By Prof. Patrick Minford
Martin Wolf takes me to task for opposing the Treasury and modellers’ consensus against Brexit. But there are two important things he and your readers need to appreciate.
The first is that whatever the models used, whether by my team or the others, they all agree that more free trade beats less free trade. So it turns out that the reason the consensus gets negative results from Brexit whereas we (and on some assumptions Open Europe) get positive results comes from differing assumptions about what Brexit entails. The consensus have assumed that on Brexit the UK loses its barrier-free access to the Single Market but still maintains the current EU trade barriers against the rest of the world: hence there is less free trade and a negative for the economy. We assumed that on Brexit the UK eliminates those current EU barriers and we move to full global free trade: so there is an overall gain, with large falls in import prices yielding big gains to consumers.
Against this he claims that EU tariffs are only 3%. But EU trade barriers are far bigger than that by general consent. Food tariffs due to the Common Agricultural Policy are about 20% according to the OECD. We estimate that for manufacturing when non-tariff barriers are included the figure is also about 20%. All modelling groups including LSE have assumed these Single Market barriers to be substantial; otherwise why all their fuss?
A further argument he deploys against our assumption of global free trade is that it is not politically realistic. Yet it is the job of economists to explain all options so that the people can decide- particularly so in a referendum when the people really do decide. And what might the people think about global free trade, when 92% of them work in sectors that get no protection? That global competition for currently protected sectors- farming and manufacturing- is good for the economy and that firms there can increase efficiency, especially by going up the value chain towards more hi-tech products as so much of manufacturing has already done; that over half our manufacturing exports already go to the world market and cope very well, as the chairman of JCB has recently reminded us; that we can help particular subsectors like steel and hill farmers directly; that falling consumer prices would translate into more competitiveness and a lower exchange rate, giving a general stimulus to the economy.
This brings me to the second important thing: modelling choices. The issue of Brexit is plainly a very long term one. At the core of long term trade theory lies comparative advantage and this is determined by a country’s relative stock of production factors: notably for the UK by its large stock of skilled labour. This is why our industry has moved more and more towards skill-intensive industries such as the City and hi-tech manufacturing. In the very long term we must also expect that industries will face full competition and cannot rely on pockets of monopoly power for their sales: market forces extinguish these in time.
We used a tried and well-founded model that could take account of these forces, one that did well in accounting for the effects of globalisation in the 1980s and 1990s. The recently fashionable ‘gravity model’ theory promoted by Prof. Van Reenen and his LSE team stresses ‘distance’; yet it cannot account for why the UK has moved into services in such a big way and anyway ‘distance’ has now virtually disappeared due to the container revolution. It may be fit for use for short term trade changes but those are not relevant here. There are many other issues, about how one tests these models and estimates them; an area in its infancy in trade but not in macroeconomics where my Cardiff group has made much recent progress. As it happens, there was quite a wide spectrum of models used by the consensus, some closer to ours, some closer to the LSE and Treasury’s gravity approach.
These model differences in any case will only make a difference to the size of our estimates. The direction, positive or negative, depends on those Brexit assumptions. I strongly advise your readers to concentrate on those.