All the speculation about whether the UK can strike good free trade deals outside the EU raises a question: is the right guilty of a long-standing and consistent error?
I ask because, to me, such talk misses the point – that even if UK exporters do get good opportunities to trade, they won’t necessarily take them.
We know that UK firms aren’t taking the export opportunities that exist within the EU: Germany exports far more than the UK. And we know too, thanks to the work of Monique Ebell, that free trade agreements don’t stimulate trade much.
There are good reasons for this. There are countless determinants (pdf) of trade other than legal opportunities: distance; home bias; uncertainty about policy, credit, and exchange rates; firms’ ability to manage supply chains; skills; investment; path dependency and so on.
Which brings me to the right’s consistent error. It has long over-estimated the dynamism and flexibility of the economy, and has assumed that if only the right legal framework can be put in place, capitalism’s dynamism would be unleashed. Such a view under-estimates the non-policy factors that stop resources shifting as quickly as basic textbook economics predicts. As Nick says, "goods don't just export themselves."
What we see in Brexit optimism is an echo of Britannia Unchained’s call for labour market deregulation. Such calls ignored the empirical evidence that deregulated labour markets don’t necessarily increase employment or competitiveness and can be associated with high and volatile joblessness.
Just as Brexiters assume that free trade laws will greatly boost UK exports, so deregulators assume that free labour markets will greatly boost employment. It’s no accident that the same people are generally in both camps. Both, however, under-estimate the amount of sand that’s in the wheels of the market mechanism. And just as the UK economy isn't prospering greatly because of deregulation, so it might not do so because of free trade deals.
I’m old enough to remember the same assumption in the 1980s. Back then Patrick Minford – now a leading Brexiter – supported pit closures on the grounds that the redundant miners would find work elsewhere. He was, to a large extent, wrong*. He made the same mistake then he might be making now: he’s over-estimating how flexible the economy is.
In this context, I fear that the amateur Kremlinology about whether the UK will reach good free trade deals distracts us from a more fundamental question: is the economy sufficiently flexible to respond well to such deals? On this question, the right has a long history of paying too much attention to ideologized elementary economics, and not enough to empirical evidence.
* Ironists might note here that insofar as employment in the former coalfields has risen, it’s been partly thanks to support from the EU.