George Magnus is for the former Chief Economist of UBS and Associate at Oxford University’s China Centre.
Economists for Free Trade (EfFT), a small pro-Brexit group, claimed earlier this year and again this month to the Pavlovian joy of the Brexit-leaning media, that leaving the single market and the customs union would deliver a boost to the UK economy of around 7% of GDP, worth about £135 billion per annum. Here is why the claim is misleading, and why those propagating it are the carpetbaggers of Brexit.
The term “carpetbagger”, originally used by Southerners in the US against Northerners in the aftermath of the Civil War, was used pejoratively to denote the latter’s opportunism and manipulation. The idea that leaving the EU will be a magic bullet for the UK fits this kind of narrative well.
How do they get to 7% of GDP? About 0.4% comes equally from an alleged subsidy to EU unskilled migrants and “other” factors, and 0.6% 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. A bonfire of regulations, worth 2%, is modelled as a fall in employers’ National Insurance Contributions. Free trade, or cutting tariffs once we leave the EU, generates the lion’s share of the boost, or, 4% of GDP.
It is no surprise that these modelling techniques generate a big rise in GDP, but you might think, correctly, that they are extremely spurious and unrealistic. It is also risible to think that the UK will be able to commercialise a bonfire of EU regulations, when we will have no choice but to introduce our own new laws and regulations, not least as we subscribe to those of others in new trading arrangements.
The most egregious misrepresentation, though, concerns the purported gains from free trade. EfFT refuse to admit 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, spur to competition, and assurances 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.
Just looking at the world of trade through the lens of tariffs is like driving a car with only one eye open and blacked out side and rear windows. And if we did unilaterally eliminate tariffs outside the EU, imports would flood in, our manufacturing would be mothballed, and sterling would plunge. We would be poorer, and no country would follow us. The whole idea is an ideological fantasy.
EfFT also commit 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 the American chlorine-washed variety. We have supply chains in our geography because they work commercially and technically. Non-tariff barriers, which are increasingly important in trade, managing currency risk, and dispute settlement procedures and legal infrastructure, all figure in the way we do trade. Prices are just one factor among many, and not even the most important.
We should not be fooled by the carpetbaggers’ flawed economic model, nor their claims. Leaving the single market and the customs union is an unequivocally damaging act economically, and it will make us poorer, unless otherwise mitigated.
