The Economists for Free Trade (EFT) group (formerly
Economists for Brexit) today released their latest unfortunately-named publication
“A World Trade Deal – The Complete Guide” which is not much of a guide and is in no way complete. Moreover “A World Trade
Deal” is no deal – it is the default option in the event that the UK is unable
to agree an arrangement with the EU. Given this starting point, expectations
for the rest of the publication were pretty low and it more than lived down to
them. But let’s focus on some of the details.
Trading under WTO rules implies imposing tariffs on EU trade where there are currently none. This is in no way a “deal” as EFT would have us believe: The WTO represents nothing more than a lowest common denominator set of rules to reduce trade frictions. EFT also believe that the UK can simply continue trading on the basis of these rules as soon as it exits the EU. There are one or two issues to iron out, such as agreeing on the division of quotas for goods which have already been agreed at the EU level (the US, Australia and NZ have already objected to the proposed divvying up of agricultural quotas). Incidentally, EFT believe this “should not cause great difficulties … the EU and the UK have been working harmoniously in this regard for some time” although The Guardian reported in the spring that “in recent months the united EU and UK front has splintered.”
EFT then poses the question “Does the WTO require physical customs checks, meaning lengthy delays at our ports and borders?” and in their view the answer is negative. But the delays come when other countries impose customs checks on goods entering foreign markets, and then some! According to the WTO, “high levels of bureaucracy and unnecessary costs” result from document requirements that lack transparency and involve duplication; a lack of cooperation between traders and customs agencies and lack of automatic data submission with the result that “at some border crossings, cargo can take up to 30 days to be cleared.”
Against this backdrop, EFT continue to argue that the economic gains to Brexit outweigh the costs. “Those who have modelled a Clean Brexit properly report long-term gains from free trade alone of 2%-4% of GDP.” You have to laugh at the chutzpah. Those who have modelled Brexit “properly” certainly do not include EFT. “The long-term negative outcomes claimed by the Treasury and the January Cross Departmental Brexit Analysis were produced by assuming implausibly high (and illegal) frictional UK-EU border costs.” Yet the bulk of the academic evidence finds that border costs are far higher than often supposed. It is not tariffs that are the problem; rather the costs associated with transacting across borders (legal, contract enforcement, transport and distribution expenses). Indeed, they are generally larger than the marginal costs of production[1].
Then EFT simply descend into fantasy. They reckon that in addition to the positive effects of free trade, the UK will save “approximately £12 billion a year” by cutting payments to the EU. Finally, “because we will be doing all this without the encumbrances and constraints of the Withdrawal Agreement … we can … withhold most or all of the estimated £39 billion divorce payment.” The upshot will be a “long-term gain to GDP of … about 7% over the next decade and a half” which will “allow enhanced spending on public services and tax cuts by the early 2020s, further boosting the economy.” To sum this up, EFT reckon that a system of imposing additional tariffs on EU trade is going to somehow boost GDP and find a Brexit dividend that the OBR says does not exist. As the kids would say, LMAO.
And we’re not done yet. EFT argue that “the economically optimal trade strategy in most circumstances for the UK would be to eliminate all tariff and non-tariff barriers unilaterally with respect to all our trading partners.” The elimination of all non-tariff barriers implies the complete deregulation of all product standards. And since non-tariff barriers exist primarily due to differing regulations between trading partners, unless we suddenly converge on a set of global standards (e.g. China and the US adopt the same standards), it will be impossible for the UK to eliminate non-tariff barriers on all imports. Moreover, there is no reason why the rest of the world should reciprocate, particularly if the UK is a relatively small export market (which it is for most countries).
There are numerous other dodgy assertions but I will reserve some final flak for the idea that losing access to the EU market will not damage the financial services industry. Without going through it point-by-point, I would question the assertion (provided without a reference) that “only 9% of the City’s revenues are vulnerable to the loss of passporting.” More than half the revenue generated by the City is generated from the rest of the EU according to TheCityUK, and initial estimates suggest that 20% of London revenues could be at stake. Moreover, some of the solutions proposed by EFT such as “setting up small entities in the EU that trade with EU customers and those entities entering into mirror, or “back-to-back” trades with the UK parent” would run fall foul of the ECB, which has ruled out boiler plate operations. Anyone who believes that Brexit will not have adverse consequences for financial services would do themselves a favour by talking to people in the industry who are already making their post-Brexit arrangements.
Eurosceptic MPs, operating under the guise of the European Research Group, promised earlier this month to produce an alternative to the Chequers plan but backed down when it became clear that some of the proposals were of “dubious quality.” Given that Jacob Rees-Mogg lent his support to the EFT proposals but was not prepared to back the ERG plans, you really do have to wonder how bad they were. As trade expert David Henig tweeted this afternoon, the EFT analysis “isn't in any way a serious document. Media should treat the report, and any MPs citing it approvingly, as having nothing useful to say on the subject of post-Brexit trade.” As a drowning man clutches at straws, so the Brexiteers continue to hang their hat on sub-standard analysis such as this. They’re losing the argument because they haven’t got one.
Trading under WTO rules implies imposing tariffs on EU trade where there are currently none. This is in no way a “deal” as EFT would have us believe: The WTO represents nothing more than a lowest common denominator set of rules to reduce trade frictions. EFT also believe that the UK can simply continue trading on the basis of these rules as soon as it exits the EU. There are one or two issues to iron out, such as agreeing on the division of quotas for goods which have already been agreed at the EU level (the US, Australia and NZ have already objected to the proposed divvying up of agricultural quotas). Incidentally, EFT believe this “should not cause great difficulties … the EU and the UK have been working harmoniously in this regard for some time” although The Guardian reported in the spring that “in recent months the united EU and UK front has splintered.”
EFT then poses the question “Does the WTO require physical customs checks, meaning lengthy delays at our ports and borders?” and in their view the answer is negative. But the delays come when other countries impose customs checks on goods entering foreign markets, and then some! According to the WTO, “high levels of bureaucracy and unnecessary costs” result from document requirements that lack transparency and involve duplication; a lack of cooperation between traders and customs agencies and lack of automatic data submission with the result that “at some border crossings, cargo can take up to 30 days to be cleared.”
Against this backdrop, EFT continue to argue that the economic gains to Brexit outweigh the costs. “Those who have modelled a Clean Brexit properly report long-term gains from free trade alone of 2%-4% of GDP.” You have to laugh at the chutzpah. Those who have modelled Brexit “properly” certainly do not include EFT. “The long-term negative outcomes claimed by the Treasury and the January Cross Departmental Brexit Analysis were produced by assuming implausibly high (and illegal) frictional UK-EU border costs.” Yet the bulk of the academic evidence finds that border costs are far higher than often supposed. It is not tariffs that are the problem; rather the costs associated with transacting across borders (legal, contract enforcement, transport and distribution expenses). Indeed, they are generally larger than the marginal costs of production[1].
Then EFT simply descend into fantasy. They reckon that in addition to the positive effects of free trade, the UK will save “approximately £12 billion a year” by cutting payments to the EU. Finally, “because we will be doing all this without the encumbrances and constraints of the Withdrawal Agreement … we can … withhold most or all of the estimated £39 billion divorce payment.” The upshot will be a “long-term gain to GDP of … about 7% over the next decade and a half” which will “allow enhanced spending on public services and tax cuts by the early 2020s, further boosting the economy.” To sum this up, EFT reckon that a system of imposing additional tariffs on EU trade is going to somehow boost GDP and find a Brexit dividend that the OBR says does not exist. As the kids would say, LMAO.
And we’re not done yet. EFT argue that “the economically optimal trade strategy in most circumstances for the UK would be to eliminate all tariff and non-tariff barriers unilaterally with respect to all our trading partners.” The elimination of all non-tariff barriers implies the complete deregulation of all product standards. And since non-tariff barriers exist primarily due to differing regulations between trading partners, unless we suddenly converge on a set of global standards (e.g. China and the US adopt the same standards), it will be impossible for the UK to eliminate non-tariff barriers on all imports. Moreover, there is no reason why the rest of the world should reciprocate, particularly if the UK is a relatively small export market (which it is for most countries).
There are numerous other dodgy assertions but I will reserve some final flak for the idea that losing access to the EU market will not damage the financial services industry. Without going through it point-by-point, I would question the assertion (provided without a reference) that “only 9% of the City’s revenues are vulnerable to the loss of passporting.” More than half the revenue generated by the City is generated from the rest of the EU according to TheCityUK, and initial estimates suggest that 20% of London revenues could be at stake. Moreover, some of the solutions proposed by EFT such as “setting up small entities in the EU that trade with EU customers and those entities entering into mirror, or “back-to-back” trades with the UK parent” would run fall foul of the ECB, which has ruled out boiler plate operations. Anyone who believes that Brexit will not have adverse consequences for financial services would do themselves a favour by talking to people in the industry who are already making their post-Brexit arrangements.
Eurosceptic MPs, operating under the guise of the European Research Group, promised earlier this month to produce an alternative to the Chequers plan but backed down when it became clear that some of the proposals were of “dubious quality.” Given that Jacob Rees-Mogg lent his support to the EFT proposals but was not prepared to back the ERG plans, you really do have to wonder how bad they were. As trade expert David Henig tweeted this afternoon, the EFT analysis “isn't in any way a serious document. Media should treat the report, and any MPs citing it approvingly, as having nothing useful to say on the subject of post-Brexit trade.” As a drowning man clutches at straws, so the Brexiteers continue to hang their hat on sub-standard analysis such as this. They’re losing the argument because they haven’t got one.
[1] Anderson,
J. E. and E. van Wincoop (2004) “Trade Costs” Journal of Economic Literature
(42), pp. 691-751
No comments:
Post a Comment