Last Word: Global Britain? The Trade Debate
| Date | 01 March 2018 |
| DOI | 10.1177/2041905818764708 |
| Published date | 01 March 2018 |
| Author | Sam Lowe |
40 POLITICAL INSIGHT • APRIL 2018
Last Word
The EU is the UK’s most important
trading partner, accounting for 43
per cent of our exports. The next
most important market is the US,
at 18 per cent. This is to be expected. Time
and time again, the evidence has found
that distance and size are determining
factors when it comes to deciphering
which countries trade most with each other
and why. A country will near-inevitably
trade more with the large economy on its
doorstep, than the large/small economy far
away. Known as the ‘gravity model of trade’,
this understanding has helped shape trade
policy for decades.
Yet, in the Brexit debate, gravity has fallen
foul of a noisy choir of nonbelievers.
This pro-Brexit choir claim the gravity-
dependent mainstream economic forecasts
– which expect Brexit to leave the UK
anywhere from 1.3 to 9.5 percent poorer
than it would have been had we remained
– are overly reliant on a model no longer t
for the modern age. Liam Fox, the Secretary
of State for International Trade, has heralded
the post-Brexit opportunities on oer in a
“post-geography trading world”. David Davis,
the Brexit secretary, contends that the UK’s
reliance on services means gravity is losing
its relevance. New free trade agreements will
result in previously untold bounty. Global
Britain will succeed, because it has to.
Yet, their arguments rest on shaky
foundations. In practice, services trade is still
constrained by distance and new free trade
agreements will struggle to oset the losses
of Brexit.
While it is intuitive that distance should
matter less when trading services, and thus
for the UK (and indeed, gravity is slightly
less of an issue for services than for trade
in goods), it is still a constraining factor. A
ten per cent increase in distance between
countries reduces services trade by seven
per cent. While technology has reduced
some costs considerably, time zones and the
cost of travel still shape business decisions.
Free trade agreements, on the other
hand, simply do not produce much in the
way of headline economic growth. For
Global Britain? The Trade Debate
Visions of a new era of free trade after Brexit are misplaced, argues Sam Lowe.
reference, the agship EU-Canada free
trade agreement (CETA) is only predicted
to increase European GDP by 0.03 per
cent. Without harmonisation of rules,
supranational regulatory architecture, and
eective accountability, mechanisms, such
as that which exist within the EU, it is dicult
for governments to do much more than
lower some (often already low) taris. The
more signicant regulatory barriers to trade
in goods and services mostly go untouched.
And in a post-Trump, protectionist world,
there is little reason to think a smaller UK will
be able to break open new markets where
the much larger EU failed.
But what if we were to take a more
extreme proposal: so called unilateral free
trade (UFT)? Promoted by Brexit supporters
such as Jacob Rees-Mogg, UFT would see
the UK unilaterally remove taris and barriers
to trade on all imported goods. UFT, it is
argued, will reduce consumer prices by up
to 20 per cent, resulting in GDP being four
per cent higher than had we remained an
EU member. Over time, other countries will
see the light and follow suit. (All it would
cost is the livelihoods of unproductive UK
producers – such as farmers.)
Yet, the assumptions underpinning such
claims do not pass the common sense
test. In order to achieve such rosy gures,
the model creating the UFT silver bullet,
assumes, among other things, that Brexit
will not aect the price of sterling and
that consumers always buy the cheapest
variant of a product available, regardless of
brand, preference or quality. It also assumes
distance and the cost of transport has no
impact on prices. In English: following
UFT’s implementation, instead of buying
champagne, UK consumers will buy the
cheapest Chinese knocko at Xinjiang
prices.
When LSE researchers took into account
how consumers actually behave, they
concluded that a Brexit followed by UFT, will
still result in ‘a 2.3 per cent loss of welfare
compared with staying in the EU’. Regardless,
when you stop to consider the politics of
a policy that strips the UK of all bargaining
chips, vis-à-vis its trade negotiations
with other countries, and will likely lead
to extreme short-term pain in the very
constituencies that voted heavily for Brexit, it
becomes clear that UFT was never anything
more than a minority pipe-dream.
The backlash against gravity is
understandable; if its learnings are taken to
their logical conclusion, Brexit begins to look
like a bad idea. Yet the time has come for
ill-informed bluster to make way for rational
thought and honest self-assessment. Only
then can the UK begin to gure out who it is,
what it wants, and where to go from here.
Sam Lowe is a Research Fellow at the
Centre for European Reform.
Follow him on Twitter @SamuelMarcLowe
How much does the UK trade with the EU and the Rest of the World?
EU £235.8 billion
Rest of World
£284.1 billion £27.5 billion
European
Free Trade
Association
Political Insight April 2018.indd 40 19/02/2018 11:19
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