When questioned on Brexit by the BBC’s Andrew Neil at a conference earlier this week, I made what appeared to be a radical statement: “Brexit will be unequivocally good for the British economy.”
Understandably, Neil came back at me sharply, demanding to know how my statement could be reconciled with City firms shifting their location outside the UK, or car producers moving the next generation of foreign direct investment to the continent.
Some of these things may occur, but they also may not. There is a concerted and organised lobbying effort at present, and some statements need to be treated with caution. But let’s say some of these things are true. What does that mean for my unequivocally good statement?
The first part of the answer relates to the short-term impact of Brexit. Prior to the referendum, it was obvious that any Brexit vote could introduce serious uncertainty. My unequivocal argument prior to the referendum was confined to the long-term impact of Brexit.
What about the short term? June was a great month to announce you were leaving the EU, given the acceleration in broad money M4X growth in Britain, the strong head of steam in key indicators prior to the referendum, and the bounce back in other indicators after post-referendum falls.
These effects could slow or reverse as a result of continued uncertainty. Where is the reassurance this won’t happen? My response is that the scale of the depreciation in sterling has been sufficiently large to offset the impact of uncertainty.
In order to understand my long-term unequivocally good argument, we must unpack the nature of our economic relationship with the EU into its three constituent parts: EU budget payments, the Customs Union and the Single Market.
There’s no doubt that budget payments are a cost. The debate is only whether you use gross or net figures or some figure in-between.
The second element of our economic relationship is membership of the Customs Union. This imposes tariffs on goods imported from outside the EU, which means that, while producers – shielded from world prices – may gain, consumers and intermediate producers have to pay more for goods. There would be a benefit to consumers and intermediate producers from the removal of the EU tariff wall, which outweighs any cost to producers from losing protection.
You would have to go back to the abolition of the Corn Laws, in the nineteenth century, to find an example of a trade-liberalisation with such a positive effect for consumers over producers.
Part of the conundrum at present is what I call iceberg economics. The visible portion of the iceberg is the announcement by company X or Y that they intend to do this or that in the wake of Brexit. The invisible portion is the millions of individual decisions which will occur if the UK pursues unilateral free-trade (WTO membership, but with zero tariffs). I need to stress here that the word unequivocal is conditional on going unilateral.
The UK economy would then be maximising competition in order to maximise its comparative advantage, and by maximising its comparative advantage, it would maximise long-term prosperity. It’s economics 101.
So if the budget and Customs Union support the case for Brexit, the benefits of the Single Market must massively outweigh them? No, there is an enormous gap between the rhetoric and the reality of the Single Market.
The most recent EU analysis of the Single Market suggests a positive impact of around 2 per cent of EU GDP. However, these estimates exclude any negative effects from regulation, which is a significant omission given the application of many across the whole economy. Also, pan-EU figures are less applicable to the UK economy, because it trades less with the rest of the EU than many other countries, and the UK economy is more service orientated.
Hey, you cry. What about the Treasury study showing GDP would be 6 per cent lower with Brexit? The answer is very simple. These studies are based on very positive dynamic effects from the Single Market on productivity in the long term. Dynamic effects we simply haven’t seen in the past, and are unlikely to see in the future, given the declining share of the EU in UK trade.
What if there was a Single Market in services? A Single Market in services is like waiting for Godot. Faced with a hypothetical Single Market in services, or the reality of trading at world prices, the dynamic effect surely has to be much greater with unilateralism. Unequivocally good.