BrexitCentral: Whitehall’s leaked Brexit forecasts are clearly based on outdated trade models

Free trade with the world or free trade with Europe? That is the question! Or so the latest Buzzfeed-leaked report from the civil service would have us believe.

The report has examined, it would appear from the leaks, three post-Brexit scenarios: continuing in a close ‘Norway’ deal with the EU, doing an EU trade deal à la Canada, and the ‘WTO option’ where we have no EU trade deal but we do trade deals with the rest of the world. All are shown to give bad results, from 2% off GDP with the Norway option to 8% off GDP with the WTO option over the next 15 years. So what we see here is that even the slightest deviation from our current EU membership apparently deals us a bad blow, while not even the most massive programme of trade deals with the rest of the world gives us more than tiny gains.

The battle has raged over models and projections and all such economist-oriented material. But naturally enough, many people mercifully untrained in these arcana find them pretty baffling. So what is it really all about? Remember that behind all the models and projections lies an imagined world to which these models give material body.

On the one side are the current ‘trade economists’ and their civil service followers who believe that ‘border’ formalities can sabotage trade. Trade, in their view, is mainly with neighbours and the larger the better – as there is relatively less border to contend with once you are inside the large market. Trade with far-flung countries and especially small ones is less important because distance creates cost and smallness means the border looms large relative to the size of trade. All this is summed up as the ‘gravity’ principle of trade: gravity is closeness times size and the bigger the gravity the more the trade.

On the other side are many non-trade economists and policy-makers who see a world of ‘comparative advantage’ determining trade and emphasise the way that transport costs have fallen to negligible levels with containerisation, while computerisation of customs procedures and the ‘virtual border’ that is now mandatory under WTO rules have more or less eliminated border costs. Add to that service trade that is not subject to border formalities and is weightless; this trade is particularly large for the UK, now over 40% of our exports. According to this view, trade is diverse and spread across the world, depending on your comparative advantage. Australia mainly exports commodities, as it is resource-rich; Britain mainly exports services, as it is skills-rich and resource poor.

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

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