Stumbling and Mumbling

Author: chris dillow   |   Latest post: Sun, 9 Sep 2018, 12:48 PM


Brexiters' blind-spot

Author:   |    Publish date:   |  >> Read article in Blog website

Tony Yates and Andrew Neil were debating gravity models on Twitter this morning. Tony was right. The gravity model isn't some hi-falutin theory without much factual backing. It is in fact (pdf) "one of the most empirically successful in economics".

Even so, talk of "models" is a bit fancy. Let's instead look at some facts. According to the World Bank Germany exported $118.6bn of goods to the US in 2016. That's $1434 per person. The UK exported $61.6bn, which is $939 per person. That's one-third less. Germany exported $85.4bn to China, or $1032 per person, whereas the UK exported only $18.1bn or £277. To Russia, Germany exported 5.4 times as much per person as the UK. To Japan it exported 2.5 times as much, and to India twice as much. Even to Canada Germany exported one-third more per person.

These facts tell us something important. They tell us that membership of the single market/customs union is NOT a great obstacle to trade with other nations. It is not the lack of good trade deals with China, the US, or Japan that is restraining exports. Germany has exactly the same deals with them as us and is exporting far more.

What is stopping us exporting? There are countless possibilities: poor management; lack of animal spirits; insufficiently skilled workers; lack of investment; financing constraints; exchange rate volatility; a lack of price competitiveness; and so on. Many of these are, unsurprisingly, the same factors that lie behind our poor productivity.

And these will be the same after Brexit as before. They will continue to hold back exports even if we do sign free trade agreements with non-EU nations. Monique Ebell (pdf) and Silvia Nenci have shown that such deals do little to boost trade. Even if you cut legal barriers to trade, real ones remain. I am free to do a park run on Saturday, but I'll not - and certainly not in a good time.

Why do Brexiters find it so hard to grasp this?

In part, it's because some of them do "violence to basic facts of economic life." Monkey

But I suspect two other things are going on. One is that many support Brexit for non-economic reasons and - motivated reasoning being so powerful - they then invent reasons why it will be a good economic thing, like a man putting lipstick on a monkey and pretending it's Rachel Riley. They forget that there are trade-offs - not least between sovereignty and the regulatory harmony that facilitates trade.

Also, support for Brexit is a way of avoiding unpleasant realities.

Since the 80s, the right has got pretty much want it wanted: weaker unions, more power for bosses, lower top taxes, less regulation and so on. And yet the UK's macroeconomic performance has remained unimpressive, not least because many structural weaknesses in British capitalism remain - weaknesses that contribute to our lack of exports.

Brexit allows the right to avoid having to acknowledge these weaknesses, however, because they can pretend instead that we can become a great trading nation if only we are free from the shackles of the EU. This prolongs the right's longstanding belief that British capitalism is fundamentally dynamic if only the right legal framework can be imposed. This, however, is a fantasy.

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