Brexit: the right's consistent error

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.

Comments

[Luis Enrique]

Is this a manifestation of econ 101 ism that abstracts away from adjustment costs, uncertainty etc. and looks at equilbiria not adjustment processes?

[Dave Timoney]

If the UK economy really were in a position to take advantage of a radical change in circumstances, such as Brexit or comprehensive deregulation, we would expect to see signs of that potential exhibited as tension. In other words, a visible straining at the leash or chafing under existing constraints.

In the absence of such signs, you'd have to conclude that either the potential isn't there or that the existing constraints aren't material. In the case of deregulation (of which we've had plenty), it looks to be the former; in the case of Brexit, it looks more likely to be the latter.

[aragon]

The Rights Consistent Error:

I am not a big fan of free trade, but companies in the UK have no motivation to export because the Right will indulge them and keep then nice and fat, regardless. After all the UK is the expert in making money from money. Manufacturing we can ship off to other countries, and therefore make more money selling the family silver.

Tories: Government of the Fat Cats (even under Theresa May)

The Lefts Consistent Error:

It's the economy stupid. To listen to Labour you would think they are the Tories. Red Tories?
On Brexit and everything else the Labour retort is that it is the economy stupid.

Liz (4.2%) Kendall et al (Blarites) are concerned about the effect of Brexit on the economy. Jeremy Corbyn makes weak noises about maintaining workers rights.

http://www.independent.co.uk/news/uk/politics/brexit-article-50-labour-jeremy-corbyn-vote-rebels-keir-starmer-clive-lewis-a7543286.html

"It will also seek a commitment to securing “barrier-free access to the single market” and that the legal status of EU citizens in the UK is resolved “before negotiations begin”.

"The Labour position is concern for the foreigners and to stay in the free market."

Maximum access to the free market is maintaining the status quo, as far as trade is concerned. But the EU may be difficult on this issue.

The position in Brexit is so weak that there are no sanctions for ignoring the party line (what party line) and Labour want to stay in the E.U. but we must respect the people (the majority our voters) opinion, although we disagree strongly with their decision.

http://www.hamhigh.co.uk/news/tulip_siddiq_willing_to_leave_frontbench_to_vote_down_brexit_after_supreme_court_decision_1_4861754

Tulip Siddiq to resign from the Labour front bench to vote against article 50.

Who do Labour represent, on economics the Tories even voting for cuts in benefits under Harriet Harmen (because they are popular).

Labour allows the Tories to frame the debate,
and even adopts the Tory arguments.

Some forecasters have Labour with less than one hundred and fifty seats at the next general election. Not bad for a party with no purpose beyond polishing the opposition green benches with there backsides.

Labour: the party of the middle (read upper class, in London and Ethnic Minorities and Foreigners in general).

The EU have a say the determining the outcome of negotiations. We want full access to the single market but will fall back on the WTO rules if we can't get agreement defines the parameters of the negotiations. We will not accept free-movement would appear to be a condition of the Brexit vote, ditto for control by European institutions including the ECJ/Parliment/Council of Ministers etc.

The outline is clear, we are leaving the EU (hard Brexit) unlike Switzerland or Norway which are half in half out.

[andrew cornish]

Another impediment was language skills. One of the UK's weaknesses in participating in the EU was that the country had (and still has) little depth in terms of foreign language skills. This inhibited the UK's ability to staff more positions in the EU bureaucracy and its ability to reach more deeply into European markets. None of that will change in the post-Brexit world. How many companies are actively encouraging staff to learn the languages of trading partner countries? When I studied Vietnamese in Hanoi my class was full of Japanese businessmen being paid to do full-time language studies for the first year of their posting. But that of course requires a long-term view of doing business.

[reason]

Luis,
you surprise me. Yes and yes.

[rogerh]

Very good points.

If we look around the world we might ask where are nice reasonable places that have a dynamic economy significantly better than that of the UK. Not very many, America (nasty social setup), Germany (not too bad), S Korea (not sure). Then we might ask why has no significant economy pulled way ahead of the others. In the past America did but that dropped off pretty badly and we shall have to see how Mr Trump gets along. But none of the European economies is really ahead to the extent that the sunny uplands claimed by the Brexiteers would have us believe we can be.

This suggests to me that economies all revert to some mean. If this is true then Brexit will require the new UK economy to run rather hotter in order to compensate for the loss of easy European market access. I suspect the American model will suggest itself and the UK will end up with a much nastier social setup. This may work to the advantage of the Labour and Liberal parties and the disadvantage of the Tories. But that is all 10 to 15 years in the future unless Parliament can cause Brexit to unravel.

[Blissex]

«even if UK exporters do get good opportunities to trade, they won’t necessarily take them.»

Well the "dynamism" of the rent-oriented UK business sector cannot be underestimated, yet there has been a nice growth in UK trade, even if non-EU trade has been growing faster than EU trade in recent times.

That could get worse. I have recently discovered that some "Leavers" don't realize that exiting the EU Customs Unions, one of T May's "red lines", means that the UK will lose Customs-free commerce with the EU27, and all commerce with the EU27 will have to go through Customs: at least on one side if there is a Customs-equivalence agreement, and on both sides if there isn't.
That means paying a customs agent to do paperwork, and considerable extra workload for UK Customs, whose budget and staff has been cut a lot since 2010.

T May of course has demanded that the UK must both be given Customs-free («as frictionless as possible») trade with the EU27 and be given opt-out of the EU Customs Union aspects that make that possible; which would allows UK based companies to arbitrage ("cheat") on origin rules.

She added that if the EU27 dare to refuse to grant to the UK to be both in and out of the EU Custom Union «That would be an act of calamitous self-harm for the countries of Europe. And it would not be the act of a friend».

[Keith]

Politics seems to have departed from sanity to a kind of deranged world of pure fantasy.

Leaving the biggest free trade block in the world with the wealthiest customers namely the EU, is presented as a way to increase trade and prosperity! If you step back from the fantasy world and think about it for a short time this makes no sense at all. It is obviously harder and less rewarding to export else where and it is unclear if any growth in exports to non EU countries will compensate for loss of exports to the EU zone. Leaving the EU will reduce the existing integration with the other EU countries and thus all the efficiency gains therefrom will be reduced. Which will impoverish both the UK and the EU zone.

Trying to make the economy grow by moving the UK in an even more right wing direction will do nothing for growth but will make most people worse off. Less taxation for the 1 per cent is not going to do much for anyone outside the one percent. The cayman islands may be able to survive by being a tax haven for spivs but a country of sixty million people is not in the same position. This whole discussion is so daft it is absurd!

[Ralph Musgrave]

Well if the UK economy doesn't respond well to free trade arrangements, that condemns our existing trade agreements with EU as much as it condemns deals we might do after Brexit!!!!

[Donald Ellis]

This is a pretty good description of the New Zealand experience from 1973 through ca. 2003. In 1973 the UK repudiated its existing trade pacts so that it could join the EEC leaving NZ in particular pretty high and dry.

NZ had to not only find new markets but it had to radically restructure its export goods and services. In 1973, for instance NZ had no export wine industry and 60m sheep. Now there are only 1/3 the sheep there once were but wine seems to be going OK. The UK went from taking 35% of NZ's exports to today's 4.5% while Australia rose through the ranks to become No. 1 trading partner.

Obviously these adjustments cannot happen overnight but they also don't need to take so long. NZ made the mistake of electing a (small "c") conservative government in 1975 that tried to preserve the old days while praying that new markets could be found for all that sheepmeat and wool. When that didn't happen the house of cards collapsed spectacularly. It was something of a lost decade.

I assume that the EU will drag its heels on a FTA with the UK until its own members have poached as much business as they can from existing UK suppliers.

So, the economic success of post-Brexit UK will depend largely on the government enacting policies that support the birth of new businesses and development of new markets while accepting that the process of change will be painful.

You are right that once the ink is dry on the Article 50 notice it will all be about firm-level decisions. Who will innovate the new products and/or new markets? If the government promotes educational opportunity across the board (especially in less affluent regions) and encourages immigration, and if it avoids the temptation to bail out its mates' failing businesses there is a chance for a relatively quick transition.

But you can count on each palliative measure that denies the reality of the UK's situation as one that will extend the pain longer.

Good luck.

PS In case the Leave side have forgotten: the Empire is dead and buried and the Commonwealth only lingers through the force of will of Queen Elizabeth.