BrexitCentral: A World Trade Deal under WTO rules is now the best option for the UK

Ever since HM Treasury published predictions of the grim future of the UK economy if voters dared to vote to Leave the EU, it has been promoting, by leaks, in evidence to select committees, in research updates, an image of how leaving the EU without a deal, and trading with it thereafter as a Most Favoured Nation under WTO rules, would have the worst possible economic consequences for the UK. In recent months, it has been joined by other government economists in a leaked cross-departmental Brexit analysis.

Why should they do this? Because this is the conclusion to which they are driven after an exhaustive, expert and disinterested examination of all the evidence? That could hardly be the case since their examination of the available evidence about trading under WTO rules has been anything but exhaustive, expert, and disinterested, as we shall see in a moment.

The Treasury’s short-term predictions of what would happen within two years of a Leave vote have been shown by Tim Congdon and Economists for Free Trade to be so ludicrously wide of the mark on every single count other than the fall in the value of sterling, that one has to question either their competence or their honesty or both. We will have to wait till 2030 for reality to test their long-term predictions, though since they relied on a flawed pseudo-gravity model, incorporated wildly improbable assumptions, ignored conflicting evidence and gave misleading interpretations of cited sources, questions about their competence and honesty can already be raised.

Space allows just one of many examples. In 2005 the Treasury conducted a solitary ad hoc study of the impact of EU membership and the Single Market on the UK, which is known only because of a Freedom of Information request in 2010. This study found that the impact of both was minuscule; 7% for EU membership and 9% for the Single Market. Fast forward to 2016, when the UK was still, of course, in the wake of the financial crisis during which world trade had taken a nose dive, but the Treasury had quickly to show, for George Osborne’s sake, that remaining in the Single Market was the best possible option for the UK. It then calculated that EU membership had boosted UK trade in goods by a truly breathtaking 115%, of which there is no sign whatever in any of the international databases.

How did the Treasury get away with such a whopping inconsistency or miscalculation? No doubt their past reputation as incorruptible experts rendering impartial advice to ministers and the public helped. And, since many think-tank and media observers were Remainers, they were evidently willing to suspend their normal critical standards, and not to check the records of UK goods exports. However, the Treasury was also not above fiddling the figures in favour of its predictions, first by ‘forgetting’ to mention their own 2005 study, and second, by hiding the truly daft assumptions such as, for instance, that the growth of total EU trade as it was enlarged by the accession of former socialist countries post-2004 would also provide a measure of the benefits of EU membership for UK trade, even though it was well aware that there were vast differences between trade in eastern and western EU. Any other researcher playing such tricks would be named and shamed as a cheat, but the British do not like think of Treasury mandarins as cheats.

If the Treasury really hoped to discover whether leaving without a deal and trading with the EU as a Most Favoured Nation under WTO rules really was the worst option, it would surely have checked to see how those countries that have been trading with the EU under WTO or GATT terms have fared from 1973 or from 1993, versus those trading in other relationships, either as EU or EEA members or under a bilateral trading relationship.

IMF-DOTS allows one to do this fairly quickly. It shows that of the 22 of the largest value goods exporters to the EU12 over the years 1993-2015, 15 were trading as most favoured nations under WTO rules, (or GATT until 1995), and seven under some kind of bilateral agreement. The former, trading under the worst possible option, grew by 135% over the period and the latter by 107%. More importantly, they grew almost twice as much as the supposed best possible option of exports of the 12 founder members to each other, which grew by only 70%, and four times more than UK exports to the other eleven, which grew by 25%.

How can trading with the EU under WTO rules be the worst possible option when the exports to the EU of 15 countries which have been doing just that over 23 years of the Single Market have grown four times as much as those of the UK, despite all the tariff and non-tariff barriers they have faced? These 15 include China, which no doubt helps to explain why the aggregate growth differential is so large, but they also include the US with growth of 68%, which is almost the same as frictionless trade of the 12 founder members to each other, and well over twice as much as the frictionless trade of the UK to the other 11. In any case, a second study, excluding China, found the growth rate of the 14 WTO exporters to the EU12 was almost double that of the UK.

If trading under WTO rules was such a bad option, one would also expect those UK exporters which currently trade under them to demonstrate the disadvantages. Over the years 1993-2015, UK exports of goods to 111 countries under these rules grew at a CAGR of 2.88%, while those to 62 countries which had some kind of trade agreement with the EU grew at 1.82% while those to the EU14 which were frictionless of course and for which the UK paid a considerable sum, grew at just 0.91%.

Since the CBI and other trade federations have expressed their horror at trading under these rules, they ought to address and explain why they draw different conclusions from these figures. Otherwise, one is left to conclude that they simply find them inconvenient and would prefer their EU trade costs to continue to be paid by UK taxpayers rather than by exporters themselves.

At the start, I wondered why the Treasury should spend so much of its time and of its credibility promoting the image of no deal as ‘crashing out’, as ‘chaos’ and ‘Armageddon’ and so forth, and of trading under WTO rules as the worst possible option, when the evidence, which they never mention, has long shown that those trading with the EU have performed as well and often better than members of the Single Market trading with each other.

The answer, I suspect, is that the Treasury mandarins recognise, like many Remainers, that leaving without a deal to trade as a Most Favoured Nation under WTO rules is the cleanest, swiftest and most definitive Brexit. It severs, with one decisive, irrevocable stroke, the ties of forty-plus years, and creates a new reality, and an opportunity for a new relationship between the two parties to be negotiated by the end of the transition period.

If Mrs May chose to leave in this manner, she could deliver exactly what she promised at Lancaster House, and stay well behind all her red lines without the least difficulty. There would be no further quarrel about the sequencing of negotiations, no reason for UK negotiators to be supplicants, no reason to make concessions or further payments to the EU, other than for past commitments and for participation in selected future joint activities. At long last, UK negotiators would have some leverage, be able to negotiate as equals, and be free to embark on their declared aim of making the UK a world leader in free trade, starting perhaps with the EU. She would of course also bring to an abrupt end attempts to qualify, compromise and delimit Brexit, and dash their hopes of remaining in some form, which I imagine would disappoint the Treasury mandarins.

But what, one must finally ask, have Mrs May, her Government and Treasury advisers achieved over these many months? They have created enormous distrust among Leave voters about their true intent, added quite unnecessary ill-will in the UK towards the EU, and no doubt vice versa, deepened the already bitter divide between Leavers and Remainers, and contributed to the uncertainty of businesses everywhere. Unless Mrs May has a sudden conversion to accepting Canada+, it’s time to take the World Trade Deal option under WTO rules, because it is, oddly enough, the best way – even the only way – to do good deals with the EU and many others.

To read Michael Burrage’s piece for BrexitCentral in full, click here.

To read Michael Burrage’s paper, click here.

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