So, will hard Brexit 'turbo-charge' our economy? Part I

If most of the latest report by Patrick Minford, of Economists for free Trade, on Britain’s future prospects post-Brexit sounds too good to be true, it’s because it probably is. It is worth going through it with a fine toothed comb – something the media is clearly not going to do – to really bring out all its flaws and inconsistencies. I will do so in a series of three blogs starting today.

One thing that Patrick Minford gets right is that trade boosts our living standards and the economy overall. But the main premise of the report – that  EU membership is damaging to trade – is deeply flawed, ignoring as it does  decades of evidence on how trade actually works, and on the benefits of trade agreements.

Back in the 1950s, a theoretical debate about the benefits of trade agreements was begun by Jacob Viner. He argued that in signing a trade agreement, two countries might trade more with each other, but they also might trade less with other countries. The increase in trade between members of a trade agreement is called trade creation, the trade that is diverted from non-members is called trade diversion.

While theory is important, it needs to be taken to the evidence. This is as true of economics as it is of physics or biology or medicine or any other scientific discipline. Since the 1950s, we have been able to observe decades of data on the trade flows of countries belonging to trade agreements, including the EEA single market. A number of prominent academics have devoted their careers to analysing this data, using the most rigorous and peer-reviewed statistical methods available. The evidence is very clear: Membership in the single market and in trade agreements more generally boosts trade*.  NIESR will be bringing out an upated review of this literature in the autumn**. In fact, I am not aware of a single piece of credible evidence that the single market or the EU has diverted more trade than it has created for its members. On the contrary, serious analysis of decades of evidence has led to the overwhelming conclusion that EU membership and trade agreements more generally are beneficial to trade.

This evidence is based on gravity models, which relate the volume of exports between two countries to their sizes, a number of variables which capture trade costs, such as the distance between them, whether they share a common language, a land border or a common colonial past, and the ‘multi-lateral resistance’ or the trade barriers facing all exporters or importers to those markets. The findings of this literature are remarkably consistent, regardless of the precise sample of countries, the time period, or whether trade in goods or services or both are being considered. Countries that are nearer one another, which are richer and larger have larger export flows. 

Seen from the UK, this means that we are likely to trade most with countries that are nearby, are rich, and are large. That sounds like a pretty accurate description of the members of the EEA single market! The single market gave us free trade in goods and services with a rich, highly developed market with a total of 500 million consumers, right on our doorstep. The evidence indicates that exchanging membership in the single market for free trade agreements with countries that are either smaller or farther away or poorer - or some combination of those things - is going to lead to losses in trade.

My own research (see here and here) shows that we stand to lose 22% to 30% of our total trade by leaving the single market. Even if we get 'average' free trade agreements with all the BRIICS (the major emerging markets of Brazil, Russia, India, Indonesia, China and South Africa) and the entire Anglosphere (the US, Canada, Australia and New Zealand), we would only claw back about 5%. 

So if we want to enjoy the greatest benefits from trade and participation in world markets, the overwhelming weight of the economic evidence is that staying in the single market is our best bet.

My next blog will explore whether it’s realistic or desirable to reduce all trade barriers unilaterally (spoiler alert: it isn’t!). Watch this space.


* See Head and Mayer's 2014 entry in the Handbook of International Economics for an overview of this literature

**Head, K., and T. Mayer, 2014, "Gravity Equations: Workhorse,Toolkit, and Cookbook", chapter 3 in Gopinath, G, E. Helpman and K. Rogoff (eds), vol. 4 of the Handbook of International Economics, Elsevier: 131–-195. 

 

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