Oral evidence: Costs and benefits of EU membership for the UK's role in the world,
HC 545
Tuesday 3 November 2015
Ordered by the House of Commons to be published on 3 November 2015
Members present: Crispin Blunt (Chair); Mr John Baron; Ann Clwyd; Mike Gapes; Stephen Gethins; Mr Mark Hendrick; Mr Adam Holloway; Daniel Kawczynski; Yasmin Qureshi; Andrew Rosindell; Nadhim Zahawi
Questions 49-139
Witnesses: Graham Avery, Senior Adviser, European Policy Centre (EU Commission, 1973 to 2006), gave evidence.
Q49 Chair: Welcome to the second evidence session on the costs and benefits of European Union membership for the United Kingdom’s role in the world. Welcome, Mr Avery, and let me apologise for the slightly late start of our public proceedings. Perhaps you will be kind enough to introduce yourself for the record.
Graham Avery: Please excuse me, Mr Chairman, I have had a terrible cough and cold. I will do my best—I must get my cough sweets out, just in case.
I worked first of all for the British Government—I was a very junior member of the team negotiating Britain’s accession to the European Communities—and then I worked for 33 years in the European Commission. I underline that I am speaking here entirely in a personal capacity. I do not pretend any more to represent the European Union or the European Commission as I used to do, though I still have good contacts in Brussels with British friends and people from other European countries. One of the privileges of retirement is that I may now say exactly what I really think, and I shall do so. Sometimes I will criticise the European Union.
I have submitted a few pages of evidence in which I have concentrated on the question: what would British foreign policy look like if we left the European Union? One of the weaknesses of the present stage of the referendum debate is that serious examination of the practical consequences of leaving is not very often done. I am glad that your Committee is examining that.
I have not tried to examine in any detail the economic and financial questions raised by Brexit—you have other experts who will talk to you about that—but let me simply say that although I think these economic, financial and trade questions are important, they are not the most important questions concerning British membership of the European Union. Too much of the present debate focuses on a profit-and-loss account of British membership, but as you know, in the field of foreign policy it is difficult, if not impossible, to make such a profit-and-loss analysis—how to put a monetary value on security, stability and influence.
Anyway, one thing is clear to me: the main reason why countries join the European Union is to obtain a seat at the table and a vote in the decision-making process. That is why we applied to join the European Communities 50 years ago, not just for trade and prosperity. By the same argument, the most important thing that we will lose if we leave the European Union is our place at the table.
Chair: Mr Avery, thank you very much for that introduction. I had hoped that for this session you would be joined by Sir Nigel Sheinwald, who had a very distinguished career in the Foreign Office representing the United Kingdom. Sadly, he has something else to do today and we will not get the benefit of his advice to the Committee, but I am sure that you will more than make up for that. You probably share a perspective with Sir Nigel, but his own perspective we will not enjoy. I invite Andrew Rosindell to lead off with our questions.
Q50 Andrew Rosindell: Good afternoon, Mr Avery. In our previous evidence session, witnesses said that the UK had the best of both worlds in foreign policy, because it can act through the EU or unilaterally. Do you agree with that?
Graham Avery: Well, I think it is a slight exaggeration to say that Britain can act unilaterally. When we do that, it is often less effective, but it is certainly the case that the main characteristic of the European Union’s foreign and security policy is that it is decided by unanimity. Therefore, you can block anything that you do not want to go along with and you can also take independent action from time to time. I think that our partners in the European Union have always greatly appreciated the professionalism of British Ministers and British diplomats and their contribution to the foreign policy that the European Union is trying to create. Indeed, I think that would be one of the things they would most miss if we left. They look to us, and have looked to us in the past, for a lead in the field of European foreign policy.
Q51 Andrew Rosindell: How significant, in your view, are the benefits of UK diplomacy working through the EU compared with our country’s ability to do what we have traditionally done and decide our own diplomatic strategy? How can it be argued that it is better to pause decision making in that respect than do what we have traditionally done as a country?
Graham Avery: If I felt that the decision making of the European Union in the field of foreign policy—including in the broader fields of development policy, enlargement and neighbourhood policy; it is quite a complex area—had constrained Britain from maximising its influence in the world, I would be more sceptical, but I do not think it has. I was never in the British Foreign Office, so I can speak more independently about Britain’s diplomats. I want to say in front of this Committee that some of the people I have most admired in my professional career in Europe have been British diplomats. I do not think the British public understands how well served it is by British diplomacy.
I put a question to one or two of my friends who have served as ambassadors in European countries. I asked them to characterise what British foreign policy would be outside the European Union. One of them gave me a very pithy reply of two words and said, “Less weight,” meaning that the European Union system is a multiplier—an amplifier—of Britain’s foreign policy objectives. Another friend put it in a rather more special way. He talked about “unconnected buttons”. He explained that we would continue to press the bilateral buttons as a non-member of the European Union to promote our objectives, as we do now, but we would find quite often that they were not connected to anything, because our usual partners—the Europeans and the Americans—and our adversaries—the Russians—would regard us as less relevant because we were not part of the European group.
Q52 Andrew Rosindell: Are you suggesting, Mr Avery, that if we left the European Union, our allies in Europe would no longer wish to engage with us on matters of foreign policy and that we would be excluded? Would we not find another sensible mechanism to work together and co-operate on things of common interest?
Graham Avery: I would like to say that I have always tried to avoid over-dramatising the effects of Britain leaving the European Union in both the economic and foreign policy fields. We should not exaggerate these things. Plainly, Britain would survive and would be a successful small state outside the European Union. Your question is about the allies.
Q53 Andrew Rosindell: When you say “small state”, what is your definition of that?
Chair: I think Mr Avery said “smaller”.
Andrew Rosindell: No, “small state” is what Mr Avery said. How do you define a small state?
Graham Avery: It is a small state in comparison with the size of the United States, China or, indeed, the 500 million of the European Union.
Q54 Andrew Rosindell: But we are talking about a European context, so would Britain suddenly be a small state because we were not in the EU?
Graham Avery: It is a big state in the European Union, but in world terms, it is not such a big state.
You were asking about the allies. First, on the European allies, why should they pay attention? They certainly would pay attention. I think I said in the written evidence I submitted that one of the areas in which Britain could expect to have an agreement with the European Union would be co-operation on foreign policy. They would very much want to do that with us, but the important difference in that context would be that we would not be at the table when the other Europeans decided what to do. As far as the Americans are concerned, I have to be quite blunt: I think they would simply pay less attention to what London had to say if we were no longer in the European Union. They would fly direct to Berlin and Paris, and pass over London more often.
Q55 Andrew Rosindell: Do you believe, therefore, that, as some have told us, the UK has become less influential in EU foreign policy making in the past five years?
Graham Avery: Yes. I think—
Andrew Rosindell: You think we have become less influential; but we are in at the moment.
Graham Avery: It is difficult to measure this, but the announcement of the referendum and the referendum process has given the others the impression—rightly or wrongly—that Britain is disengaging itself. It is isolating itself from the mainstream discussion by threatening to leave.
I think the way in which the situation has been handled concerning Ukraine can give us a foretaste of what might happen if we do leave. In the case of Ukraine, as you know, Putin has been talking to Merkel and Hollande without the presence of a British Prime Minister. There are various reasons for that, but that seems to me an example of where the European partners have become a little bit disenchanted with Britain’s plans in the European Union.
Q56 Andrew Rosindell: To finish the question, at what point in recent British history did we stop being such a main player and so influential in the world in terms of international relations and co-operation? It seems like you are saying that the EU is now where it is at and Britain alone would not have anything like the sway that we have traditionally had.
Graham Avery: I do not think I could put a date on it. All I would say is that for centuries it has been the nightmare of British foreign policy makers for there to exist a European grouping of states in which we did not have a sufficient voice.
Q57 Mr Holloway: Good afternoon. You said that people would just fly over London. That is a pretty miserable analogy. The day after 9/11, one aircraft flew across the Atlantic and I think I am right in saying that it contained the heads of our three intelligence services. We are the only people with tier 1 special forces with the Americans and there are the surveillance assets. I think we are a bigger investor in the US compared with the rest of Europe put together and we still have our huge trade relationship. How would the Americans’ feeling be different if we were outside the EU?
Graham Avery: You have raised the complicated question of the interrelationship between trade negotiations and foreign policy in broader terms. I think I will leave it to the other experts to talk about the trade part of it, but one thing is quite clear to me: successive American Administrations for quite a number of years have wanted the Europeans to take more collective responsibility for affairs in the European neighbourhood, and if Britain is not part of this collective action, I think it would be less relevant to Washington.
Q58 Mike Gapes: If we were to leave the European Union, clearly there would be a need to re-orientate the Foreign and Commonwealth Office—and, presumably, other Government Departments. What level of resources would we need to dedicate first to establishing and formulating and then to maintaining policy towards the European Union compared with now?
Graham Avery: As I tried to explain in my written evidence, I think that the British Government would have to put a lot of effort into lobbying the other Europeans, both in Brussels and bilaterally, to persuade them to follow the British point of view. I do not say this is automatic. At the moment, they do not necessarily follow our point of view, but by being around the decision-making table, we have a better chance of persuading them. Outside the European Union, I think the Foreign Office would certainly have to reverse the cuts that have been made recently in bilateral embassies—resources of bilateral embassies—in the other 27 member states of the European Union, because it would be important to lobby them as well as the institutions in Brussels.
Q59 Mike Gapes: Presumably, as the Prime Minister pointed out on his recent visit to Iceland, if we were to be outside, we would potentially be in the same position as Norway is today. We would have to not have any representation within the structures, but we might still want decisions to be favourable to us—a form of integration without representation. As a country that wished to have access, at what level and at what time would we have that access if we were not a member state? Would we be consulted at the earliest stages in foreign policy discussions in Brussels, or would we be a bystander?
Graham Avery: As I tried to explain in my written evidence, my guess—my prediction—is that what the EU would offer to Britain leaving the European Union would be membership of the European economic area. That is sometimes called the Norwegian model, but of course it also includes Iceland and Lichtenstein. The European economic area, which at one stage I managed when I was in Brussels, has the merit, from the point of view of the other member states, of existing for, and having been tested over, more than 20 years. It functions very well. It is a very trouble-free relationship.
Q60 Mike Gapes: But they are small countries aren’t they? The populations of the countries in the European economic area are minute compared with ours.
Graham Avery: I am just telling you what I think the European Union will offer, not what a British Government would say. The EEA model is ready and available. I do not think that the European Union would be prepared to offer something better. It might give it another name. To simplify, in order for Britain to have the best possible access to the single market, which I suppose is what we would want, the other Europeans would insist that Britain respect the EU rules, relevant to the single market, which of course includes the free movement of workers.
When it comes to consultation, I do not think they would offer anything better than what happens under the EEA, which is that there is a committee in which new European acquis is discussed, and in the lead-up to decisions by the Council the other members of the EEA can make representations. But, in the last resort, they do not have a vote and they have to accept what has been decided.
Q61 Mike Gapes: You have referred already to the need to reinforce diplomatic resources bilaterally with existing EU states to beef up our diplomatic presence if we were outside the European Union. How would that relate to our presence in the institutional framework of the European Union? Would there be a cost of reinforcing our presence in Brussels and other countries? If that was the case, how would you assess that that would be dealt with? Would it be offset by savings from reducing our contribution to the EU budget or would it be a net cost to us?
Graham Avery: In the context of an EEA arrangement, or an EEA-type arrangement, as I explain in my written evidence, I am quite sure that the other Europeans would insist that Britain make some kind of budgetary contribution. That could be quite a tough area of negotiation; but the Norwegians do it, so why shouldn’t the Brits?
On the question of how Britain would organise itself to make representations in Brussels, I do not think that that is terribly complicated because member states of the European Union have offices headed by ambassadors that are called permanent representations, because technically the ambassador is a permanent representative. Non-member states have things they call delegations, headed by ambassadors. On the face of it, I do not think that Britain would need to increase its representation in Brussels—there are quite enough expert people there. The problem is who would listen to them and at what stage in the decision-making process.
Q62 Mike Gapes: May I take you back to your answer to Adam Holloway, when he asked you about the United States? President Obama and other members of his Administration have been very clear that they would prefer the United Kingdom to remain in the European Union. If the British people voted to leave the European Union, would that lead to damage to the relationship between the UK and the US?
Graham Avery: You use the word “damage”, but I would just say “diminished”. It would be less relevant for Washington. It seems to me that the long-standing relationship between London and Washington would continue to be extremely important for London, but it would be a great deal less important for Washington.
Q63 Mike Gapes: What could a British Government do to reassure the United States in those circumstances? Could it mitigate or offset that diminishing of influence?
Graham Avery: I don’t see how.
Q64 Mike Gapes: You think that, whatever we did, the mere fact that we had left the European Union would mean a diminishing of our relationship with the US.
Graham Avery: If the value to Washington that I am talking about is that Britain has a voice in EU decisions and we no longer have that voice, I don’t think we could anymore pretend to do it.
Q65 Mike Gapes: Even though we would still be a key ally of the US through NATO and still have bilateral relationships, it would still damage or diminish that relationship.
Graham Avery: Yes.
Q66 Mike Gapes: And what about the US’s relations with the rest of the EU. How would they be affected by the UK withdrawal?
Graham Avery: Gosh, well I think you perhaps ought to ask the Americans that. Plainly, they would intensify relations with Paris and Berlin, and perhaps Rome. They would focus on the others. I don’t think there’s much more to be said about it than that. Why should they bother to try to ask London to influence EU decisions when London no longer has a vote?
Q67 Mike Gapes: So they wouldn’t be telephoning London so often.
Graham Avery: Yes.
Q68 Chair: Mr Avery, may I ask you about the effect on the European Union of a British exit, particularly on the institutions in which you worked? We had evidence last week from Charles Grant that the view in Paris is that the problem with the Commission is that “it is so bloody British these days”. He continued: “If we are talking about economic policy, the EU Commission is very much driven by British interests and philosophy—that is how it is perceived in many parts of the EU.”
Graham Avery: And they speak English, too—even the French!
Q69 Chair: If we left, would the Commission actually be able to work rather more with the grain of our continental partners? They might then not find it such an Anglo-Saxon institution. What would be the institutional effect on the EU institutions? Would it be a disaster for the rest of the institutions, or would they actually find it rather easier to get on and do business without the bloody British getting in the way and applying a brake the entire time to the effective integration of policy?
Graham Avery: I would like to make one small correction, which is that if we are talking about foreign policy, that is not handled by the European Commission, but by the European External Action Service.
Q70 Chair: It is about the whole effect on the institutions of the British no longer being there.
Graham Avery: As far as the European Commission is concerned, I think the beneficial effect of having Brits working there for many years wouldn’t wear off for quite a long time, and they might still hire British experts to advise them. But the present situation is already quite alarming, in that there is a very low percentage of British staff in the European Commission; manifestly, that would go down almost to zero.
As for foreign policy and how it was conducted by the other member states—
Q71 Chair: My question is not really about foreign policy; it is about the coherence of the Commission as the driving force of the Union, and about whether the Commission would actually work better without us on the Council and without this Anglo-Saxon influence. There wouldn’t be this large fly in the European ointment constantly asking difficult questions and being instinctively hostile to integration and the institutions working together in a way that is seen as more communautaire than our traditional position.
Graham Avery: I don’t think Britain leaving the European Union would make the institutions more coherent. It is quite correct arithmetically to say that there would be 27 members instead of 28, but I don’t think it would make it more coherent. There are other problems of coherence within the European Commission which I could give you a long lecture about, but I don’t think they are related to that. I think that Britain’s departure would be greatly regretted, and they would still want to talk from time to time to the United Kingdom, but—excuse me if I repeat myself—in the last resort, Britain would not be there when the decisions are taken.
Q72 Chair: No, I am driving at something else. Would there be a collective sigh of relief among those who are pursuing—
Graham Avery: No.
Q73 Chair: Not overall; within a rather narrower group of people anxious to pursue an effectively federal project with co-operation among the nation states within the institutions of the European Union, which would become easier without the British presence. Are you saying that that effect would not be there at all?
Graham Avery: I don’t understand.
Q74 Chair: I understand what you are saying, and we have certainly begun to uncover evidence that Brexit would be very much regretted by nearly all our partners, but would there be some for whom delivering a greater degree of fiscal union and co-ordination to support the currency and the whole European project would be advanced by the British leaving?
Graham Avery: No, I don’t see it that way. There may be some; perhaps I could even think of some French who might say, “Thank God we’ve got rid of these Brits, because they always wanted to demolish the system,” but I think they are rather in a minority. To put it in a slightly more philosophical way, perhaps you could argue that the European Union could do better with fewer members, but in my personal opinion, the European Union could do less. It would be less influential and efficient in its policies.
Q75 Mr Hendrick: Mr Avery, China’s President Xi appeared to indicate after his state visit that China wants the UK to remain a part of the European Union. If the United Kingdom left the EU, how might its bilateral relationship with China change?
Graham Avery: First of all, I have talked a certain amount about the foreign policy implications of Britain leaving. I think that the foreign policy implications of Britain leaving would be more problematic in what you might call the European theatre—the regions surrounding Europe—and perhaps in some other areas of the world where there are failed states and problems in development. In the case of a country like China, I don’t think it would make much difference in terms of foreign policy. However, in terms of trade, it is quite clear that for negotiation purposes, the European market would remain much the most attractive target for the Chinese, for negotiations and for investment, if the British were on their own outside.
Q76 Mr Hendrick: Do you think it might affect China’s willingness to invest in Britain, because Britain has much easier and quicker access to the single market than it would have if the UK left the European Union?
Graham Avery: Yes, that seems to be one of the reasons that motivate foreign investors: we have direct and unfettered access to the single market, and however good the access we had to the single market as non-members, it would not be entirely unfettered.
Q77 Mr Hendrick: Do you think Britain’s political, and particularly its economic, clout might be affected by the fact that without the same access to the single market, we would be less influential in decisions made by the European Union?
Graham Avery: Yes, I think that would be the case.
Q78 Daniel Kawczynski: You alluded to Russia earlier in your statement, and gave us the impression that they are negotiating with Merkel and Hollande rather than the United Kingdom. I would dispute that as being a result of the structures of the European Union; that may be to do with our own Prime Minister’s priorities. But may I press you on how you perceive our relationship with Russia would change if we were to pull out of the European Union?
Graham Avery: First, in the context of Ukraine, the instrument that we British have decided to use—and so have the other European partners—is not the military instrument; it is the economic instrument of sanctions. It is not clear to me whether, with handling Russia, either this Parliament or the Parliaments of the other member states are ready to invest military action in a confrontation with Russia. So let us imagine that the way in which we would handle Russia would be by economic means. Then it is a question, to which I do not have a clear answer, whether, outside the European Union, Britain would take a tougher line with the Russians or a weaker line than the other European partners. There is a certain scale of attitudes within the European Union to Russia in which this country is rather on the hostile side—not quite as hostile as some of the smaller member states, but you know what I mean.
Personally, I think the most likely scenario, if we talk about the use of economic levers to deal with Russia, is that we British will want to do exactly the same thing as the other Europeans and, indeed, as the Americans, so we would probably spend our diplomatic efforts trying to persuade the other Europeans and the Americans to adopt the same kind of sanctions and levers as us.
Q79 Daniel Kawczynski: I understand your perspective about Britain’s approach, but if we had a Government in the future that was far more interested in promoting bilateral trade with Russia and a rapprochement with Russia, and we were outside the European Union, surely it would be easier for us to engage in those sorts of discussions rather than being constrained by the uniform approach of the European Union.
Graham Avery: Well, let’s hope that the scenario you mention will come about—that it will be possible to relax relations with Russia. But personally I don’t see a scenario where, faced with the kind of aggression that we have seen in Crimea and Ukraine, Britain would want to take a softer line than the other European partners.
Q80 Daniel Kawczynski: Moving on to the neighbourhood policy, if the United Kingdom were to leave the EU and consequently withdraw from the neighbourhood policy, how would pulling out of this accord change the way the UK engages with countries on Europe’s eastern and southern borders?
Graham Avery: The countries in question are Ukraine, Moldova, Belarus, Georgia and around there. I guess that Britain would wish to promote to the maximum, stability and prosperity in these countries. This seems to me a given of British foreign policy now, or in the future scenario we are talking about. So the question is how to do that.
Sitting suspended for a Division in the House.
On resuming—
Q81 Chair: Let us resume the meeting. Mr Avery, if you were halfway through an answer and can remember where you were 15 minutes ago, please resume; otherwise I will go back to Mr Kawczynski.
Graham Avery: Mr Kawczynski asked me about British foreign policy in relation to the eastern European countries, and I was trying to say that I don’t think that the aims of British policy would be significantly different if we were outside the European Union. The question is the means by which we could affect those countries. I have to say that in the case of the so-called neighbourhood countries, and also the countries which are in the European Union’s accession process, such as the western Balkans, the EU offers financial and economic instruments, methods of co-operation and levers of political influence, that Britain could not match on its own.
Q82 Daniel Kawczynski: My last question to you, Mr Avery, regards the strategy of enlargement. If the United Kingdom was to pull out of this structure, would that in your estimation affect the way in which the European Union tries to continue to increase its membership?
Graham Avery: I was quite heavily involved in the enlargement process, and I want to make the point that the enlargement of the European Union has taken place systematically, not through some sort of imperialistic ambition from Brussels or the policy makers, but because the neighbours knocked on the door. So it has been a reactive process, and I think it will continue to be so.
It is perfectly correct that Her Majesty’s Government, ever since 1973, have been among the most enthusiastic for successive enlargements of the European Union, for motives that are sometimes questioned among the European partners. In the case of the western Balkans, I don’t think that Britain leaving the European Union would in any way diminish the attraction of the European Union for them, or the EU’s commitment to trying to bring peace and stability to that part of the world.
Turkey is a different kind of question. It is a very big country. It will soon overtake Germany in population size and would be—already is—the biggest state that ever applied to join the European Union. I think that with Britain in or outside the European Union, the prospects of Turkish membership are a very long way off, and I wouldn’t put too much money on it. In the meantime, however, the European Union, with us as a member, is strongly engaged with Turkey in trying to bring European values and European democracy to a reformed Turkey. The possibility of Turkish membership can still be a very powerful lever of influence to get the Turks to behave in the way we want them to.
Daniel Kawczynski: Thank you.
Q83 Stephen Gethins: Before I move on to a more substantive question on another issue, I will continue on Mr Kawczynski’s line of questioning. In terms of enlargement, how do you think Brexit is viewed, especially in the western Balkans, which realistically might be the next set of countries to come into the European Union?
Graham Avery: I don’t think they would pay a lot of attention to it. It is not their No. 1, No. 2 or even No. 3 domestic or foreign policy problem. I think it would be correct to say that since Britain has often been a good friend to that part of the world, they would regret it, but I don’t think it would inflect in any significant way their attitude or that of the European institutions.
Q84 Stephen Gethins: So it would be no great shakes in Belgrade or Podgorica or elsewhere?
Graham Avery: As I have said in my written evidence, I think Britain as a non-member of the European Union would wish, like the Norwegians do, to provide financial aid and technical assistance in Serbia and the other countries. We want things to come right in that part of the world, whether or not we are in the European Union. In the case of the western Balkans, we would be helping and assisting European foreign policy, not deciding it.
Q85 Chair: Would we really be that interested in the western Balkans if we were not in the European Union?
Graham Avery: Britain, like the international community in general, is committed to trying to find ways to bring peace, prosperity and security to that part of the world. Many reports have been written. Thousands of trees have been felled about the problems of the western Balkans, but no one has come up with a convincing alternative to moving them along the path to European Union membership and the taking on of European values, European governance and so on. I find it difficult to believe that Britain would not want to support that. How else can we give them prosperity and stability?
Q86 Chair: I want to investigate here. We made an enormous commitment in Bosnia in the 1990s during the Bosnian crisis. We were leading players in trying to resolve that, and we provided Paddy Ashdown as the EU’s Commissioner in the region. If we weren’t in the European Union, we would surely have ceded that responsibility to the European Union, wouldn’t we? There wouldn’t be that sense of British interest, because we wouldn’t be part of it. It would be someone else’s responsibility to pile all that effort in there.
Graham Avery: No, I don’t agree with you, Mr Chairman. I don’t think it is in the British tradition to consider stability and prosperity in that part of Europe as somebody else’s responsibility. This is a commitment of the international community, of which we are and will remain a part, to try to do the best thing for the people in that area. How would we do it other than by helping them along the European road?
Q87 Chair: It would be a bit like mucking around in Costa Rica if the Americans were engaged there, wouldn’t it? We would be looking to the leadership of the United States if it was in their back yard. If we were not in the European Union and there were problems on the European Union’s southern border, the level of our interest in it and our role in it would be much diminished, wouldn’t it?
Graham Avery: As I said, other non-EU members, such as Norway, consider it worth their investing budgetary contributions and technical assistance. I wouldn’t like to think that the Norwegians are more altruistic than we are. I am absolutely sure that Britain would still want to ensure the best outcome for that region of Europe, whether we are in or out. For me, it is quite clear that the instruments of the European Union are the best ones to use. If we were not a member, we would want to assist and follow the European Union without directing it.
Q88 Stephen Gethins: Let me move on to paragraph 14 of your written evidence. I don’t want to go through another experience of a referendum—the independence referendum in Scotland—but you argue that the difficulties in Scotland joining the EU were exaggerated. I am interested in your point that, should the UK leave the European Union and Ireland and even Scotland remain in the European Union, the United Kingdom would therefore rely on Dublin and Edinburgh for more of its influence, in terms of European Union or broader foreign policy influence.
Graham Avery: I have given this slightly provocative paper—
Stephen Gethins: Some might say.
Graham Avery: Not just to provoke you, Mr Gethins, but because we have to try to think in concrete terms about how British foreign policy would actually be conducted if we were non-members. As we examined before, there would have to be an effort in Brussels at lobbying the EU institutions. I believe we would have to step up our bilateral efforts, which means that we would have to lobby Dublin and, in a certain scenario, Edinburgh, to persuade those member states to follow the line we want in Brussels decisions.
Q89 Stephen Gethins: Right. So one might say provocatively that Scotland’s remaining part of the European Union could be beneficial to what remains of the United Kingdom?
Graham Avery: Mr Chairman, I think he is trying to provoke me.
Q90 Chair: I am delighted to see that it was going to work. What do you think the United Kingdom’s standing would be if we achieve Brexit and the vote in Scotland is to stay in the European Union? Some would then say that that would trigger the opportunity for the Scottish nationalists to put a robust case to repeat the referendum, because the circumstances in our own Union would have changed. If that led to Scotland’s withdrawing from the United Kingdom, what do you think would be the effect on the rest of the United Kingdom’s global standing?
Graham Avery: In a scenario where Scotland voted for independence and to stay in the European Union? Gosh.
Chair: Would the rest of the world notice?
Graham Avery: I think it’s plain, as we discovered in the Scottish referendum debate, that the standing, and indeed the size, of the rest of the United Kingdom would be diminished. I do not think it would be dramatically diminished, because how many are you—5 million Scots?
Stephen Gethins: Five and a half million, yes.
Graham Avery: So it would not make a dramatic difference, but it would have been seen, and would be seen, as a—what’s the word?—shameful event for the United Kingdom.
Chair: Shameful?
Graham Avery: If the United Kingdom split up. The other member states did not want to see that, because it might have had certain implications for the rest of the EU members.
To respond belatedly to Mr Gethins, it is pretty clear that in this scenario of Scotland being an independent state and in the European Union, Scotland would take a similar point of view to the United Kingdom on a very large number of issues. I think that Scotland in many ways would be a very sympathetic and like-minded member of the European Union.
Chair: Mr Avery, you have now provoked Mr Gethins.
Q91 Stephen Gethins: Not at all. My final question, to move away from the Scottish example—
Daniel Kawczynski: Keep on it.
Stephen Gethins: I would gladly keep on it, but I suspect that we might be here for some time.
I deliberately mentioned Dublin as well in that regard, because it is an interesting analogy. You mentioned that Scotland could be a friend to the United Kingdom and would have very similar foreign policy goals. Is that the case with Ireland? That is one of the reasons why I mentioned Dublin. Has that been the case with Ireland? Has Ireland been a good friend? Will it continue to be a good friend, notwithstanding that it might be worried about Brexit?
Graham Avery: The case of Ireland is a bit different, first of all for historical reasons—there is a history with Ireland that is not quite finished. Secondly, it has somewhat different economic interests, with a large agricultural sector and so on, but the general point is valid—the Irish support less regulation and so on.
Q92 Chair: Mr Avery, thank you very much indeed for your evidence. I think we managed to provoke you sufficiently to describe Mr Gethins’s party’s principal policy as “shameful”—
Stephen Gethins: I am not sure that—
Chair: Sorry, I am just being—I am extremely grateful for your evidence, Mr Avery.
Graham Avery: May I make one final remark, Mr Chairman? It is often said that the founding project of the European Communities in the last century was to bring peace within Europe. We succeeded in the sense that military action between one or other member state of the European Union is not on the radar—it is inconceivable—and, indeed, the enlargement 10 years ago has extended this to a wider part of Europe. So I often say that if that part of the project was successful in the last century, what is the project for this century? For me it is very simple: the project of the European Union should be to promote the interests of its citizens and to project their values in the wider world by means of collective action, which can be much more effective if we do things together than if we do things individually. In that collective action I want our country to play a leading role.
Chair: I think we got that general gist, Mr Avery. Thank you very much indeed. I will now invite our next two witnesses to come forward.
Examination of Witnesses
Witnesses: Professor Patrick Minford, Cardiff University, and Dr Stephen Woolcock, London School of Economics and Political Science, gave evidence.
Q93 Chair: Gentlemen, welcome. Thank you very much for joining us. Perhaps you will introduce yourselves for the record.
Professor Minford: I am Professor of Applied Economics at Cardiff. Thank you for inviting me. I have written quite extensively on the European Union, including the first edition of a book in 2005 called “Should Britain leave the EU?” I am about to bring out the second edition next month.
Chair: Perhaps roughly connected with why you are here. We are drawing on your expertise.
Nadhim Zahawi: What is the title this time?
Professor Minford: It is the same—it is a second edition.
Dr Woolcock: My name is Steve Woolcock from the London School of Economics. Thanks very much for the invitation; it is an honour to be here. I teach international political economy and international trade at the London School of Economics. We submitted a joint written submission. My bit was the trade part of that—that is my area of expertise. I will obviously try and cover the other aspects in the written submission.
Chair: Many thanks indeed. Perhaps I can ask Mark Hendrick to begin our questions.
Q94 Mr Hendrick: Good afternoon, gentlemen. Could I start by asking you both how effective you feel the EU is at leveraging its economic weight in pursuit of its foreign policy goals?
Dr Woolcock: I will have a go at that one. I think you have to define foreign policy goals in terms of whether the aim is to maintain an open trade and investment system, for example. Is it to maintain stability in international financial markets? Is it to promote sustainable development in neighbouring countries—so, in Africa and the Middle East? Those all have security implications and foreign policy implications. Perhaps climate change as well is an area where there are security interests at stake.
So how effective is the EU in promoting these policies? It varies. In terms of maintaining an open trade and investment system, I think it is effective. In terms of financial markets, as we have seen, it is not so effective, although you have to bear in mind that most of the competence issues in financial regulation still rest with the member states. In terms of promoting sustainable development in neighbouring countries, it is effective, but it could be more effective—and I think probably more effective in the trade field than in terms of the provision of aid. In climate change, I think the EU provided leadership in the whole debate on climate change at a time when no one else was providing much leadership.
Those are very general points. The other area, I suppose, where trade may support or provide leverage in foreign policy is in terms of—if I can put it this way—providing the bedrock for bilateral relations with other countries. That brings us on to the whole question of bilateral relations between the EU or the UK and third countries, and the whole question of trade and investment agreements. The way I would characterise it there is that in the academic debate we talk about club models; so in other words, multilateralism has been rather superseded by what is called a club model—in other words, this is TTIP, TPP, EU-Japan, and RCEP in Asia. Those are all clubs, and it is the big clubs that will tend to influence outcomes.
Professor Minford: I don’t really study foreign policy, so I haven’t really got much to say about this. Issues of foreign policy in the UK-EU relationship, which is what Mr Avery was talking about, are different. There, I think that the key thing for us is to remain friendly with our allies, and they will still be allies. The economic interests and political interests will still be the same, so I don’t really see many implications of leaving for any of these foreign policy areas, and that is the bit I would focus on, really. They key thing for us is our relationship with the EU and what sort of relationship we want. Having defined that relationship appropriately, I think we can then go on to rebuild the same alliances and the same common interest policies as we have now.
As for the broader policies of the EU in the foreign policy area, I haven’t got any comment.
Q95 Mr Hendrick: Can I ask you both a question as a follow-up to that? Clearly, Britain as a country has many aims in terms of trade, economic stability and helping with international development and climate change. Do you feel that Britain as part of the EU and adding to the weight of the EU would be more effective in pursuing those goals, or would a UK outside the European Union be equally effective, and could we do both while remaining inside the European Union, so that we would get the benefit of both worlds? That is a slightly leading question, but I would like to hear a response from each of you.
Dr Woolcock: As I suggested, the EU’s effectiveness in different policy areas varies and I think that, in terms of maintaining an open trading system, for example, the UK would have less influence in maintaining an open trading system. My argument is that the larger clubs shape the rules of the game. The UK can still play a part, but it would be a smaller part because it has a relatively small economy, and that was discussed earlier. That is in trade and investment.
In finance, the UK still has quite significant leverage in the IMF, the G20, the Financial Stability Board, the various technical standards-making bodies, the Basel Committee on Banking Supervision, and so on. The UK sits on all those, so we could have more leverage and have in the past.
On climate change, I think we would have less impact because, again, if you take the analogy of the size of the market, the UK does not really pollute very much, so it is not so crucial in international climate change negotiations by itself.
On trade and development, the UK has made quite a significant contribution, maintaining 0.7% of GDP for foreign aid, but if that is not linked in with what is happening in trade, you have issues of coherence, so it may not be as effective.
Professor Minford: I realise this is the foreign policy committee, so you are very interested in foreign policy, but I have to say that the UK’s main national interest is to have a thriving economy and to control its own affairs. The reason this whole issue of the EU and a Brexit has arisen is not because it is just a question of combining and sitting at the same table and having foreign policy influence that is at stake; it is how far we control our own affairs when being a member of the EU, which is committed to becoming a much more powerful state in its own right and has qualified majority voting which controls many of our own decisions. Mr Delors said in 1988 to the Trades Union Congress that it won’t be long before 80% of British laws are decided in Brussels. That is what has thrust this issue into the centre of the stage. Besides that, the question of whether we have more or less influence on joint foreign policy making with the EU is fairly small potatoes.
Really, the question from the point of view of our national interest is that if we are outside the EU for other reasons, we will still be there as allies and with common interests with all these other players. No doubt we will co-ordinate with them just as we do today. The seat at the table won’t be there, but there will be other tables at which we will be sitting.
Q96 Mr Hendrick: You think we will have the benefits of the club without being members of the club.
Professor Minford: I don’t think the benefits of the club; I think foreign policy has always been conducted by self-governing nations to maintain and pursue their own interests. I come from a foreign policy household. I was trained to believe that foreign policy was about pursuing the national interest for your own citizens as best you could. Obviously the question then is whether you want to be governed by someone else or be a common ally in some alliance with them. Of course, the answer to that question is what lies at the heart of the matter. To answer it we have to answer the question, “Do we want to be part of the EU or not?”
Q97 Mr Hendrick: Well, we have some common interests.
Professor Minford: Of course we have shared common interests, but that is not what the whole issue is about. When it comes to foreign policy, we will always have shared common interests with all our allies—the EU, the US and many other players on the international scene.
Q98 Nadhim Zahawi: I hear what you say, professor, but we have previously taken evidence on trade deals, for example. Having the ability to collectively negotiate being a much more powerful economic unit delivers a better deal than, say, a deal that Iceland can cut with China or that a smaller country would be able to cut. Is that affecting our economic wellbeing?
Professor Minford: Rather like foreign policy, this is another completely irrelevant issue.
Q99 Nadhim Zahawi: It is not irrelevant because—
Professor Minford: Let me explain why it is irrelevant. You asked me the point—
Q100 Nadhim Zahawi: Sure, but can you stick to economic wellbeing?
Professor Minford: I am exactly going to talk about why what you just said is totally irrelevant. The fact is, if we are an independent self-governing nation, we will join countries like Japan, Singapore or the US in the world trading community. We will be a small nation of slightly over 30 million workers in a world market of 7 billion people. One of the things that comes out of applied trade is that when you are in that position, trade agreements are totally irrelevant to you because you are part of a global market and you are a very small player in that market. This is known—you may not have come across it before—as the importance of being unimportant.
If you are unimportant and very small, you cannot influence the price of the goods that you trade. You are part of a huge market of 7 billion people, right? And we are only 30-plus million. Therefore, as part of the world trading environment, we will not have any influence on the prices of the goods we sell. Our job is to be competitive and to produce good goods and good services, and, on the whole, we do. Thanks to the liberalisation of our economy since the ’80s, we now have a very competitive economy. We are now a nation of entrepreneurs and shopkeepers.
Q101 Nadhim Zahawi: Professor, I get that. I have sold across the world.
Professor Minford: I want to just make the point that you do not seem to have understood, which is that these trade agreements are totally irrelevant. They will not make any difference to anything. We do not need any trade agreements. We need to get out of a protectionist trade arrangement—namely, the EU customs union. Everyone says how wonderful it is to be in the EU but they forget that it is a highly protectionist organisation, not just in agriculture, but also in manufacturing. It is infinitely preferable to be in the global market under conditions of free trade. That will give us huge gains. The trade issue, far from being a great negative in terms of leaving the EU, is a huge positive. People think that it is terribly negative because you cannot negotiate these trade agreements, but they have totally misunderstood the irrelevance of these trade agreements to our situation in the global market.
Q102 Nadhim Zahawi: I get your point. So why do countries sign bilateral trade agreements?
Professor Minford: Well, often large countries sign bilateral trade agreements. The EU is currently negotiating a huge trade agreement with the US. The fact is that people sign trade agreements when they are very large because they are large and have monopoly power. If you are small, you do not have monopoly power. You have no incentive to sign the trade agreement. I am not saying that there will not then be trade agreements, but some people say that if we leave the EU, we will have to rush around and sign a lot of trade agreements. I do not agree. We may sign the odd trade agreement if it is particularly significant—I think we will sign an agreement with the EU, mainly because the EU needs to sign an agreement with us because it sells us so much stuff at inflated prices.
The great irony is that it can only possibly be in your interest to join a customs union if you sell people a lot of stuff—much more than you buy from them—within the union. We are in the opposite situation. The EU will have a strong incentive to negotiate a trade agreement with us. That will probably be the main trade agreement that we will negotiate after we leave. It will be an agreement to give them some access to our market.
Q103 Nadhim Zahawi: So we do need to sign trade agreements.
Professor Minford: They need us to sign a trade agreement. I have costed us leaving the EU on the basis that we sign no agreements. I think as a matter of practical life, there will be some trade agreements that will be signed.
Q104 Nadhim Zahawi: For what reason?
Professor Minford: Because of vested interests, Mr Zahawi. The reason for trade agreements is due to individual vested interests. They are not due to the national interest. I was talking about the national interest.
Q105 Nadhim Zahawi: Whose vested interests?
Professor Minford: If you look at the EU, a lot of people are queuing up to say that we should not leave the EU because they have a vested interest in EU protectionism.
Q106 Nadhim Zahawi: In whose vested interest is it to sign trade agreements for the United Kingdom outside the EU? That is my question. Can you answer that question for me?
Professor Minford: I am trying to answer it, but you don’t seem to understand the answer. The point is that the vested interests for us staying in the EU, inside the biggest trade agreement we have signed in the last 40 years—
Q107 Nadhim Zahawi: With respect, that is not what I asked you. You said that you signed trade agreements outside the EU. We have now moved outside the EU. We are outside and you said that we signed trade agreements because of vested interest if we stand alone. In whose vested interests do we sign those trade agreements? Please answer that question. I may be stupid, but just answer that one.
Professor Minford: You didn’t listen to my answer. I said when we leave the EU—
Chair: Professor, I think he is persuadable—
Professor Minford: Let me try to answer it again. When we leave the EU—we are in the world now where we have left the EU—there will be a lot of very upset vested interests who were gaining from being in the EU.
Q108 Nadhim Zahawi: Like who?
Professor Minford: The car industry, for example—
Q109 Nadhim Zahawi: How much do they invest in the UK?
Professor Minford—some parts of the City. Any industry that currently gets protection from the customs union will be a vested interest and be very upset when we leave. Therefore, we are very likely to have to be in the process of negotiation because those vested interests will say, “We want transition agreements,” and the EU itself, which sells us stuff in those industries in a big way, will also want an agreement.
Quite unlike what many people say, which is that we are going to be so badly off outside the EU we will have to sign trade agreements in the national interest, I say the very opposite. We would be better off where we didn’t sign any trade agreements, but lots of people will be pressing us to sign agreements—both the vested interests that are losing and the EU itself.
Q110 Nadhim Zahawi: Just to be clear, the vested interests, for example, if we are outside the EU, would be like the automotive sector in my constituency in the midlands, which is now producing a car every 20 seconds. It would be harmed in some way and will therefore want us to sign trade agreements. That is correct, right?
Professor Minford: Yes, when you abandon protectionist agreements, the people who are protected don’t like it; they get damaged. In practical terms, I think it is inevitable that we will sign various agreements to give transitional protection to various industries. A lot won’t change immediately after the—
Q111 Nadhim Zahawi: Because they matter to the UK and the UK’s economic wellbeing.
Professor Minford: Whenever one changes policy environments, some people lose. We have a tradition in this country of trying to compensate losers, so as to get consensus. I think that tradition will prevail in this case. I think we will try to negotiate transitional arrangements that help these people to move to a more dynamic future.
Q112 Nadhim Zahawi: Like the automotive sector?
Professor Minford: Including the automotive sector—parts of the automotive sector. Some parts don’t need it, by the way.
Q113 Chair: Professor Minford, I understood that the usual purpose of trade agreements would be to reduce the barriers you might face between two independent small entities within a trading system who have a mutual interest in trading—that you would enter into agreements in order to try and reduce the barriers between the two entities, rather than manage protection within them. The usual purpose of trade agreements is to try and open trade from where we, as a market of 30 million labourers, or whatever, would then be seen to protect ourselves from competition outside, because the vested interests inside the United Kingdom would be working to protect our internal markets.
Professor Minford: If we are talking about two small nations—would they sign a trade agreement? From the point of view of each of their national interests, they should each, from their own internal point of view, abandon their tariffs because it’s self-harming. Because the reason for those tariffs is some internal vested interest that has asked for protection. So sometimes you get a situation where two small countries come together and find that they can trade one vested interest off and therefore improve their own situation.
Q114 Chair: That is about as far as my economics goes; I can just about get there. In terms of the politics and the facts of trade agreements, it is impossible to get to that perfect situation and then just abandon the barriers completely. The trade agreements are a route to reducing those barriers progressively. They begin to address the politics of protectionism within countries, so they are routes to begin to sweep the barriers away. I buy the free trade argument. I think no barriers is best of all, but they exist.
Professor Minford: Yes. The point here is that if the UK was to leave the EU and go to free trade—just abandon the EU’s tariff and simply unilaterally go to free trade, which would be its best policy barring vested interests, which would not necessarily like that—there would be no point in it engaging in any trade agreements with anybody, because it would already have reduced all its own self-harm from its own tariff barriers. If you are a small nation, a tariff barrier has the effect of self-harming you. You create inefficiencies in your own economy. You don’t affect anybody else. You raise the prices at which other people sell to your consumers by putting a tariff between them and the world market, but when you abandon the tariff you lower the price to your consumers and make your consumers and your economy better off.
If we had already gone to free trade, there would be no point in any further trade agreements. In that sense, they are irrelevant. But of course you are quite right. In the real world we probably wouldn’t go to complete free trade, and therefore anything we could do to persuade our own vested interests to abandon certain sorts of protection would be good.
Q115 Chair: May I ask Dr Woolcock to comment on the discussion we have just had?
Dr Woolcock: Professor Minford has given you the economist’s position, which is perfectly legitimate. This is a liberal free trade position, which is in line with British ideology—the history of British liberalism.
Q116 Chair: At least for 150 years, anyway.
Dr Woolcock: From the 19th century. Unfortunately, trade agreements don’t quite work that way today. Most trade agreements are based on reciprocal commitments between parties, meaning that your negotiating leverage in an agreement depends on the size of your market and how open your market is. So if you have a large market that is relatively closed, like China’s, you have significant negotiating leverage. If you have a relatively small market, the UK is still an important economy, but it is very open, so that means you have very limited negotiating leverage. The EU has a bit more, but it is also fairly open.
On why countries sign agreements, I have sat through many discussions on the Transatlantic Trade and Investment Partnership with NGOs. Why do we negotiate TTIP? The reason is that with tariffs down to very low levels—2% or 3%—it is about non-tariff barriers. So 80% of the benefits from TTIP—by analogy, probably more in the case of the EU-Japan agreement, because of the nature of the Japanese market, and the TPP agreement between the US and Asia—will come from removing non-tariff barriers to trade. This gets to what Professor Minford is talking about in terms of regulation. But these agreements are really geared to facilitating trade. You have standards in terms of health, safety, environment and food standards that differ between the economies. What the parties to these agreements are trying to do now is to facilitate trade by negotiating how you can find equivalence between the different standards. This is why trade negotiations are taking place today. That is the main focus of the effort.
There are always vested interests in trade, and some of the major trade agreements that have been negotiated are, because they are between large economies, very effective in removing some of those vested interests. If you look at the liberalisation commitments under tariffs, we are talking about 98% or 99% of tariff lines being liberalised. Even in agriculture, there has been significant liberalisation in some of these major agreements. It is perhaps unfortunate in terms of the multilateral system, but the agreements have taken over from what was previously multilateralism.
One final point is that the agreements are only specific binding agreements. You can still trade, liberalise and open your economy, but you do not have any guarantee that you will not face discrimination in the Chinese or Japanese market.
Chair: Nadhim, do you have an immediate follow-up question?
Nadhim Zahawi: Dr Woolcock answered it; it was about one tariff.
Q117 Andrew Rosindell: We would all like to see a day when we do not need to have trade agreements and when we have a proper free market globally, but that is not happening now. Surely the main point is that by not being in the EU, the United Kingdom could have whatever trade deals it chose to have with other countries around the world, harnessing the Commonwealth, the English-speaking world and the global market, which includes the future markets of our country. Being in the EU restricts us from having the freedom to do just that. With the trade deficit we have with the EU, the only loser if the EU tried not to trade with us or put barriers up to trade would surely be the EU itself. I don’t know whether Professor Minford agrees with me, but we have the ace card and the upper hand in this.
Professor Minford: Yes. Let me come back to that, because the key point is that by leaving the EU, we abandon a customs union. My old mentor, Harry Johnson, fought in the 1975 referendum campaign. He tried to explain to the British people that it was not a great idea to join a customs union because it is highly protectionist, but he got nowhere. He did not get his point across. The issue has come back now, 40 years later, and is central to the whole thing.
What people are saying is that if we leave the EU it will be disastrous, because we will lose leverage, blah, blah, blah. The truth, however, is that we will move, if we have any sense, to a liberalised economy fundamentally under free trade. It is not in our interests not to have free trade, for the reasons that Mr Rosindell has pointed out. It pays us to be a global player under free trade. It pays us to sell our goods to other people in the world market and to take their goods at world prices. That will lower our cost of living.
We have done a simulation of leaving the EU, and the first thing that comes out is an 8% drop in the cost of living on day one, because of the move from EU prices to world prices. That is really worth having and means that we are then in a world in which we do not actually—we can sign lots of extra trade agreements.
We will definitely be forced by the EU for the reason you gave—that they sell so much to us—to have some sort of agreement with them. The last thing they will want us to do is to walk away without some sort of so-called free trade agreement with the EU, because they are so dependent on our market, relative to our dependence on theirs. They are selling us stuff at inflated prices on a massive scale compared with what we sell to them on inflated prices within the customs union. There will definitely be that trade agreement with them, because they will push for it, as you rightly said.
Otherwise, as I have argued already, we do not need to do trade agreements with anyone else. Frankly, we can take the world price. If we do a trade agreement with, say, New Zealand, it will not affect the world price we get; it will affect what New Zealanders have to pay for our goods. We sell the stuff at the world price and New Zealand consumers, if New Zealand puts a tariff on it, have to pay more. It is really a problem for them, not for us. I am sure we will do trade agreements; I am not doctrinally against trade agreements. I am merely saying that they are not necessary for our wellbeing in terms of leaving the EU. They would be a nice add-on for people like the New Zealanders who, if we could do something with them, would help their own consumers.
Q118 Yasmin Qureshi: Currently, we are in the EU, so we are where we are. At this point with what we have got, to what extent do the EU’s current priorities for international trade reflect the UK’s national interest? Do they act as a multiplier for our economic influence in the world? Or are they effectively putting constraint on us? I am talking about the current situation in the EU.
Professor Minford: We have done that calculation.
Chair: Professor, let’s hear the more traditional view.
Professor Minford: I will let my colleague Dr Woolcock speak.
Dr Woolcock: The UK has been part of the customs union and has formed part of the single European market. You have this framework agreement. Over the past 15 to 20 years, UK preferences have been more or less aligned with the rest of the EU. In that sense, the EU reflects UK preferences. I think the UK has been fairly effective in shaping EU trade policy. It has been one of the key players in making it more liberal, helped by enlargement to include some other countries. You could make the case that on agriculture the UK may have been a bit more liberal, but broadly speaking I think it is in line with UK interests.
Q119 Yasmin Qureshi: Taking away the economics of it, how influential has the UK been in determining priorities for the EU’s economic diplomacy?
Dr Woolcock: It has had a major impact. The UK has been very effective in shaping the detailed debates within the Trade Policy Committee within the Commission, and shaping views and opinions within Europe. It has been one of the main protagonists in promoting an open trading system that some people would like to see, supported by other countries. I’m not sure I can say any more than that.
Q120 Yasmin Qureshi: Those who favour us staying in the EU often say that if you are in the EU you are able to influence what is going on. From what you have just said, it seems that up to now Britain being in the EU has been able to have a positive effect, and effect changes in the EU.
Dr Woolcock: Yes, I think so. In your previous session you asked quite a lot of questions about what might happen in future, which are quite difficult to answer. I would make the case that the UK will have more influence being a member of this bigger club. The rules of trade and investment are set through negotiations.
For example, one of the core elements in TTIP is regulatory co-operation between the US and the EU. If the UK is not sitting at the table, part of the EU, in those negotiations about how you reconcile different domestic regulations, the UK will not have any influence on those. Okay, the UK can be a price taker but it will have to adopt the regulations that have been agreed between the EU and the US. It can still trade but it will not have any more influence on the outcome. It would have much more influence if it were within the EU.
Professor Minford: May I come back on that? I love this fact that we have this great influence on the EU and make it a much better place. It may be true; it may make it more liberal. The question you originally asked was, what is the cost for the UK in this arrangement? That is the thing that worries me. I have already answered Mr Rosindell by saying that the customs union itself is extremely expensive to us. The regulations that are increasingly put on us in labour and financial markets are onerous to us, cost us serious resources and hold back growth. Many of those regulations are not in line with free market principles.
When you add all these things up, it may be that we have a force for liberalism inside a fundamentally illiberal EU political and economic philosophy, but the costs to us are very large. It may be great for us to contribute to the wider world interest by making the EU a more liberal place, encouraging trade agreements and so on and so forth, but being in this particular club comes at a huge cost to us. The club itself wants to have more and more control over what we do, and its control doesn’t seem to be in our interests.
Q121 Mr Hendrick: What, in your view, would be the optimal framework for the UK’s relationship with the EU, if it chooses to withdraw its membership? I am looking particularly at the so-called Swiss or Norwegian models, which people have talked about.
Dr Woolcock: An optimum model, if the UK withdrew?
Mr Hendrick: Yes, if there is such a thing.
Dr Woolcock: Let me try to build a scenario from my previous point. The point I was trying to make is that it is not that the EU is imposing regulations on the UK. There are health, safety and environmental standards that all countries have to comply with. If the UK left, we would still have to comply with those standards, and we would have to show compliance with those standards if we wanted to export to the US or any other market. Incidentally, one estimate of the non-tariff barrier costs—not the tariff-equivalent costs—of entering the US market is 20%. If the UK didn’t negotiate a bilateral agreement with the US, its exporters would be at a 20% disadvantage to the EU if the EU was able to negotiate an equivalence agreement with the US, in terms of market access. Sorry, that was a bit technical.
Q122 Mr Hendrick: I am looking particularly at the relationship between the UK and the EU, rather than the US. I will come to TTIP later.
Dr Woolcock: The point I am trying to make is that the UK would still have to adopt the same standards—either EU standards or some other international standards. The optimal way would be to keep the European standards, because we have at least had some role in influencing them.
Mr Hendrick: Exactly.
Dr Woolcock: If you are looking at other options, the Swiss option is a bit closer than the Norwegian one. Switzerland negotiated a bilateral agreement with China. That is the scenario, if you like. The UK could negotiate a bilateral agreement with China. You need to look at the details, though, and it calls for some caution, because the Swiss negotiation with China was about not really much more than existing World Trade Organisation commitments on services under the GATT agreement. It didn’t get any more than the existing WTO commitments. It got nothing on investment, public procurement and the non-tariff barrier measures. In other words, all it got was a tariff agreement and some provisions on intellectual property. That is an illustration. Maybe the UK would have more leverage, but it is difficult to say. You can’t really predict what the UK would be able to get outside the EU, but if you look at what the Swiss got, it wasn’t very much.
Professor Minford: May I have a quick go on this one? I have already answered it in terms of your question, Mr Blunt, but I will answer it again. Dr Woolcock is a great expert on trade agreements, and that’s wonderful, but, as I said earlier, they are totally irrelevant to the UK in this respect, because he is talking about trade agreements between large blocks—large monopoly suppliers. My answer to you, Mr Hendrick, if you want to hear the answer—maybe you don’t want to hear it.
Q123 Mr Hendrick: I think you have forgotten the question.
Professor Minford: You asked me what we should do if we left the EU, but you don’t want to hear the answer.
Mr Hendrick: No, I asked you to look at the Swiss model and the Norwegian model—how they are small countries trading with the EU.
Professor Minford: Yes, I was going to answer that question. I was going to say that we don’t want either model. I did answer this in response to Mr Rosindell. The model we want is the model of a standard, self-governing country. I do not know why everyone seems to assume that we have to become a small dependency of the EU even when we leave the EU.
Q124 Mr Hendrick: We’ve got that, but we are also trying to say that in order for the Norwegians and the Swiss to trade with the EU, they have to comply—certainly in Norway’s case—with the acquis communautaire and many other rules and regulations. As a former MEP, I have worked on directives and rules that must be complied with in order for a country to trade. Are you saying that the EU is suddenly going to drop all the requirements to comply with certain standards on food quality, air standards and rules on how services operate just because Britain chooses to leave the EU and behave differently to other nations such as Norway or Switzerland?
Professor Minford: About 9% of our GDP is exported to the EU. On that 9%, yes, we would obviously comply with all the standards, because every exporter has to comply with all the standards of the country it exports to. So yes, but that is 9% of our GDP. If you asked me whether we have to have all the regulations of the EU in order to sell that 9% of our GDP to the EU, I would say no, because the other 91% of GDP will be free of those regulations and will operate according to the regulations that we, as a self-governing country, think are good for our industries. There is absolutely no reason for them to be the same as the EU’s—none at all. If the EU insists on certain things it wants in those exports—standards and whatever they might be—then obviously if you export to the EU, you have to do it. By the way, our trade with the EU is contracting as a share of our total trade, whereas our trade with everywhere else is expanding.
Q125 Mr Hendrick: It is still significant.
Professor Minford: Yes, it is 9% of GDP. Are you telling me that the other 91% of the economy has to comply with everything in the EU in order for us to export that little 9%? I say to you: where does that come from?
126 Mr Hendrick: Dr Woolcock?
Dr Woolcock: On all exports, if you are exporting to other markets, you have to comply with the standards that are expected in the other markets, so it would apply to all exports.
Q127 Mr Hendrick: But in some cases it is mutual recognition rather than harmonisation.
Dr Woolcock: Yes, but that still has to be negotiated. You could certainly say that yes, okay, the UK standards on health, the environment and safety could be lower. If that is what the voters want, you could do that.
Chair: Mark, do you want to move on to the TTIP question?
Q128 Mr Hendrick: Related to that, how significant will TTIP be for the political relationship between the US and the EU? How would the UK fare outside an EU-TTIP arrangement?
Chair: I think that is probably for Dr Woolcock.
Dr Woolcock: In terms of political relations, TTIP is partly a political agreement—it is driven by political motivations—to consolidate transatlantic relations at a time when the US is negotiating the Trans-Pacific Partnership in order to consolidate US relations with the Asia-Pacific region. Were the UK not part of TTIP, it might have some sort of political impact or knock-on effect, although I am not quite sure what.
I would look more at the economic impact, which would be that UK exporters into the US market and UK financial service exports into the US market would face a disadvantage compared with the rest of the EU. It won’t happen overnight, because TTIP is going to take some time, but if it is successful, exporters from another part of the EU would have a preference—that is what these agreements are—over the UK, so the UK would then have to negotiate an equivalent agreement in order to match those preferences. As we have heard from the US negotiator, the US would no doubt negotiate with the UK, but other, bigger markets may take priority.
Q129 Mr Hendrick: If we were outside the EU, presumably the residual regulations and standards we would be left with would be the ones we had when we were in the EU, and we would have to negotiate on a similar basis to if we were within the EU anyway. What do you believe are the prospects for a successful conclusion of TTIP?
Dr Woolcock: It will be concluded because there is too much political capital invested in it, but my own view is that it is going to take some time for TTIP to really be fully implemented. If you look back at EU-US efforts at deepening market integration, they have come in fits and starts, so it will take some time before it has any real impact.
Q130 Mr Hendrick: If the UK were excluded from TTIP, do you think it would risk falling behind the transatlantic curve on setting standards and regulations?
Dr Woolcock: Yes. The approach to dealing with these trade-facilitating regulations will be shaped by the EU and the US in this regulatory co-operation, so the UK will have no option but to follow—either export according to US standards or export according to EU standards.
Q131 Mr Hendrick: And those standards are very important, as we understand from the EU context, in that they are often aimed at promoting health and safety—for example, the crash testing of cars sets standards in terms of ensuring passengers have a good chance of being safe when there is an accident. In a free market world scenario, what sort of a global market do you think might exist if we did not have the sorts of standard being set through TTIP, between the US and the EU?
Dr Woolcock: Well, this gets to the whole globalisation debate and whether globalisation is a race to the bottom in terms of standards—health and safety, environmental and social standards. The case for TTIP and these other agreements is that they set an international level below which there will not be pressure. In other words, the downward pressure resulting from globalisation and competition between economies would be stabilised on the basis of what the Americans call a democratically agreed set of social standards.
Q132 Mr Hendrick: If we had our own trade agreement with, let’s say, China, outside the EU, how effective do you think we would be in ensuring that goods and services bought from China—such as children’s toys—that were not covered by the sorts of standard we would like to see were safe and reliable?
Dr Woolcock: The UK could still prohibit the importation of unsafe products, according to whatever the UK standards were. If you had health and safety standards for children’s toys, you could still prohibit imports.
Q133 Mr Hendrick: But we would not necessarily have the economic power to exert the influence needed for things to happen politically within China, to change the way their market operates.
Dr Woolcock: On the particular case you mention, yes, because the Chinese have done this anyway—they have shifted into accepting those kinds of international standard. In an area where China has not yet quite adopted international standards, it would probably be much harder to get them to shift and change. One such area is Government procurement. I think it would be very difficult for the UK to get any kind of fair treatment in the Chinese procurement market outside the EU.
Q134 Chair: Finally, may I bounce my own thesis off both of you? The United Kingdom’s unique selling points, as it were, are things such as legal services, financial services, education services, culture and media, and perhaps pharmaceuticals. Those are all things with a global market, rather than a regional one. Is it possible, if we are outside the European Union, for us to pursue a much more aggressive and specialised agenda around those industries and services, in terms of trying to get entry to other markets? I suspect that Professor Minford would say that we don’t need to.
Professor Minford: May I come back on this, seeing as Dr Woolcock has told us a lot about why we need to have all these trade agreements? Economically, they are pretty small potatoes. The main thing is to have products that people want, as you rightly said, such as pharmaceuticals. You gave a good list of industries in which we are very competitive. People are falling over themselves to buy our products. That’s what you want in a global market. You need to be a highly competitive economy producing a lot of interesting products, so your 30-odd million people get good prices in world markets because they have got good products.
The key thing for me is that we should be part of that global market. We should be able to compete in it because we are buying inputs from a global market, not from a protected EU market that is excessively expensive. By joining the global market and getting out of the customs union, we make ourselves much more competitive. We are then indeed in line with our comparative advantage, which is to produce the things you listed: high-tech, skilled labour-intensive products. That is where our comparative advantage lies. At the moment, what is happening—this is the big cost to us from all this trade protectionism that comes from the EU baggage—is that a lot of our industries are protected inside the EU, so our comparative advantage is distorted into industries that we are not very good at. That is the key thing. In a global market, we can focus on the industries that we are good at and make sure they are highly competitive.
As I said earlier, we really don’t need trade agreements. I am not against them. I am perfectly happy for other people to have trade agreements, and there may be minor things that we need them for. But, of course, the US is our oldest trading partner. We already have massive trade with the US in the products you are talking about. The EU has much less trade with the US than we do. If you include the whole service area, we are already deeply integrated into the US market. For us, TTIP is a minor extra element in the story.
Dr Woolcock: I don’t disagree. Of course we need goods and services, and we need to be able to produce them competitively to be able to sell them. I am not saying that free trade agreements are the only thing.
Q135 Chair: Perhaps I can illustrate with the example of trying to sell insurance services into India. Are we better off trying to negotiate entry for British insurance companies with the heft of the European Union, would we be better on our own, or are we able to survive by not even attempting to broker agreements with India but hoping they will buy British products because they happen to be the best?
Dr Woolcock: As I said, trade agreements only ensure that there is not unfair treatment of UK or EU suppliers. It doesn’t mean that the UK insurance industry can’t go to industry and try to sell services to the Indian Government. If the insurance sector is regulated in India in such a way that precludes foreign investment, that’s where the benefit of a trade agreement comes in. The EU would have more leverage in trying to get a negotiation with India in order to get India to agree to foreign investment in the insurance sector.
Q136 Chair: How does the United Kingdom get past the vested interests of the Indian insurance industry? Let’s presume it’s woefully inefficient—I don’t know whether it is or it isn’t—but let’s say it’s far less efficient than our own. However, they can buy Indian politicians in order to deliver the regulations in order to protect them.
Professor Minford: This is a really good example of what I have been trying to say all evening. It is a matter of massive indifference to us whether Indians inflict harm on themselves by refusing to buy our insurance services or not. Our insurance industry is world-competitive. It is not infinitely large—it has a definite, limited size—but it is in a nation of 30-odd million workers. If the Indian economy decides not to allow British insurance, plenty of other people will be ready to buy it. It’s a global market. The insurance industry in the City of London is the world’s biggest market and it deals with every part of the world. It is not dependent on any one country to sign a trade agreement with us.
This illustrates perfectly my point that the insurance industry is going to survive fine, whether or not India wants to liberalise. Obviously, we would all prefer it if India liberalised; it is good for India. From our point of view, the big issues are do we want to be part of a global market with free trade, or do we want to be inside the EU, inside a customs union, with highly restrictive policies and extremely tough and excessively interventionist regulative policies? That is the big issue that completely dominates all this detail of trade agreements once we leave this organisation.
Q137 Mr Baron: May I return us to the World Trade Organisation and the concern expressed by those who worry about leaving the EU that punitive tariffs could be imposed on the UK by the EU? We know it is not in their interests to do so. We run a large trade deficit with the EU and I doubt whether they would be allowed to do so. Article 50 of the Lisbon treaty makes some sort of arrangement post-exit. But there is a concern out there—not a widespread concern but a concern all the same—that the EU could retaliate in some form with massive punitive tariffs. May I take your view on that?
My understanding is that the WTO says that most favoured nation status means that you keep the tariffs as they are at the level of other countries. With the States, for example, it is more like—
Professor Minford: That would be my understanding, but Dr Woolcock is an expert on this.
Q138 Mr Baron: I would be interested in your view: in the worst-case scenario, what could the EU do to us?
Dr Woolcock: No, the UK is a member of the WTO and the EU is a member of the WTO. The EU would have to offer MFN tariffs to the UK. There is no tariff, of course, with the EU at the moment. As far as MFN tariffs are higher, there may be an increase in tariff.
Q139 Mr Baron: Right, but can you give us a scale, if you don’t mind?
Dr Woolcock: It depends on the products. EU tariffs on agriculture products can go up to 14%; shoes 14%; cars 8%. The MFN tariff would be significant in some sectors. More importantly, tariffs are coming down. You could negotiate an agreement, as I was saying earlier. Most preferential trade agreements have negotiated away most tariffs.
Non-tariff costs will come in. If the UK is not part of the EU—not part of the customs union—if it has different tariffs, it has to prove origin status. If you are exporting from the UK to the rest of the EU, you have to prove originated status. The costs of proving that can be 5% of production costs. You have border control costs, which can be 3% or 4% of production costs. So there are significant trade costs that are probably more important than the tariff issues.
There are some other issues that would need to be considered. The UK could simply keep the existing tariff, but then there is no point in leaving the EU. There is, for example, a Government procurement agreement that has been negotiated within the WTO. That would have to be renegotiated. It is based on bilateral commitments between the EU and the US, and the EU and Japan, and the other signatories to the Government procurement agreement. The UK would have to renegotiate that and try to get the equivalent access that the EU has. For example, sub-federal level procurement in the US is a big issue and that may be difficult to negotiate.
Professor Minford: Well, I have costed the whole business of leaving the EU on the assumption that we have no agreements with anybody, and the EU just applies to us the MFN tariff and any non-tariff barriers it wants. Of course, what then happens is that we leave and become a normal country outside the EU, which is something that many countries are, and we then face world prices. That is immensely better than being inside the EU’s wonderful tariff wall, because that protects too many bad industries, compared with what we would have if we were out there in the global market, selling the things we are good at. Our comparative advantage would be enormously liberating for us. It would stop us thinking of ourselves as a regional player, which we are not, and would give us the mindset of a global player facing world markets. We are a small global player, so all we’ve got to do is produce things that are good that we can sell for high prices to anybody around the world. As I said, the world is a very big marketplace, so if somebody wants to put extra tariffs on us, again, that makes no difference to my calculations.
As you rightly said and as I believe, the EU will want to sign an agreement with us, because that is in its interests, because they sell us so much stuff at inflated prices, net. They will want to. The boot will be entirely on the other foot to what most people say. Instead of us going cap in hand to the EU, saying, “Please sign an agreement with us,” they will come cap in hand to us, saying, “Please sign an agreement with us, because we want to sell to you.”
Chair: Professor, on that note, we do not want to keep you here as long as Hillary Clinton was kept by the Congressional Committee, so I thank you both very much indeed. It is always stimulating to have your evidence, Professor, and Dr Woolcock, thank you very much. Your expertise is very much appreciated, so thank you so much from all of us to both of you.
Oral evidence: Costs and benefits of EU membership for the UK's role in the world, HC 545 24