case in Britain, but instead tariffs were used to exclude cheaper foreign produce. There is nothing evil about this process — it is exactly the same as most countries use to protect their workers from the chills of free trade. But protection in this particular area has not been used by Britain for. a long time, for the good reason that it was felt to be inimical to Britain's economic interests. A closer examination of the workings of the CAP will throw more light on the way in which it is likely to affect our economy.

In most discussion of Britain's balance sheet with regard to the CAP, there is a confusion between two sorts of costs imposed on Britain. The first cost is the tariff on foodstuffs (and, for that matter, other goods) imported from outside the EEC. This goes directly to the Community budget, and is a genuine payment across the foreign exchanges. The amount of this with regards to foodstuffs depends on the extent to which a particular country cannot meet all its needs from EEC sourees. As a result of long tradition, British taste is used to demanding a considerable number of products which either are not produced at all or are not produced in sufficient quantity within the EEC.

For instance British bread contains a much higher proportion of hard wheat than most continental bread, and, in the quantity that we use it, this will almost' certainly need large wheat imports from Canada or the United States, all of which will, when the transitional period is over, carry at least a 20 per cent tariff — as we shall see, under some circumstances the tariff barrier may be a great deal higher than this. Similarly across an enormous variety of products, from tinned pineapples to corned beef to tinned salmon, a 20 per cent tariff will be levied. Of course it can be argued that over time, and with the incentive of higher prices, British tastes may change closer to the continental pattern, and this may indeed by true. But to force this kind of change through the price mechanism causes particular hardship on the poor and the old, who are the least adaptable and most affected by the price increases.

The number of consumers' champions in the Labour Party who are also vehement pro-Marketeers helps to confirm my view of the general honesty of politicians as a class. However this is beside the point in trying to assess the actual cost to Britain across the balance of payments of Common Market membership, but it is this magnitude which has been the basic point of 'renegotiation and the subject of the alleged triumph won by the Government. It is to this we now turn.

It was obvious from the start of Britain's negotiations with the EEC that the structure of its imports meant that it was likely to pay heavily towards the community budget. However this question was itself rather ambiguous. The important point was not the gross payment made by Britain to the European budget but the net — in other words how much Britain paid compared with how much it received from the budget. The problem from Britain's point of view is that at present the great preponderance of payments from the community budget goes on agriculture, an area where, understandably, Britain stands to gain relatively little. This means that even if the deal which Mr Wilson won at Dublin was as good as he says it is, and it is not, it would still only be a method whereby Britain's gross payments were roughly in line with its share of the community's income.

In net terms it would still mean that Britain was a considerable loser, since, for instance, France even if it paid more in gross terms would be receiving a great deal more from the budget via the common agricultural policy. This has of course been known for a long while, and is the reason why so much weight was put on a European regional policy, which it was hoped would compensate Britain for its losses on the agricultural policy. Agreement has now been reached on this policy, which, it is true, gives Britain complete freedom to run its own regional affairs — understandably the point which Mr Wilson and the pro-Marketeers are stressing. On the other hand it has been estimated that the net payment which Britain will receive under this agreement is £20 million per year — hardly enough to make much difference to the net losses on Britain's budgetary payments. Even after the agreement that amounts up to £125 million (roughly) will be repaid if Britain's gross payments exceed its share of the community's income, Britain still stands to be a very considerable net loser, especially when it is remembered that the figure of £125 million which, frankly,. and

contrary to Mr Wilson's boasts, is not very great, will appear increasingly unimportant as inflation forces up the costs of the common agricultural policy.

So Britain will undoubtedly be a significant loser on its budgetary payments. It would be difficult at this stage, because of inflation, the possible changes of taste in Britain and the possible changes of agricultural production patterns in Britain and Europe to say exactly how much Britain would pay net into the community budget, but after all payments from the regional fund, social fund and any other fund anyone can think of, it is almost certain that Britain will be a net loser on this area of several hundred million pounds a year.

However, this is only part of the equation. There is a second part which is often confused with it, but should be kept clearly separate. This is the opportunity cost of the tariff wall which helps to keep out agricultural produce from the rest of the world and encourages therefore buying the same produce from Europe. The thing to remember is that money spent in this way does not show up directly as a budgetary payment, but merely results in Britain paying a different price for its butter or beef or wheat than it would if it bought it on the world market unimpeded by the elaborate tariff structure of the EEC. One important difference between this area and the budgetary payments we have been talking about up to now, is that the latter, because of Britdin's import structure and relatively small agricultural industry, is almost bound to be a negative item. The opportunity costs of buying European goods rather than on the world market would only be a cost if world food prices were lower than European ones. If the reverse was the case there would be a positive benefit in buying European food. This qualification is important because for much of the last eighteen months this has been the case in a number of important food areas.

It is difficult to give definite figures on this, since the situation changes from foodstuff to foodstuff and from day to day. For instance during much of last year beef was cheaper inside the EEC than outside it, as a world beef shortage developed. The reverse is now true, hence the growth of the great beef mountain of unsold and unsaleable European beef. Similarly during most of the last two years wheat and maize have been cheaper in Europe than outside it.Thus when the pro-Marketeers saythat Britain's membership of the EEC has up to now done little to raise the price of food they are reasonably correct. Partly due to the fact that Britain is just in the middle of a transitional period for joining the EEC, the situation is considerably more complex than I have yet suggested, but fortunately we do not need to go into the full complexities. All we need to consider is the likely pattern of EEC food prices and world food prices over the foreseeable future, although of course this in itself is a study on which a book could quite easily be written, and which can therefore be treated here only in its broadest outlines.

Perhaps the best point at which to start is to say that the relation between EEC food prices and those in the rest of the world is asymmetrical. If there is ever a period when world prices rise to levels higher than that of the EEC, the latter will very quickly follow. The reason for this is clear. The costs of agriculture in Europe are to a large extent determined by the costs of agricultural imports such as animal feeding stuffs, fertilisers etc and these move largely as the world market price does. At the, same time high world prices for food are a general signal of world inflation, which tends to force up the overall price and wage level for all industries. Under these circumstances the agricultural producers in Europe have enough political power to ensure that they are not left too far behind in the wages scramble, which of course means higher prices for the consumer. Normally the consumer's reaction to higher prices is a restraining factor on the political readiness to give in to agricultural producers, but at a time when world prices are high, this stabilising influence weakens. On the other hand when world prices are well below European levels, there is no mechanism by which prices of agricultural products in Europe can be brought down.

At best the rate of increase in European prices might be slowed down, but as long as the general wage level in a European country continues to increase there is no way in which the farming community can be prevented from exercising their political power to keep their wages more or less in line with those of industrial workers. Of course, as farming increases in efficiency, as it has been doing in most parts of Europe for a number of years, this somewhat eases (he problem, since if the efficiency increase were fast enough it could allow increased wages without raising pAces to consumers. However the one certain point which has been shown over the past decade in Europe is that the efficiency increases are never sufficiently great to permit this happy solution. All that can be achieved is slightly to slow down the rate of price increase.

We can now apply these points to the present situation in food prices in Europe and the rest of the world. The sudden and almost completely unexpected rise in food prices in 1972-1973 brought world prices above those in Europe — an understandable reaction. since of course the European market for agricultural products is far more controlled and less open to random demand influences than that of the world as a whole. This led to great increases in plantings of food and production of live stock all over the world, as food importers tried to become more self-sufficient while food exporters expanded their production to get in on the bonanza. Since there is a variable but considerable lag time between the intention to increase agricultural production and its realisation, high prices were bound to continue for some time. The pro-Europeans then, and indeed still, took this as evidence that "the days of cheap food are gone forever" and that "only within the EEC can we ensure food supplies at a reasonable price". Unfortunately for them the evidence against this thesis is becoming more compelling day by day. Indeed the original subject of many sermons on the necessity of ever increasing prices, namely beef, collapsed in price last year to levels lower than those seen since 1971, and if inflation is taken into account, probably the lowest levels ever.

Prices are now climbing again, but the pro-Europeans can get little comfort from this, since this largely appears to be due to the fact that the Irish are selling their beef into intervention — that is into the beef mountain — rather than exporting it to Britain. This is hardly a triumph for the EEC's ability to keep down food prices.

In one way the pro-Marketeers have been extremely lucky. Although their case on many livestock products has now been shown to be worthless, the price of wheat remained lower in