Trade deal? Yawn.

One of the most elementary distinctions in economics (and in life) is that between instruments and objectives. Interest rates, for example, are only an instrument whereas the objectives are price and output stability. I fear, though, that this distinction is being overlooked by those Brexiters aroused by what Trump calls a “big and exciting” trade deal between the UK and US. Trade deals are only a means of achieving what really matters – prosperity. And they might be a weak one at that.

Liam Fox claims that bilateral US-UK trade could rise from £167bn a year to about £207bn by 2030 “if we’re able to remove the barriers to trade that we have”. This isn’t as impressive as it seems.

The UK currently exports £100.3bn of goods and services to the US. Let’s assume this rises as much as Fox claims. Over the 11 years from 2019 to 2030 that’s a rise of £24bn. Which is 1.2% of GDP. Or 0.1% per year. And in fact, the rise would be much less than this simply because exports have a high import content*.

Granted, this might understate the benefit. Perhaps a trade deal would boost GDP not so much by raising exports but by giving us access to cheaper imports, thus raising real incomes. However, cheaper US imports would threaten to drive some UK producers out of the market – a fact they would of course resist. One reason why trade deals take such an infernally long time is simply that every goddamn lobbyist in the country sticks their neck in.

All this, though, assumes something that mightn’t be the case – that Fox is right that a trade deal would raise exports a lot: that word “if” in his statement is doing a lot of work.

Research by Monique Ebell and Silvia Nenci shows that this mightn’t be the case. Nenci, for example, shows that cutting tariffs has been of only “small significance” in boosting trade. A big reason for this is that trade deals often leave in place non-tariff barriers to trade such as differences in regulations. These are the sort of things removed not by trade deals but by a single market across nations. If only somebody had ever thought of such a thing.

What’s more, there are countless non-governmental obstacles (pdf) to trade such as exchange rate volatility, consumers’ preferences (pdf) for home-produced goods and services, uncertainty, credit constraints, a lack of entrepreneurial nous and of course distance. Two big facts tell us that these are important. One is that world trade has slowed in recent years without significant increases in legal obstacles. The other is that Germany exports much more than the UK does to non-EU countries – a fact which tells us that the barriers to UK exports are not primarily regulatory.

Herein lies my gripe with Brexit. It steals cognitive bandwidth. Instead of considering the countless possible ways** in which we might improve our economic performance without the omniuncertainty of Brexit, we’re discussing how to clean a fucking chicken.  

Why, then, are Brexiters making such a big thing of a UK-US trade deal? One reason lies in the old cliché that if your only tool is a hammer, everything looks like a nail. They’re making the mistake the right has made for years – of assuming that dynamism and flexibility will be unleashed if only the state gets out of the way.

Also, there’s the confusion of instruments and objectives. Those who regard Brexit as a good thing in itself are making a fetish of trade deals: they're saying “look at what we can achieve outside the EU” without asking what the payoff to that will be. 

In this sense, Brexiters are like the worst sort of amateur DIYers who refuse to hire proper tradesmen. Their unwarranted belief in their competence and self-reliance is causing them to wreck the house.

* This is a specific example of the general policy made by Dietz Vollrath – that “you can’t reform your way to rapid growth.”

** There is of course a tension between this claim and Vollrath’s scepticism about supply-side reform. My point is that economic stagnation requires a broad-spectrum response; we should throw as many sensible policies at it as possible, in the hope that one or two will work.  

Comments

[Anonymous2]

The fact any negotiations would be conducted it seems by Fox, who has already had to resign once in disgrace, is deeply worrying to me. His links with Atlantic Bridge need checking out. Would negotiations be conducted with the welfare of the UK uppermost in the minds of the relevant UK ministers?

[mpc]

My worry is we are already being told that if we do not accept US food without question then we are the ones standing in the way.
The argument that when you visit the USA you are eating this stuff so its okay for when you get home is a poor argument since much of the UK cant afford holidays in America.
There is also food chain security. Horse meat maybe safe to eat but when our regulations ban it I want to know its not in my food and I want confidence our regulations are being followed.
Finally I am not happy at the idea that we buy all our food from abroad and ignore the plight of our own farmers. Free Markets are great when they serve us. When Free Markets destroy your own food standards and farms then you need controls.
At least with Europe we had a say. Can you imagine the USA listening to the UKs thoughts.

[aragon]

https://www.dissentmagazine.org/online_articles/left-case-brexit

"Liberal defenders of global capitalism led by President Obama like to stress the fact that the treaties enshrine workers’ rights and gender equality, and they imply that the other provisions are necessary to enforce these rights and to prevent states from restricting free trade through such means as the manipulation of labor laws and heath and safety regulations. But the fundamental fact is that supranational intervention on behalf of left-wing causes is bundled together with intervention on behalf of modern global capitalism, and it is not difficult to see which type of intervention will have—and is intended to have—the most lasting impact."

The EU is not a trade association but a proto-superstate, missing vital elements, like democracy and wealth transfers, but having a supranational court, which constantly expands EU competence (scope).

The BBC are offshoring Jobs, to fund more pay for 'Talent'.

https://www.theregister.co.uk/2017/07/26/bbc_to_offshore_hundreds_of_atos_roles/

"The workers were warned they will be pushed into an "availability pool", where some may be redeployed to another role within the company.
But only a fraction are expected to be retained on the BBC account, with most of those local roles to be exported to Atos centres in Poland and India, sources told us."

Jobs for mere mortals and taxpayers to be transferred abroad, along with the purchasing power and organisational knowledge.

[derrida derider]

You've surely missed the worst thing of all about a bilateral deal that increases trade between the partners - that the bulk of the increase in bilateral trade is trade DIVERSION rather than trade CREATION. Getting an extra 2.4% of GDP going to US-UK trade does not mean that either US or UK aggregate GDP will rise by anything like that.

This the reason trade economists are usually strong proponents of multilateral approaches, such as through the WTO or (dare I say it) the EU. They've done a huge amount of empiric work on this over the years, whose results all indicate trade diversion effects are generally big.

[rogerh]

Fox's schtick is that all of a sudden we can boost trade. Well, if it were that easy why hasn't everyone done it. Why hasn't Norway or Sweden or whatever rolled up their sleeves and boosted trade. As you say there are multiple barriers, not that easy at all.

Worse still, innovation requires a warm and fertile soil and a benign environment and a fair amount of time. Added to which there has to be something new 'in the air' capable of exploitation. Then you have to hope no one will spot the idea or opportunity first. Then of course if I had a good idea I and my backers would be looking round the world for the best place and transfer the idea in a heartbeat. Fox and his mates would do the same, the hard cold stony soil of the UK venture capital market ensures that.

Then world events are moving unfavourably. The Giga Factory is the new thing, applied to the car industry those new electric cars will put millions out of work. Everyone will be falling over themselves for the world's two or three Giga Factories supplying essential components, add a local body shell and paint job and your done. Fox and his mates don't care and will not be able to do much anyway.

Don't kid yourself or us Foxy, inside or outside the EU there are no sunny uplands.

[Guano]

It always pays to keep a very close eye on what disgraced former ex-Minister Dr Liam Fox is doing when he is abroad, especially the USA. He re-launched Atlantic Bridge after the invasion of Iraq by going to the USA and saying that the Tories had voted for the invasion so please give us some money.

If animals are raised in the USA in conditions that require over-use of antibiotics and washing in chlorine, it is of little concern to him. If antibiotic resistance is imported into the UK from the USA food-chain, that is of little concern to him (even though he supposedly a medic). If the UK cannot trade in food with the EU because it has accepted USA conditions, it is of little concern to him. His concern is access to American funding-streams.