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February 25, 2005

The Economics of EU Membership.

EUPundit applies his rigorous logic to the question of the economic benefits of the UK’s membership of the European Union. Somewhat amusing really:

International economics - at its simplest understandable level - is trade. What does one country produce that another needs, and vice versa? To understand the position of the UK in the EU one has to ask, what does the UK produce that the other countries of the EU need, and, conversely, what do the other countries of the EU produce that the UK needs. Without such complementary needs, trade would be impossible, since there would be nothing to exchange.


At this point I need to point out that as an economist this man seems to be a pretty good lawyer. Trade is not based on what various countries need (and I’ll leave aside the point that there is nothing special about international trade either. It’s  just an extension over national borders of what we all do all the time anyway....sell what we are efficient at doing and buy what we are not) but on comparative advantage. This was the great breakthrough that Ricardo made, that even if a country can produce both wine and corn, and so can a nation it trades with, it is still in their best interests to specialize and trade. For each place (and if you want to return to national economies, each company or person) should concentrate on what they are least bad at and swap around the results.

What this leads to is the point that has escaped our retired (?) law lecturer. Trade does not depend on complementary needs, it will never be impossible, there are always comparative advantages and trade will therefore always happen...unless, of course, the State decides to fiddle with it.

He’s also missed the point that even under his own logic,  there is no reason why trade should be restricted to EU countries, nor why there should be tariffs in the first place. If trade, even in his limited view, is beneficial, why do we try to curtail it in this manner?

I find it hilarious that he mentions Patrick Minford without actually quoting the result of his recent research, that the UK would be 25 billion quid better off each year outside the EU tariff barriers. Obviously just doesn’t fit in with his worldview.


If UK were not a member of the EU, then of course it would have to pay higher prices for food products imported from the EU than the UK does presently, because the rest of the EU would still be subsidizing the French farmers, who get EU subsidies to produce food for all us. The Member States would then not foot the subsidy bill and give the UK a free ride. Of course, the UK could then subsidize their own farmers, also costly, or import more food from elsewhere overseas, and rely on those markets, which might ultimately also turn out to be costly.

At the same time, since the UK would then be "out" of the club, the UK would have to pay a premium - through tariffs - to provide the services of its service industries to the EU Member States. There would also no longer be free movement of manufactured goods OR capital from the UK to the EU and vice versa, and that would be very expensive for the UK.


Those two paragraphs  verge on the border of lunacy. Firstly leaving CAP would produce an immediate drop in food prices in the UK.  CAP does not, in fact, provide cheap food...one of the methods of subsidy is to fix market prices above their natural level. Lord Pearson has pointed out that this costs a family of four 20 odd pounds a week on their food bill.  Second, the EU provides greater subsidies to exports of food than it does to consumption in the internal market...if the UK were outside CAP we would get greater subsidies, not lesser.  Thirdly, if food from outside the EU is more expensive than food produced inside the EU, why do we have huge tariff barriers to stop those dastardly non-Europeans selling us cheap food?

As I say, as an economist the man’s a pretty good lawyer.

On the subect of the free movement of goods, he has a point. The average EU tariff barrier is 1.4% on all goods and services. Extortionately high on food and agricultural products, pretty low on manufactures and zero on services. Which is precisely why the UK would benefit so much from being outside the EU. We’d get our food at the (lower) world prices, without huge tariffs, we’d get our manufactures without (low) tariffs and be able to export our services, which we already use to pay for these things, in just the same manner that we do now. All without paying into the Brussels budget, adopting insane and idiot laws,  swamping ourselves in regulation , in fact,  the best of all possible worlds.

In his conclusion:


There may be political and other reasons for a certain percentage of the UK population to not desire to be a part of the EU, but economic considerations do not seem to qualify as a grounds for complaint.


No, ’fraid not. The economic arguments are some of the strongest for why the UK should leave the EU. Even in the abscence of the evidence that the entire continent is being run by economic illiterates (
A deregulated market for air travel has created a bigger need for consumer/passenger protection.).

February 25, 2005 in European Union | Permalink

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Comments

A small question:
Should the importers be responsible for paying the costs incurred to check imports for smuggled goods/people? If yes, then we can not have a 0per cent import tariff.

Posted by: Monjo | Feb 25, 2005 1:08:38 PM

Of course not. If you have an 0% import traffic, the only goods being smuggled are goods like hard drugs and child porn that are illegal anyway - so the cost of policing them should fall on the standard police budget.

Posted by: john b | Feb 25, 2005 4:44:20 PM

"tarrif" not "traffic" above.

Posted by: john b | Feb 25, 2005 4:45:14 PM

Your argument assumes that if we left the EU we would automatically abandon agricultural subsidies. This would be political suicide and I'd be surprised if any party - especially one that relied on the countryside for much of its support - brought it in.

Posted by: Jarndyce | Feb 26, 2005 7:18:00 AM

Your argument assumes that if we left the EU we would automatically abandon agricultural subsidies. This would be political suicide and I'd be surprised if any party - especially one that relied on the countryside for much of its support - brought it in.

Tim adds: Well, yes and no. The Minford numbers don’t, those are just to do with trade. The food prices certainly assume that we drop the CAP rules, but not al agricultural subsidies. If we moved from product price support to income support then prices would come down. And political suicide? Maybe, maybe not. New Zealand did it after all.

Posted by: Jarndyce | Feb 26, 2005 7:19:28 AM

I didn't read the Minford stuff, just your analysis. I'm basically pro-EU (and anti-CAP) but even my 10-years-without-use economics training could see that your destruction of the EUPundit's position was spot on. I know NZ are subsidy free, but as far as I know that's the only one. GWB calls free trade a 'moral imperative' with one hand and dishes out 180 bn to agriculture with the other, so 'talking the talk' isn't uncommon. IMHO only an urban-based party would be able to do away with subsidies in the UK; one that relies on the country for its base just won't be able to.

Posted by: Jarndyce | Feb 26, 2005 10:03:30 AM

We could stuff agriculture full of subsidies and have even cheaper food if we wanted to - bearing in mind we're a net contributor to the CAP budget, we could give more subsidies than they get at the moment. Not that I'd recommend it, mind, but the CAP seems to have been designed from the start to be an economic absurdity. My guess is that CAP only exists to provide economics lecturers with a convenient case study on protection and subsidy.

Re EUPundit - he just gets better and better, doesn't he?

Posted by: Blimpish | Feb 26, 2005 12:16:05 PM

Not true John b. People can bring in fuel, tobacco and alcohol products illegally.

Posted by: Monjo | Feb 28, 2005 3:09:27 PM

Ur a tit, and your economic knowledge lack depth, whereas mine is flawless.

Posted by: James Clift | Jun 21, 2005 2:44:54 PM

hello i hate you and your economic knowledge lacks depth, whereas mine is flawless.

Posted by: James Clift | Jun 21, 2005 2:45:32 PM

Why does everyone say that the EU producing cheap food for Africa causes famine Surely it stops famine and getting rid of the CAP would cause more famine aren't the euro sceptics confusing poverty with famine, when they complain the CAP stops Africa selling food to us what is the point in Africa selling food to us if they don't and have any left over and they don't get cheap food from us anymore and they have a famine.
Stop falling for right wing extremist drivel the sort of dogmatists who allowed 4 million Indians to starve to death in the British empire because the free market said the poor should not get food, and the free market dogmatism said the free market will always provide well it won’t why on earth would any country in the world provide food for starving Africans other than subsidies.
Look at the potato famine and the Indian famines, caused by the free market when they couldn't afford our food prices. how does the CAP cause famine how does making too much food cause famine.
The last time we had a free market in Britain in the days of the empire, 1940s India was exporting food while 4 million Indians starved. That is the cruelty of the free market. Why does selling food to a drought stricken country cause famine. Surely we need more food security not less especially with climate change issues.

Why is EU extremism has increased to such levels that anything the EU does is allowed to be insulted without criticism back.
Why are we becoming so ignorant that we forget this mistakes of the past the free market in CAP will not help Africans or Europeans.
Oi forgot everything Britain does it right must remember to keep taking the Tony Blair is always correct pill that all you lot take.

Posted by: Tony Smuc | Jul 11, 2005 1:09:58 AM