Giuseppe Berlingieri, Prof. of Economics at ESSEC Business School and Economist at the OECD, crunches the numbers to tackle the question of whether UK consumers would be better off without EU trade agreements.
Adapted from an original paper published by ESSEC Knowledge
It all happened on a Thursday, back in June 2016. The United Kingdom voted to leave the European Union after a historic referendum in which the people rejected the advice of the main Westminster party leaders and instead took a plunge into the political unknown.
Even though the leave campaign focused on emotional arguments about immigration, there were many (more) reasons that pushed Brexit supporters to believe that such a divorce would benefit the UK. Most of the arguments advanced were not new, including those claiming the EU was a threat to British sovereignty or a body that prevented radical reforms. Indeed, part of the Brexit camp blamed the EU for impeding the signature of new trade agreements with the argument that the UK should be free to negotiate and set the course of its own trade policy.
Economics Professor Giuseppe Berlingieri decided to look closely at the impact of trade agreements implemented by the EU between 1993 and 2013 on consumer welfare. The attempt was to shed light on the question of whether these trade agreements have been beneficial or detrimental to British consumers and whether they would be better off without them.
Barriers: Do they exist to be overcome?
Over the past two decades, there has been a surge in the number of trade agreements and economists have studied the economic consequences of them, focusing on their impact and on variables such as trade flows, productivity, firm exit and entry, employment, and wages. One area that has been neglected by recent research is the impact of trade agreements on consumers.
One central assumption of trade theory is that lowering trade barriers increases welfare. Trade agreements between countries lower trade barriers on imported goods and according to theory, they should provide welfare gains to consumers from increases in variety, access to better quality products, and lower prices. Although large volumes of literature have focused on estimating the overall gains from trade, less is known about the effects of specific trade agreements and the channels through which they increase welfare.
In light of public and political opposition to new agreements such as the EU-Canada Comprehensive Economic and Trade agreement or the Transatlantic Trade and Investment Partnership, it is important to understand how past trade agreements have affected consumers. And for that, the EU provides an interesting case study in that it is the biggest trading block in the world and has been a prolific negotiator of trade agreements over the past two decades. Take the following example observed by Berlingieri and his co-researchers. Suppose we have 21-inch LCD Televisions imported from Korea into the EU12 (i.e. before the 1995 enlargement). And they have the same price as those imported into the EU from Japan. But Japan’s market share in Europe is 20% and Korea’s 10%. As such, the quality estimate for Japan will be higher. If the price of Japanese LCD TVs is higher, we would need to control for the price difference which would reduce the quality estimate for Japan.
Naturally, there’s more than just quality to be taken into account. In order to measure the impact of trade agreements, Berlingieri and his fellow co-workers measured prices, quality and variety and assessed how these changed after the implementation of trade agreements. They then compared the evolution of the three variables for the group of countries that had signed trade agreements with the EU with a group of countries that had not.
The bottom line: do we benefit from EU trade agreements?
Berlingieri and his colleagues observed that the EU’s trade agreements increase quality by around 7% over a five-year period, but that they do not have much impact on prices and variety. These results highlight the importance of taking quality into account. A naive approach, he asserts, that only looks at the impact of trade agreement on non-quality adjusted prices might wrongly conclude that trade agreements have no impact on consumers. At least for the trade agreements implemented by the EU, the entire effect works through changes in quality. As such, once prices for quality are adjusted, it can be observed that trade agreements lowered prices by close to 7%.
Another important takeaway from their research paper: higher-income EU countries (Belgium, Luxembourg, Ireland, the Netherlands, the UK) saw much stronger increases in quality than other EU countries. For lower-income EU countries (Greece, Portugal and Spain) the impact worked almost exclusively through a reduction in prices rather than increased quality.
Their approach does not allow them to identify the exact sources of these quality improvements, but the evidence suggests that it comes from potential mechanisms, with one plausible explanation being that foreign exporters upgrade quality in preparation for serving the EU market after the implementation of trade agreements. Moreover, comparing the consumer price index (CPI) in two different scenarios – EU trade agreements versus no EU trade agreements – allows them to answer the question by how much poorer EU12 consumers would have been in real terms without the agreement-based trade. While not sizeable, it still amounts to substantial savings for EU consumers of around €24 billion per year.
To return to the Brexiteers. We can see that it is not all doom and gloom after all. Thanks to the EU, trade agreements have been beneficial to UK consumers: the flow of imported goods increased together with their quality. It may be true that negotiations and trade agreements handled by the EU are complex. This being said, it is also true that the EU has been a prolific negotiator over the past few decades – and it turns out that the UK has benefited the most out of this trade policy.
Would the UK be better off if it could negotiate its own trade agreements? For that to happen the UK would need to leave the single market, i.e. leave the largest free trade area on its doorstep but also, and this is where the plot thickens, lose access to all trade agreements signed by the EU over past decades – trade agreements that turn out to have been beneficial for UK consumers. On top of that, the choice of the UK leaving the bloc means that it will have to face the problem of rules of origin. Most trade agreements require that 55% of the value of a product be produced locally. For products with complex supply chains such as cars, the UK would find it difficult to prove that they were made in Britain and as a result wouldn’t and couldn’t be covered by new trade agreements signed independently by the UK. What relationship will the UK have with the EU after Brexit? MPs are still deciding whether the UK should stay part of the European Economic Area after it leaves the EU – a similar arrangement to non-EU countries Norway, Iceland, and Liechtenstein. The same question has been on the agenda before – and the MPs voted “no”. Might it be time to utter a little “yes”?
- View Prof. Giuseppe Berlingieri’s academic profile
- Link up with Prof. Berlingieri on LinkedIn
- Discover the degree portfolio at ESSEC Business School
- Read other articles relating to Brexit by CoBS members Warwick Business School
- Download this article and others in the Global Voice magazine special focus on Europe.
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