A non-economist’s fair tirade against Economists for Free Trade

Since the morning of June 24th 2016 the Brexiteers vision of how much better off leaving the EU would make the UK has been slowly crumbling. From Nigel Farage almost tripping over himself in his rush to make it clear that the extra £350 million for the NHS wasn’t going to happen, along the road to where we are now, with Dan Hannan saying that voters knew there would be an economic hit (because the Leave campaign told them so) and Pete North going a step further, and saying that voters actively wanted to be worse off.

Is there no light in the darkness for the Brexiteers? The government’s own forecasts say we’re going to be much, much worse off, the cabinet can’t decide what they want to transition to, and the clock is slowly ticking down until article 50 of the Lisbon treaty drops us into a hard exit from the EU, through our own inability to manage the two year exit process.

Thank goodness, then, for Economists for Free Trade (EFT), formerly Economists for Brexit, who have told anyone who’ll listen that a no-deal Brexit is going to make us better off. Much, much, MUCH better off.

eft1

Let’s not piss about, £651 billion is an enormous sum of money. It’s more than 5 times the total NHS budget, and a whisker over 94% of the government’s revenue from direct and indirect taxation in 2017. That £350m/week for the NHS is nothing in comparison…£651bn would represent paying such an amount, week in, week out, for more than 35 years!

If hard Brexit is going to allow us to furnish the NHS with gold-plated hospitals, while maybe giving us all a break from income tax for a couple of years, then why the hell did anybody oppose it?

The loose thread to start picking at to begin unravelling of this tapestry of shit is the phrase ‘EU tariff revenue’. If we leave the EU with no deal then it’s probable that tariffs will be levied on EU goods coming into the UK, and on UK goods being exported to the EU.

At the moment something we import from the EU might cost, say, £1. If it’s subject to a 22% tariff then the importer would have to pay 22p/item to the UK government. The importer would, naturally pass that cost on to the UK consumer (us), so what used to cost £1 would now cost us £1.22, of which 22p would go to the government.

This is what makes the phrase “tariff revenue” so worrying. It’s money that the UK is taking off individuals, and because it’s consumption based revenue it tends to be regressive, hitting the poorest hardest.

However, Economists for Free Trade aren’t so stupid as to suggest that a massive, regressive tax on the UK consumer is a good thing…

…oh no, they’re much stupider than that. They think that, through mathematical sleight-of-hand, that the EU is going to pay it.

The paragraph quoted above comes from their Alternative Brexit Economic Analysis, published at the start of this week, and quickly disseminated to everybody they thought might listen, but to understand where they’re getting their numbers from you have to go to their publication from last month, The Numbers Behind No Deal – Why the EU is a Loser, by the economist Patrick Minford (you can read it here, if you’re really keen).

In this publication Minford lays out the following argument:

  1. Because of the protectionist nature of the EU, consumers within the bloc pay, on average, 20% more than the true world market value for goods.
  2. Quickly striking free-trade deals with the rest of the world (where we reciprocally agree not to levy tariffs on each others goods) will lower UK prices to world market value.
  3. In order not to lose their market, the EU exporters will have to lower their prices to match world market prices.
  4. Our trade deficit with the EU (we import more from them than they import from us) works in our favour, because they’re still paying high trade-bloc prices, where as we’re reaping the benefits of plundering the world market for the cheapest goods.

Let’s work this through.

If our £1 item is 20% over-valued then it has an “actual” world market value of 83p (83p + 20% = £1, give or take fractions of a penny), so once we’ve swiftly signed a free trade deal with whoever is knocking them out at that price we’ll all be saving 17p every time we buy one of these things.

If it’s something that we were previously buying from the EU then there’s no way we’re going to pay the new, tariff-boosted, price of £1.22, so our EU supplier is forced to lower their price, so that the price of their thing, plus the tariff, equals 83p. We, the consumer, pay no more, and the government pockets the tariff on each item sold. The tariff is, EFT argue, being paid by the EU (specifically the EU exporter, who’s taken a hit on their profits to sell at the cost we’ll buy for).

If the item in question is something that we export to the EU then we can knock it out at our new, lower, price of 83p and, even with a 22% tariff, the price to the EU consumer won’t change much. Hence, the EU pays when it imports (because of the tariff) and also pays when it exports (because of the lower price).

Minford puts down his pen, lights his pipe, smiles, and tells you that this means that a no-deal Brexit means the UK is £651bn better off, while the EU is £507bn worse off.

Indeed, the above economics suggest that a credible threat by the UK to leave in the face of an unattractive trade deal would be a powerful motivating factor for the EU to agree an attractive deal.

Alternative Brexit Economic Analysis, page 18

That’s all good, then. End of article.

 

No, hang on, if no-deal puts £1.1 trillion of clear water between us and the EU, then why on Earth would be care if the EU offers us an attractive deal or not? Are they really going to offer us a deal more attractive than £651bn in our national bank account?

The answer, rather predictably, is that while Minford’s numbers may stand up to mathematical scrutiny (especially if the reader is keen to just hear what they want to hear, or is looking for a quick ‘Brexit boosts UK by £650 billion!’ headline, to fit the editorial stance of their newspaper), but there’s an enormous amount of supposition and wishful thinking underlying it, and if Brexit has taught us anything it is (hopefully) that “I reckon” is a poor substitute for “I know”.

The first hurdle is that to get to the world market price we have to negotiate free trade deals with everyone we want to buy from. The World Trade Organisation, under whose auspices we’d be importing goods, doesn’t allow us to discriminate based on the origin point of goods, so we either throw ourselves open to tariff-free imports from the entire world (including the EU) and hope that they do the same for us, or we sign those trade agreements one-by-one.

Thing is, we’ve had a bit of a meltdown on the world-stage and publicly separated from the supplier of, to pick a random example, 27% of our food supply. This makes us hungry, possibly literally, for those free-trade deals…and negotiating the price of a sandwich when you’re starving is rarely a good position to be in.

When those trade deals roll in we’ll benefit from being free of protectionism, but we’ll discover that part of what it was doing was protecting us. Just because we can import an item from China for 83p doesn’t mean that the UK makers of said thing can knock it out at that price. China has lower wages, less worker protections, fewer environmental regulations and more lax safety standards than we do. Either we’re happy to let our home-grown manufacturing and agriculture industries die or we’re willing to hack back our regulatory framework, until it’s on-par with the lowest priced supplier in the world.

Thinking about that also uncovers the flaw in the EU-will-lower-their-prices argument. If something that used to be sold to us tariff-free for £1 is now being sold to us at 83p, including a 22% tariff, then that means that the EU supplier is now exporting it at a cost of 68p. To assume that they’d do so to pursue their market is to assume that they currently have that level of profit built into their product (and Minford’s own argument says that, if they have, then somebody should already be undercutting them). The EU is neither going to sell to us at a loss, or to slash its own regulations down to the bone to allow manufacturers to do so.

Nor can we export to them, especially not without a manufacturing industry. We can’t simply import goods and then sell them on to the EU as if we were the country of origin. The WTO isn’t keen on such things.

The result then would be our vibrant 40 year trade partnership descending into the sad state of affairs where they have nothing we can afford, and we have nothing to sell them.

The outcome of a no-deal, then, is the death of UK industry, a mess of unfavourable, hasty trade deals, dropping our standards to buy on price alone, without thought to ethical or safety standards, and possibly the complete end of our relationship with our biggest and closest buyer and seller.

All worth it for £651bn a year though, right?

It might be, except that figure was never an annual one. EFT have attempted to calculate the total future value of any gains, while ignoring any short-term losses, as this paragraph from the ABEA explains (badly)…

eft2

Now the point is valid; many of us, totally rationally, choose to notch up debt for 3 years getting a degree, in order to access lifelong higher average earnings, but in this case these figures are easily expressed as potential annual gain. Not to do so gives the impression that the authors were more interested in big headline figures, that would appeal to their target audience.

Hang on, haven’t we been here before?

Former London Mayor Boris Johnson speaks at the launch of the Vote Leave bus campaign, in favour of Britain leaving the European Union, in Truro
Former London Mayor Boris Johnson speaks at the launch of the Vote Leave bus campaign, in favour of Britain leaving the European Union, in Truro, Britain May 11, 2016. REUTERS/Darren Staples
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