Who Are the Good, the Bad, and the Ugly? Not What Mr. Boris Johnson Thinks

When announcing his “Better Plan for Brexit” in The Daily Telegraph, Former Foreign Secretary Boris Johnson observed “that the one size fits all EU model of regulation—according to the Treasury itself—has probably cost about 7 per cent of GDP, that the EU is a zone of low growth and low innovation, and that the EU institutions themselves are colossal and extravagant wasters of taxpayers’ money.” Given such a bold statement, the British public deserves more clarity on the background of the “7 per cent” figure highlighted by Mr. Johnson. So, where did this figure come from originally?

It happens that it comes from my study on the costs of protection in Europe.[1] This book was written twenty years ago, and the estimated costs were based on data from the second half of the 1990s. A lot has happened since then, therefore Mr. Johnson should have checked whether this figure is still relevant for today. The reality is that not only is this figure outdated, but the evolution of the last twenty years provides robust evidence that what has actually happened is the opposite of Mr. Johnson’s claims.

This “7 per cent” estimate is based on a detailed analysis of the costs of protection in three services: air transport (passengers), telecommunications, and the film industry. These three sectors were selected because of their size, importance for European consumers, and relevance in the political agenda of the “Single Market.” Regarding the film sector, I estimated the cost of protection only on the case of France where massive amounts of subsidies have been granted to its film industry. This was because in the late 1990s there was widespread fear that EU Directives would adopt this French-type protectionist regime for the European audio-visual sector.

First, let’s explore the case of the air transport and telecommunication services. Since the publication of my book, there has been incredible advancement in technology. Furthermore, intensive regulatory competition among EU Member States and other countries to take advantage of this technological progress have generated a plethora of new airlines and telecommunication firms, as well as a massive expansion of their markets—in terms of size, geographical coverage, and varieties of services provided. More recently, competitive pressures brought on by digitization have added their own powerful dynamics to the ways in which these markets operate.

As a result, changes in the air transport and telecommunications sectors have been remarkable. A number of air hubs have sprung up all over the world. For example, Seoul is no longer a far-away final destination it was once. Now it is the busy transportation hub connecting Europe and East Asia. The telecommunication sector has also witnessed similar forces at work, with the prices for traditional services, such as those for roaming charges across the EU, negligible compared to what they were in the 1990s. At the same time, consumers are able to enjoy affordable on-demand services on mobile devices, such as music streaming, that were unimaginable twenty years ago. A case in point is the international success of Korean pop music which has been largely driven by the intensive use of the Internet as a tool of promotion. Digitization has been an important factor in providing countries that were once on the fringe to enter the mainstream.

In the two sectors just mentioned, EU regulatory initiatives have been on the whole a positive force. First, they have offered more growth opportunities in Europe’s markets to firms based in the Member States who were quick to adopt more pro-competitive regulations made possible by new technologies. Second, they have pushed the less innovative Member States to catch up, hence offering another chance to their companies. In short, the EU has contributed toward enlarging markets and deepening competition.

The film industry is a very different story—even more critical of Mr. Johnson’s claims. My fear twenty years ago that France would succeed in its protectionist barriers being imposed on the rest of the EU did not materialize, much to my great relief. In fact, most Member States paid little attention to EU TV quotas—the UK and Germany in particular. However, this is not the whole story. British film policy has not ended up on the right path and this has little to do with EU regulations.

When making his plan for the future of Britain, Mr. Johnson should pay more attention to his country’s film subsidy policy as an example of “extravagant waste of tax-payers’ money.” Since the mid-2000s, the UK grants lavish tax relief to foreign film companies who choose to shoot in the UK or use the services of British studios. Today, these British subsidies are roughly the same size as their French counterpart. Despite their large amount, they have not helped the British film industry, unless one believes that Gravity is truly an example of its success.[2] Indeed, in an ironic twist, the major beneficiaries of this tax relief are de facto the Hollywood Studios, such as Warner Bros or Disney. Unfortunately, this waste of British taxpayers’ money has induced France and Germany to also wrongly follow the same path—thereby engaging in an intra-European race to provide ever larger subsidies. This all contributes toward making the problem worse.[3] One can only lament that the EU policy of curbing subsidies (state aid) has not been strong enough to prevent or limit this vicious circle.

The hasty quote of figures, and very much out of context, is not the best way to show who are “the good, the bad, and the ugly.” Instead, it reveals a reality that is the exact opposite of Mr. Johnson’s dreams.

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[1] Messerlin, Patrick, (2001), Measuring the Costs of Protection in the European Community (page 40). Peterson Institute for International Economics. Washington, DC.

[2] Gravity’s director and main cinematographer are Mexicans, the two main characters are Americans, the music composer is British, the VFX locations were in the UK and Australia, the distributor is the Hollywood major Warner Bros. Pictures, and the Tax relief (subsidies) is mostly British. The British Film Institute lists this film as a production from Mexico, the UK and the US.

[3] Jimmyn Parc and Patrick Messerlin, (2018), ‘In Search of an Effective Trade Policy for the Film Industry: Lessons from Korea,’ Journal of World Trade, 52(5): 745–764.

* This work was supported by Laboratory Program for Korean Studies through the Ministry of Education of Republic of Korea and Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2015-LAB-2250003).”