Garvan Walshe is a former national and international security policy adviser to the Conservative Party. He runs Brexit Analytics.
Astronomers used to think the Sun revolved around the Earth, and economists used to think that trade between countries depended on each country’s “natural endowments”. The planets moved in celestial spheres, and “epicycles” were introduced to account for the fact that they moved back and forth in the sky, and not in a straightforward circle, like the moon. Different countries’ different endowments encouraged them to specialise and, if it weren’t for tariffs and other restrictions, settle where comparative advantage would dictate. Aristotle’s earth-centric model of the universe, and David Ricardo’s model of trade were useful in their time. Aristotle´s could predict the planets’ movements, and therefore eclipses, transits and other phenomena. Ricardo’s provided a good argument against the self-defeating idiocy of mercantilism.
But once astronomers were able to take detailed measurements of planets’ orbits, and econometricians of international trade, they found better explanations for both: gravity. In astronomy, the force operating on two objects is proportional to the product of their masses, divided but he square of the distance between them. In trade, the ease of trade between two countries is proportional to the product of their outputs, divided by the distance between them. (Yes, the trade economists stole the name of their models from the astronomers). Other factors – Ricardo’s natural endowments, considered broadly, like a common language, a functioning legal system, or a deep trade agreement such as the European Economic area make a difference – but the distance relationship is paramount. This is perhaps the best attested result in all empirical economics.
This is where Britain’s geographic position comes in. We have a single nearby trading partner: the European Union, and only one other trading partner anywhere in the world whose economy is about the same size: the United States. The EEA relationship reinforces geography through its single commercial legal system. But when we leave that, the NIESR estimates this would cut our total world trade by a quarter. Leave aside the loss of sovereignty, for a moment, and imagine joining the American single market instead (which would entail at least affiliating to the USA, like Puerto Rico, if not actually becoming the 51st state). Distance would still do its trade-destroying work. We would have to try about five times harder work to achieve the same level of trade with the US, and make up for lost European Trade.
Nevertheless, Patrick Minford’s newly renamed Economists for Free Trade (formerly Economists for Brexit) have stuck to the outdated, distanceless, trade theory. But it’s not surprising they take no account of the last 30 years of trade economic research, because they’ve ignored the last 30 years of modern trade practice, too.
Their plan for unilateral free trade looks attractive. Economically, there´s no difference between a legal trade barrier and a physical one. Imposing a barrier on imports is like “putting rocks in your own harbour” as the economist Joan Robinson used to say. But they neglect the fact that international trade negotiations take place between protectionists. They are really an exercise in countries saying to each other: “I’ll take this rock out of my harbour, if you’ll remove that one from yours.” Unilaterally fishing your own rocks out deprives them of an incentive to remove theirs.
And though Minford is right to say we have no reason to protect inefficient manufacturing industry from foreign competition, modern trade isn’t about tariffs anymore. It extends into politically sensitive ‘rocks’ equally able to impede commerce. These are treacherous reefs: immigration policy, labour laws, animal welfare regulation. The benefits of modern trade agreements accrue from their mutually assured removal, which makes countries adopt the same standards. It must be added that Matt Ridley is wrong, mutual recognition of standards isn’t enough: should we, for example, recognise American animal welfare standards for livestock, if they recognise ours? Or what would Americans think if they had to allow all cladding approved for use in UK buildings to be fitted on American skyscrapers, however combustible American regulators considered it to be?
A politically legitimate body is needed to make agreements that cover these kinds of commerce. A reasonable interpretation of last year’s referendum result is that the British people don’t consider the it right for the EU to be such a body. The effect of that decision, however, is to forego its economic benefits, and they can’t be replaced by shallower trade agreements with other countries, because they are too far away. And while there could, as Minford suggests, be economic gains from deregulation, they won’t happen while Britain´s politics is moving leftwards.
Far from bringing benefits through other trade deals, leaving the EU erects an enormous trade barrier with the rest of our continent. Economists for Brexit should have renamed themselves Economists for Protectionism.