Important businesses are losing patience with the UK government over progress — or rather lack of it — in the Brexit negotiations. With just 10 months to go before Britain leaves the EU, that is entirely comprehensible. Airbus, for example, has threatened it might pull out of the UK altogether if no trade deal were agreed. Amazingly, Jeremy Hunt, health secretary, responded that it was “completely inappropriate for businesses to be making those kind of threats”. Is this the “party of business”?
Rival politicians are competing for the favour of their base. But some actually believe a “no deal” Brexit is a credible option, possibly even an attractive one. For support, they can appeal to Economists for Free Trade. While theirs is a minority position among economists, it must be evaluated, not only because some members are reputable, but also because it is influential in Brexiter circles. Two recent papers — Alternative Brexit Economic Analysis and What if We Can’t Agree? — lay out the group’s arguments for the superiority of a clean break over remaining inside the customs union and single market.
There has been an extensive debate about the best economic models to use. In recent work, this group simply argues that “if the correct Brexit policies are fed in, it seems that all of the models produce directionally the same results — all clustered around a positive 2 per cent to 4 per cent of GDP range” from unilateral free trade, under World Trade Organization rules. Yet such results are the opposite of those of almost all other economists. The differences are due to varying assumptions, as Alasdair Smith of Sussex University told the House of Commons Treasury and International Trade Committees’ joint inquiry in May.
These are the group’s key assumptions. The cost of EU membership is not the 4 per cent tariff consistent with its overt trade policy instruments, but actually 20 per cent, because of covert regulatory barriers. Under a clean Brexit, much, or even all, of these burdens could be eliminated.
Furthermore, no additional tariff, transaction or regulatory costs would fall on UK exports from trading under WTO rules. The justification for this extraordinary assumption is that, under unilateral free trade, UK producers will sell everywhere at the “world price”. Consequently, the costs of EU tariffs and other barriers will fall entirely on the EU’s purchasers. Another justification is that WTO rules prohibit discriminatory barriers and eliminate nearly all transactions costs.
In addition, unilateral free trade is equivalent to general free trade or at least gives a lower bound to the benefits of having many free trade agreements.
These are loaded assumptions.
First, the notion that EU barriers have a tariff equivalent of 20 per cent is highly questionable. Yet let us accept it. The free trade group seems to assume that the UK will sweep away vast numbers of unspecified regulations on, let us say, pharmaceuticals, chemicals, motor vehicles, children’s toys or food. Will the public really accept elimination of such notionally burdensome regulations?
Second, if this estimate of EU protection is correct, barriers equivalent to an average tariff of 20 per cent will face UK exports to the EU, in the absence of a trade deal. The group’s apparent belief that this will not be costly rests on the idea that the UK’s biggest market has no market power. That is incredible. Tell Airbus it can sell its wings freely at a known “world price”. The idea of homogeneous products traded freely at world prices, anywhere, is absurd.
Third, the idea that trading from outside the customs union and single market is going to be frictionless is implausible. It is certainly not what business believes. If our newly deregulated haven for dangerous goods wants to export, the EU is going to make sure that its regulations really do apply. That is going to be “frictionful”, especially in the short- to medium- term, as businesses warn.
Fourth, the idea that the WTO will be able to protect the UK is a delusion: its dispute-settlement system is ponderous, and toothless; the US is at present engaged in destroying it; and, above all, the EU may well not view as sacrosanct the WTO rights of a country exiting without meeting its obligations. Who will make them think otherwise?
Finally, as Prof Smith notes, unilateral free trade will almost certainly increase the adjustment shock. In the long run, everybody might be better off, but the long run might be very long. Free trade overnight would be a big shock. One should never ignore such costs.
In sum, the idea that a “no deal” Brexit would bring large benefits and next to no costs is simply incredible. The government has flirted with the “no deal” option. It should forget it.
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