Brexiters’ idea of unilateral free trade is a dangerous fantasy
Has the Brexit campaign put forward a proposal that delivers both more self-determination and greater prosperity than membership of the EU? Plausible new arrangements with the bloc could not do so. They would sacrifice significant amounts of either favourable access or self-determination. But one group, Economists for Brexit, argues that such an alternative exists. It rejects post-exit deals with the EU and instead recommends unilateral free trade and reliance for market access on the rules of the World Trade Organisation.
Does this make sense? The short answer is: no. The longer one is that unilateral free trade would not be economically superior to EU membership, would be less simple than imagined and would also be politically unacceptable.
Start with the economics. Patrick Minford of Cardiff University suggests that, under this option, UK economic welfare would rise by 4 per cent after Brexit. The economy would also end up specialising in services and lose manufacturing. In analysing the same option, economists at the London School of Economics reach a quite different conclusion: a reduction of 2.3 per cent in welfare, only marginally less than the 2.6 per cent reduction they believe would follow a Brexit without such unilateral reductions in tariffs.
What explains this discrepancy? The essential answer is not that Prof Minford has a sophisticated model the LSE economists lack. It is that he ignores the understanding of trade developed over the past half century, while introducing very peculiar empirical assumptions.
Prof Minford argues that costs of imports would fall by 10 per cent, even though the average tariff is only 3 per cent. This result comes from out-of-date estimates of actual price differences, plus the assumption that all those differences are due to trade barriers. This is enormously unlikely. Given heterogeneous goods and imperfect competition, a mixture of measurement error, differential mark-ups and different tastes could well explain these findings.
Second, Prof Minford ignores the well-established “gravity” effect — the tendency for countries to trade more with countries close to them geographically. Combined with his assumption of homogeneous goods, this leads to the conclusion that trade with the EU is the result of trade diversion and that, upon unilateral liberalisation, all imports would shift to cheaper sources.
Third, the EU’s regulatory harmonisation is not just a perfidious plot against consumers. It allows freer circulation of goods and services, and so greater competition and exploitation of economies of scale and scope. Moreover, safety and other regulations also benefit consumers. Finally, in several areas — notably services — regulations are the principal barriers to trade. Without some harmonisation, access will be lost.
Fourth, modern approaches, on which other analyses build, start from realities. Prof Minford’s assumptions of homogeneous goods, perfect competition and no geographical effects contradict them. This, argue the LSE authors, “is poor scholarship and bad science”.
Furthermore, moving to unilateral free trade and WTO rules is just not that simple, as the latter’s director-general, Robert Azevêdo, points out. There is a formal point and a substantive one.
The formal point is that: “No WTO member can unilaterally decide what its rights and obligations are.” Thus, the UK’s trading partners would have to accept its new schedule of trade policies if it is to enjoy all the protections of membership. This could take years.
Second, in the modern world, “unilateral free trade” is a complex notion. The UK might, for example, abolish all tariffs. But would it “bind” those tariffs at zero, losing its future freedom? Within the WTO, this makes a huge difference. Again, the meaning of “unilateral free trade” for the regulatory barriers on which trade negotiations now focus is obscure. Free trade in services might, for example, include movement of workers needed to provide them. How would that go down in a post-Brexit UK?
This leads to perhaps the biggest point. The idea that the UK is going to reject EU membership only to eliminate all its bargaining chips unilaterally is surely a fantasy.
Yes, Hong Kong and Singapore — tiny entities that lack competitive democratic politics — have done so. But the idea that the UK would do so seems wildly implausible. It is far more likely that a supposedly autonomous UK would be more protectionist and interventionist than it is within the EU. If one doubts that, just look at the heroic efforts of a pro-market secretary of state for business to rescue a failing steel plant in Wales. Forget free trade: the UK will not return to the 19th century.