Theresa May today said she wanted a “bolder embrace of free trade” so that the UK can “rediscover its role as a great trading nation.” This echoes Gerard Lyons and Liam Halligan’s view (pdf) that Brexit is an opportunity for the UK to “trade more freely with nations far more populous and fast-growing [than the EU].” For me, there are two problems here.
One is simply that free trade deals might not be so easy to arrange. Trump has promised us a “fair” deal – but “fair” is often a euphemism for “not free”. And as George Magnus has tweeted: “C'mon Twitter, you think Xi JinPing is the new champion of free trade and a liberal trading order?”
That issue will get lots of attention in coming months.
I fear, though, that it effaces another problem – that even if the UK does strike great trade deals, exports might not increase very much. Just because we have the opportunity to do something does not mean we will. I would have thought that Gerard, being a lifelong Fulham fan, would know there can be a distance between opportunity and achievement.
My table gives us a clue about this. It shows goods exports per person to some non-EU countries, taken from World Bank data. You can see from this that Germany exports much more than the UK – more than twice as much person to Japan and China, and more to India and Australia, despite the UK’s historic links with those nations.
This alerts us to an important fact – that it is not membership of the EU that is holding back UK exports. Germany faces the same trade rules that we do, and is doing much better.
Exactly why this should be is of course a big question. It’s not just that UK businesses are “fat and lazy” (to use Liam Fox’s expression). It’s because the UK has for decades lagged behind in skills and investment in some key exporting industries.
Trade performance isn’t just a matter of gravity – countries export more to their near-neighbours than to distant countries – but also history.
And the thing about history is that it is usually slow to change. This means that even if we do strike great free trade agreements, overall economic growth won’t increase much. Monique Ebell shows that free trade agreements which fall short of really deep integration do little to boost exports.
What’s true for exports is even more true of GDP. In a superb post, Dietz Vollrath shows that most policies have only a small impact upon growth. Even a big rise in potential GDP, he shows, implies only a small uplift to growth simply because actual GDP is slow to converge upon potential*.
And basic maths tells us we won’t get a big increase in potential GDP from free trade deals, simply because exports to most non-EU nations are small as a share of GDP. For example, UK exports to China last year were just 0.7% of GDP. Even if they were to double over a five year period, therefore, we’d get only a 0.13 percentage point rise in GDP growth**.
I say all this to agree with Nick. Brexit – at least on the terms proposed by Ms May – jeopardizes good existing trade arrangements with the EU in favour of chasing agreements which even if they are reached might not actually benefit us much.
This isn’t just economically risky. It’s also in one sense deeply anti-conservative. Michael Oakeshott famously wrote (pdf):
To be conservative, then, is to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant, the sufficient to the superabundant, the convenient to the perfect.
This, of course, is the precise opposite of what Ms May is offering.
* Yes, GDP can converge quickly towards potential as an economy recovers from a recession. But we’re talking here about changes to trend growth, not cycles.
** In fact, probably much less because we'd have to increase imports to produce those extra exports.