By Patrick Minford
The vote for Brexit has given us the people’s views of their future. Core to these views are a desire for the UK to control its borders and institute a green card system that is based on our skill needs; and to get back democratic control of our laws and regulations. Remain supporters appear to be pushing for an EU relationship little different from the status quo, such as the EEA. But plainly this could not achieve these two core wishes of the electorate as under EEA-style agreements free movement must occur and the Single Market rules must be obeyed. The optimal arrangement that achieves these wishes is the option of unilateral free trade. This would sweep away current EU protectionism in food and manufactures while also leaving the UK free to set up a green card system and abandon the Single Market regulatory system. The economic gains from moving to free trade are the reduction of consumer prices and associated rise in competition: the impact is similar to that of a large tax cut and output grows by an extra 4%. On top of this come growth gains from regulation better targeted at the needs of UK competitiveness. The green card system should eliminate the welfare burden and depressed wages imposed on poor communities by unskilled immigrants who pay little or no tax.
Unilateral free trade requires no concessions from our EU neighbours. This means that the negotiations can concentrate on other issues that are not controversial, such as expatriate rights and visa requirements. It is likely that some EU industries such as cars would press for an agreement for that industry- e.g. one that preserved the current set-up for a transitional period of 5 years or so; this would be because EU suppliers would otherwise face much lower prices and profits in the UK market. It seems that the UK could reasonably agree to such an agreement for the sake of goodwill. However we do not need it: our industry is well able to raise its productivity to match world competition, as is evidenced by the fact that two thirds of our car exports and a half of our manufactured exports generally go to the world market outside the EU. We are also easily able to give help to farmers and manufacturers that need it.
There is no need for the UK to renegotiate the EU’s trade agreements with third countries as these countries’ changes in demand are too small to have any effect on the world prices of the products we sell. If they want to renew them we would but if not we do not care.
Policy uncertainty is eliminated just as soon as a new Conservative government takes power and announces its strategy. The effects of the temporary uncertainty as we wait is as expected being offset by a 10% fall in the pound which is acting as a stimulant stabiliser of the economy.
Now that the British people have voted for Brexit, attention naturally must turn to what exactly should it be like? What policies should be followed? How will the economy react?
The whole point of creating the group Economists for Brexit was to provide clear answers to these questions, based on the economic analysis of experienced professional economists, with around 200 person-years between them in analysing and forecasting the UK economy. We set out our position on these issues and the economy’s prospects under Brexit in Efb (2016).
First, what is the minimum demand made in Brexit? I suggest that it consists of democratic control of:
— laws and regulations concerning UK life, including industrial practices: Single Market regulations would be superseded as democratically desired
— migration from EU countries; there would be a green card system based on skill requirements to govern immigration and unskilled EU immigration would only be permitted if consistent with this
— economic policies generally
Second, what does this imply for our relationship with the EU?
Third, what is the best form that this last could take? The Treasury and the other consensus forecasters who examined it assumed that the UK would maintain existing trade barriers that the EU imposes on the rest of the world when it leaves the EU, while facing EU trade barriers on our exports to the EU. This is the worst possible policy scenario for Brexit and predictably (as indeed the Treasury wished) delivered bad economic results. It amounts to a reduction in the scope of free trade faced by the UK, since existing barriers on our imports are retained while we face extra barriers on our exports to the EU. We have dubbed this the Great Brexit Consensus Deceit of the British people- Minford (2016), see also Blake (2016) and Dowd (2016). In the next section we go on in some detail to explain the only possible way in which the will of the British people can be delivered.
As is inevitable after such a bruising referendum debate and an outcome that is highly unwelcome to those on the losing side, we are hearing many arguments to the effect that the vote is not or should not be decisive, that Parliament remains sovereign and could decide to act in violation of the result and much else. Let us be quite clear. A referendum was called to resolve democratically the constitutional issue of whether we should be governed within the EU treaties that have a strong effect on the decisions taken in the UK. This has resulted in a decisive result: with a massive turnout of 72%, the highest since 1992 in any national contest, the nation has voted for Brexit, the margin of victory being some one and a half million votes, around 4%. In a democracy everyone agrees to abide by the result. The reason is that this is the way to resolve issues: the alternative is civil war. If Parliament does not act according to this decision it will provoke internal violence and dissent in a worst possible outcome; in the best possible MPs will lose their seats in a massive popular reaction. This is simply not where anyone should wish to go.
Some groups are particularly embittered or at least make a show of saying so.
First, we have the SNP leader, Mrs. Sturgeon, declaring she may well try to get another referendum for Scottish independence: well, indeed, so she may and we will see in future months whether in fact Parliament and the Scots have a stomach for a second referendum on Scottish independence in a matter of a few years.
Second, in Northern Ireland where Remain had a larger vote than Leave, there are those urging that Northern Ireland should ‘leave’ and join Ireland. This is tantamount to a bid to reverse the peace process, which was brought in to end the IRA’s unsuccessful ‘war’ to achieve this objective. Northern Ireland’s border with Ireland has always had a special status. This can clearly be maintained after Brexit, requiring no such reversal of the peace process.
Third, London had a majority to Remain; and there are voices raised that somehow it should opt out of Brexit. Are these voices implying that had the national vote gone to Remain the rest of the UK should have abandoned London? Some Londoners are suggesting a parallel with Singapore: this was created by Chinese people who were persecuted by the Malay majority in Malaysia. Over one third of the London population is of immigrants from all over the world. Is it being suggested that they or the other 64% of indigenous population are being persecuted by the UK government or the UK population?
In democratic politics when you lose, you must put up and shut up: join the policy debate but respect the majority decision. In this Brexit referendum the majority vote was for Brexit; this must absolutely be respected and carried out integrally.
The optimal WTO option and the route to a Free Trade Agreement with the EU
The best WTO option to carry out Brexit in terms of the demands set out above is to remove the existing EU trade barriers on our imports from the rest of the world, including the EU, and go to full global free trade. By doing this we reduce consumer prices sharply and stimulate the economy. Our exporters will no longer get protected EU prices, instead they will face world prices and the global competition that implies. Half our manufacturing exports already are sold outside the EU on world markets, and one third of our manufacturers are hi-tech, fully able to face global competition. So it is a challenge for the rest that can be surmounted by tried means: go up the value chain and raise productivity. It will be assisted by greater competitiveness as those consumer prices work through the economy lowering costs, accompanied by a lower exchange rate. There are farmers and firms (like Port Talbot steel) we need to help out, which we can easily afford to do from the massive gains we make from leaving the EU.
What this all means is that we are not dependent at all on the goodwill of our EU neighbours upon departure. EU leaders like Angela Merkel and Wolfgang Schauble have threatened us with no ‘deal’ on trade or the Single Market. Many EU leaders still threaten us in a similar way. What they will soon understand is that we do not need a deal to do well. Our best strategy is global free trade, free of all the incubus of the Single Market regulations and the EU’s protectionism.
What will they then do? They will panic! They have large industries with huge sales into the UK market. With global free trade the prices these firms will get in the UK market will plunge to world prices set by global competition- whether in cars, or furniture, or machinery. Mercedes, Mannesmann, Volkswagen, Siemens, and many others will be ringing Berlin asking what the Bundeskanzler is doing to stop this massive damage to their profits. Berlin will then ring London and propose a trade deal. The boot will be on the other foot- London’s not the EU’s.
Notice that it is actually strictly against our best interests to agree to ANY deal. Efb have calculated that the highest gains, as is obvious, come from maximum free trade. Also we can deal with our own industries that face greater competition, as already explained, by policies that assist them in raising productivity, by the rise in general competitiveness from the fall in prices and the lower exchange rate, and by helping those that need it directly.
However, we may well decide on political grounds that we should enter into a transitional trade deal on specific industries over say the next 5-10 years, to give our neighbours and our own firms some help over the adjustment process. An obvious example is cars. We exported in 2014 £11.9 billion worth of cars to the EU, and £17.9 billion to the rest of the world; we imported from the EU £31.3 billion and £4 billion from the rest of the world. Total domestic car sales were worth some £64 billion. After Brexit without a trade deal our exporters would face the EU tariff of 10% so their profits on EU exports would fall by this. As EU trade barriers on world imports are more like 20% on our calculations, EU exporters to the UK would face price falls of about 20% on their sales here, with imports here from the rest of the world undercutting them. Consequently the EU would much welcome a trade agreement on cars over say the 5 years from the end of negotiations (itself 2 years) that preserved the status quo. From the UK side there are political attractions in such a deal, since the car industry would get a breathing space in which to prepare itself for the necessary changes it would need to make to raise productivity and adjust; more importantly we could show neighbourly understanding to our EU ex-partners that would grease the future path of cooperation we all should wish to occur.
What we see here is an example of how the UK would indeed move to a trade deal on cars from a position of bargaining strength. The UK can by its own national policies perfectly well deal with the adjustment problems of the car industry. But we can benefit politically from a trade deal here both for the sake of goodwill with our neighbours and because it removes the need to make particular arrangements for the car industry.
From the point of view of a jittery British public the prospect of such specific trade deals is reassuring also. If possible British voters want cooperation with the rest of the EU, not confrontation. After a bitter referendum campaign in which harsh things have been said by EU and UK politicians, this would be a soothing prospect.
So we emphasise that the WTO option leads naturally through bargaining to an FTA with the EU covering specific industries for a transitional period. What it would not do is compromise on the long term global free trade agenda, but it would smooth its adjustment path. Although these industries covered by the FTA would be subject to the necessary regulations covering their activities over the FTA period, this would not apply elsewhere in the economy. Hence Single Market regulation would no longer be generally applicable, and would cease applicability everywhere after the FTA transition. Nor would this interfere with the cessation of EU free movement.
In sum, the UK would be able under this scenario to achieve the objectives set out above. We have already explained the economic prospects under the full WTO free trade option. Depending on exactly which industries were covered these gains would need to be reduced a bit, but the forecasts would not be changed materially.
The canard of trade agreements
One thing we need to dispose of in all this is the question of all the free trade agreements the EU has signed. It was said by Remain and indeed by the head of the WTO, Mr. Azevedo, that it will take many years to renegotiate these agreements when we leave the EU. However, Efb analysis has repeatedly pointed out that there is no national advantage for us in these agreements as they are all with countries that are small players in world markets, i.e. their demands and supplies are too small to affect the world prices of the products they sell and buy. In this respect they are just like us: we too are a ‘small country’ in this sense, even though with around 3% of world GDP we are the fifth largest economy in the world. It follows from this that any trade agreement the UK has with any of these countries will have too small an effect on the world demand for the products we sell to affect their world price. Since it is these world prices that determine our total output of these products, it also follows that our total output and total trade is unaffected; all that happens is ‘trade diversion’, that is we sell more to the agreement country and less elsewhere while others sell less to the former and more elsewhere.
So we are supremely indifferent to whether these agreements are continued with us or not. Our policy could be to let these other countries decide whether to continue or not with their agreement; if not we let it lapse. Notice we will not in any case put up any trade barriers against them, since those damage us!
With trade agreements with large countries or blocs of countries like the EU, the analysis is different. Because these dominate our trade by being so large relative to us, they do indeed affect the prices we obtain, as we have seen with our membership of the EU customs union. With the US we have never had a trade agreement and have traded successfully for nearly two centuries because of common law and culture. It remains to be seen whether we would find it in our interest to have an agreement with it or with say China. It clearly will depend on the effects, much as with our EU agreement, which as we have seen is strongly against our interests. However, such things are for the future and can be examined on their merits if and when future proposals are made.
For now, the WTO legalities of speaking again on our own behalf (instead of the EU doing it for us), of dealing with EU trade agreements with third parties, and of announcing our zero trade barriers against all are easily handled, as Martin Howe (2016) explains.
The mechanics of Brexit and dealing with policy uncertainty
One of the main reasons given by consensus forecasters for the possibility of short run recession is uncertainty, where different modellers have made a variety of ad hoc assumptions about how much there would be and how big its effect would be. We of Efb have argued that this would have to be policy uncertainty- i.e. people would not know what policies would be put in place after Brexit- but that this uncertainty is entirely within the control of politicians. Indeed one the great ironies of this debate is that the Remain politicians like Messrs Cameron and Osborne set out to ramp up this uncertainty as their preferred tactic for fighting Brexit! Plainly in the interests of the country this had to stop at once after Brexit. However because the government we have is still the one that pushed Remain so hard in this way, there is still policy uncertainty.
How can policy uncertainty be closed down now that the vote for Brexit has occurred?
First, we notice that the optimal policy is quite clear and perfectly achievable. It is to move to global free trade under the WTO but be willing to negotiate an FTA with the EU on specific industries for a transitional period. So this policy needs to be clearly explained now, so that people can be reassured.
Secondly, however, this needs to be achieved while the whole process of negotiation is going on. Plainly there will be enormously detailed agreements to be reached on such things as the rights of existing foreign residents, and which EU regulations will be taken into UK law. The UK government will want to provide maximum reassurance that the transition in these matters will be gradual and that existing rights will be respected under the usual ‘grandfather’ clauses that apply in UK practice. Cooperation will continue in foreign policy, in legal arrangements, in fighting terrorism and so forth.
The mechanics of all this have been set out comprehensively and clearly by Martin Howe (2016), the pre-eminent expert on EU law. Exit from the EU happens legally through Article 50. This provides for negotiations to be carried out for a maximum of two years; at the end of that the UK would leave whether or not agreement had been reached. As we have seen, in the event of breakdown on trade discussions the UK can optimally go it alone. In other areas we are perfectly capable of reaching arrangements for our and others’ citizens that would be civilised and reasonable, even if the rest of the EU will not agree to some parts of them.
Howe also points out that the existing European Communities Act 1972 can be used, via amendments, to sort out which parts of existing EU-originating law will be kept intact and which rejected. No doubt in the short run most will be retained, but would be subject to longer term examination by Parliament. Once this Act has been used in this way, it would be simply replaced by these domestic provisions and would lapse.
In sum uncertainty about the aims and direction of policy would be eliminated by setting out the main policy goals and the mechanisms being pursued as above. Some politicians have muttered about obstructing the process in some way, to divert policy towards the EEA option. But, as we have explained, the EEA cannot deliver what Brexit is wanted for, as set out above; we expect such mutterings to disappear from the debate as this point becomes widely understood. Of course any defiance of the people’s will as expressed in the referendum would be political suicide and can be discounted. So there is no threat here to the basic direction of post-Brexit policy.
Of course there is always some uncertainty surrounding economic issues. But this is always with us and there is no evidence that it obstructs the normal progress of the economy.
Uncertainty in transition created by opponents of Brexit
So far the economy’s behaviour since the Brexit shock has followed closely the pattern of the reaction to our departure from the European Exchange Rate Mechanism in September 1992. The exchange rate has fallen as well as asset prices; there has also been sympathetic movements in continental markets, as then too fears occurred that others would follow suit (which they did in time). Then there were fears that the falling exchange rate would set inflation off again and that recession would follow. Now similarly there are fears that inflation will rise too much and set off rising interest rates that again will cause a recession.
In fact then monetary policy within two months had replaced the ERM ‘inflation anchor’ with an inflation-targeting interest rate rule. The economy started growing at once and inflation never got out of control. Today the parallel would be the rapid adoption of WTO-based free trade. Interestingly in 1992 the main proponent of inflation targeting had been New Zealand; hardly anyone else had yet adopted it. Today the main precedent for unilateral free trade adoption is also the New Zealand of that time. So there is a virtuous short run trajectory for policy: uncertainty being offset by the exchange rate stimulus, with new well-based policy coming in rapidly to close down uncertainty. In our forecasts for The economy after Brexit (Economist for Brexit) we had a forecast along these lines, with inflation getting slightly over target enabling interest rates to get back to more normal levels, while the economy grows steadily and a bit faster than before under the stimulus of the free trade prospect.
One concern that we must have is that the opponents of Brexit will somehow try to hijack the current period of transition from a government under David Cameron and George Osborne to a new government, in order to convince people that somehow they made a mistake because indeed there is uncertainty about future policy created by their own unwillingness to move forward on the optimal Brexit agenda we have just described. Thus indeed by creating policy uncertainty they have the power to create economic uncertainty; and by this means to persuade people to take some other Brexit policy which is worse. Notably both these two politicians tried to win the Brexit referendum by trashing the future economicprospects under Brexit. May they not carry on doing so for three months, with the objective of swaying people and persuading them they were right after all?
There are various ways such uncertainty can be created.
First, it can be put about that ‘free trade is politically impossible’ and so the WTO option can again, as by the consensus, be evaluated as one where we keep all the EU’s trade barriers. There is no basis for this assertion of political impossibility as major Leave proponents explained to people that Brexit meant leaving the Single Market and also explained that free trade would bring down prices sharply. Not only Efb explained this repeatedly; also Nigel Farage. It was put in Efb videos, which were viewed by around 3 million times; also in Brexit the Movie which viewed also massively. Also Michael Gove was insistent that we would leave the Single Market and trade effectively even if he did not spell out the details. Thus people voted knowing these points.
Second, it can be said that in practice the only politically possible option is for an EEA deal. But as the people voted for the stopping of uncontrolled EU migration, this option would fly in the face of their demands. So it would be said that we would have to have this renegotiation and then another referendum in due course after it was all done. This again would be a way to stop the Brexit WTO free trade option being exercised in favour of effectively a continuation of the status quo: we would be in the Single Market, subject to free EU movement, and simply facing more administrative hassle, with no gains from leaving. That would truly prolong uncertainty as the next referendum would be founded on the betrayal by our governing elite of the people’s will. The anger would be intense and the uncertainty huge. I shudder to think of the people’s reaction to such blatant ignoring of their previously expressed wishes.
Third, and an even more cynical effort, would be to let things drift and deliberately stoke financial and economic disruption for the next three months in the hope that people would be so distressed they simply gave up on any Brexit. Rumour has it that the civil service would like to do this under their Machiavellian chief, Sir Jeremy Heywood. This course of action however could create a greater popular backlash, as it became apparent what had been done.
One would hope that none of these somewhat dishonourable courses of action are followed. It is really time that our governing elite understood the referendum vote and stopped playing their games to stay in the EU. However, one can rule no behaviour out in the current febrile political atmosphere where the losers seem unable to accept that they have lost.
From the start of our campaign we have argued that the Brexit option was the clear one of global free trade under our own democratic control of our regulations, economic policies, and borders; we showed that it brought considerable benefits both short and long term, as one would expect from such a move towards greater economic freedom.
We were confronted by a Treasury and consensus onslaught on this scenario which both used some dubious modelling methods in many cases and also totally misrepresented the WTO option, in effect substituting an option in which free trade was greatly reduced. This attempt at deceit of the British people in order to terrorise them out of their Brexit demand for democratic freedom is both brazen and culpable.
Now in considering the prospect of a vote for Brexit we can see that there is a very clear policy mandate to achieve the aims being voted for; and that the economic prospects this yields are achievable with no destabilising policy uncertainty. To achieve this major reform in our economy the government needs to embark on the Article 50 negotiations at once with the clear objectives of going to the WTO option and standing ready to do an FTA over specific industries; and of dealing with the many details of the law by progressively amending the 1972 European Communities Act. Far from this process dragging on for years, the government can state the true position which is that the Article 50 process must end in two years and that the amending process under the 1972 Act will be carried out by ourselves with maximum expedition.
Last of all, how do we achieve this when we do not yet have a new government in place, as promised by David Cameron in his resignation statement? Will we not have three months or so of delay and prevarication, when matters will drift and perhaps create sufficient obfuscation that the Brexit requirements will be abandoned by default? For example it has been suggested that the senior Civil Serice will, in Sir Humphrey manner, frustrate the will of the people in this manner. David Cameron must make sure in a transparent way that this does not occur: he must name a transition team that sets out the Brexit steps it is following and is seen to adhere to them, in preparation for finalisation by the incoming government. These steps must conform to the minimum Brexit demands set out above.
In short, quite contrary to the past accusations of Remain, there is a unique and clear set of policies and prospects ahead under Brexit. The Brexit vision is mandated, attractive, feasible, must be carried out and must be seen to be carried out, to eliminate policy uncertainty.
Blake, David (2016) ‘Measurement without Theory: On the extraordinary abuse of economic models in the EU Referendum debate’, Cass Business School, City University, downloadable at www.economistsforfreetrade.com
Dowd, Kevin (2016) ‘Lies, damn lies and the Treasury’s Brexit reports’, Durham University, downloadable at www.economistsforfreetrade.com
Economists for Brexit (2016) ‘The economy after Brexit’, www.economistsforfreetrade.com
Howe, Martin (2016) ‘Transforming the UK’s relationship with the EU: the legal framework’, chapter 5 (pp 82-100) of Breaking up is Hard to do, eds Patrick Minford and J.R. Shackleton, IEA.
Minford, Patrick (2016) ‘The Brexit Consensus Bug’, www.economistsforfreetrade.com