20th November 2017
They say that leaving the Single Market and Customs Union, aka Brexit, will deliver a major boost to the UK economy, worth 7 per cent of GDP or £135 billion a year. Their claim, voraciously hoovered up by the Brexit-supporting media earlier this year when it was first made, and again this month ahead of the Budget, looks like manna from Heaven. Who are they, and is there any substance to what they are saying? I am going to explain that what they are saying is at best, misleading. I am going to argue here why they are the carpetbaggers of Brexit.
For information, Economists for Free Trade (EfFT) is small group of mostly economists with training ranging from macroeconomics, to banking, industrial economics and journalism. The Chair is Professor Patrick Minford of Cardiff University.Their advisors tend be right-leaning Brexit politicians, commentators, and supporters.
For reference, the term ‘carpetbagger’, originally used by Southerners in the US against Northerners, was a reference to the material on the bags that Northerners brought with them as they scoured the South for commercial opportunities. The term was used pejoratively to reflect what Southerners saw as their opportunist and exploitative behaviour. The idea that leaving the EU will be a magic bullet for the UK, in the way that EfFT asserts fits this kind of narrative well.
The 7 per cent of GDP boost comes in three parts. The smallest part is roughly 0.4 percent and comes equally from the alleged subsidy paid to EU unskilled migrants and ‘other’ factors. About 0.6 per cent comes from not paying any more contributions to the EU. Curiously, these benefits enter into Professor Patrick Minford’s economic model as an income tax cut, and so it’s not surprising that his model responds enthusiastically. Yet, these alleged benefits are contentious and in any case, not assured. We have heard the old wives’ tale about using the EU net contribution to boost the economy before. The model doesn’t even try to compensate by estimating the cost of new border controls and customer procedures, the civil servants and trade policy infrastructure we will need after Brexit, the cost of supporting farmers, universities and other recipients of EU payments, and much, much more.
The second largest part comes from the bonfire of EU regulations, worth 2 per cent. Yet, what EfFT is doing is ridiculing itself by claiming that finally we will be able to ‘buy knobbly pears, ditch dim energy-saving light bulbs, embrace more power vacuum cleaners, and pioneer advanced medical research and new agricultural technology’ whatever any of that means.
Anyway, getting rid of EU rules and regulations, many of which exist to protect product, provider, safety and environmental standards is modelled by EfFT as a fall in employers’ National Insurance contributions. Again, it is no surprise that the model responds well to a tax cut for employers, but again, how realistic is it to assert that massive deregulation of labour, competition, and product rules and standards equates to an employer tax cut? More to the point, the idea that the UK can dispense with these after Brexit is absurd. After Brexit, we will have to legislate and create our own rules and regulations, and create new institutions that will have to be staffed and managed, not least as we enter into trade and investment negotiations with other countries, which will have their own rules and standards to which we will have to conform. Free trade, or cutting tariffs once we leave the EU, generates the lion’s share of the boost, or, 4 per cent of GDP.
The most egregious misrepresentation, though, concerns the 4 per cent of GDP attributable to free trade, or cutting tariffs, once we have left the EU. EfFT don’t seem to recognise that there is no such thing as free trade. There is only negotiation to minimise the barriers to trade. As an EU member, the UK is already in the largest free trade area in the world, where the elimination of regulatory barriers, the boost to competition, and the assurances we all want about the quality of goods and services, for example affecting food, chemicals, airline and transportation services, are about as advanced as anywhere in the world.
The group talks about doing new free trade agreements (FTA) with the US, Japan, Australia, New , Zealand, Canada, South Korea and Singapore as thought else were all made-to-measure clones for, or better versions, of the EU. Some of these of course would love to do FTA’s with us, especially smaller countries such as Australia and New Zealand, which would want to boost their agricultural exports. Larger countries, though, have the leverage in negotiation that goes with size, and the desire to do deals with large markets. The much talked about free trade deal with the US is something the Americans have already gone cool about, and we know that US negotiators would be keen to sell us chlorinated chicken, for example, along with the right to make inroads into our pharmaceutical and healthcare services, that a lot of Brits think intrusive and not in the spirit of the NHS. America First means just that.
And China is no slouch when it comes to unfair trade practices and leverage. In any case, they think we are daft for leaving the EU, and wonder who on earth, we think they might prefer doing deals with us rather than the EU. So, in general,why the UK is supposed to be a more attractive or dynamic market with which to engage in an FTA is not made clear by the EfFT. Perhaps because it isn’t.
It also states that we should unilaterally engage in ‘free trade’ by cutting tariffs altogether or to the bone, but the UK is already a fairly open country into which to sell. If we declare ‘open season’ by slashing tariffs, imports would flood in, our already high external imbalance would deteriorate, Sterling would drop like a stone, and large swathes of what’s left of our manufacturing would be vulnerable to foreign suppliers. True, shorn of our engagement in some EU supply chains, we would have to create our own manufacturing substitutes but I suspect the arguments are pointed firmly towards a withering of our manufacturing base in the even of unilateralism. And we shouldn’t expect reciprocity from others. Why would they follow our example, given they wouldn’t have to and their own trade arrangements? The whole idea of unilateral free trade, as is called, is an ideological fantasy.
What EfFT also focus on is also its undoing. If you just look at the world of trade through the lens of tariffs, it is like driving a car with only one eye open and blacked out side and rear windows. It commits schoolboy errors by assuming that the only factor that determines trade is price. It showcases huge gains in trade, therefore, from relatively small changes in trade prices. But this is fantasy too. We might prefer to buy Italian, rather than Indian lighting products, German rather than Chinese machine tools, and Dutch/EU poultry rather than American.
We have supply chains in our immediate geography because that is where they work best commercially and technically. Non-tariff barriers, which are increasingly more important in trade than tariffs, managing currency risk, and dispute settlement procedures and legal infrastructure, all figure prominently in the way we do trade. Prices are just one factor among many, and not even the most important, as you can read elsewhere in a great demolition job written by Professor Alan Winters of Sussex University.
We should not be fooled by the carpetbaggers’ flawed economic model, nor their claims. The Brexit debate reaches into many areas, but leaving the Single Market and the Customs Union is an unequivocally damaging act economically, and it will make us poorer, unless otherwise mitigated.