27 May 2016

CEP: 'Economists For Brexit' - A critique

The latest in a series of #CEPBrexit reports, published by the Centre for Economic Performance (CEP) at the London School of Economics, explains how the 'Economists for Brexit' fail to grasp basic facts about the nature of regulation, product standards and international trade.

A more realistic assessment shows that Brexit plus 'unilateral trade liberalisation' would still lead to a drop in UK living standards. The new CEP report shows that:

• The only modelling details provided by 'Economists for Brexit' come from Professor Patrick Minford of Cardiff University, who argues that after leaving the EU, the UK should unilaterally abolish all trade protection. Under this 'Britain Alone' policy, Minford describes his model as predicting the 'elimination' of UK manufacturing and a big increase in wage inequality. These outcomes may be hard to sell to UK citizens as a desirable political option. 
   
• CEP's analysis of the 'Britain Alone' policy predicts a 2.3% loss of income compared with staying in the EU. This is only 0.3 percentage points better than Brexit without unilaterally abolishing tariffs, which would result in a 2.6% income loss. Taking into account the Brexit-induced effects of uncertainty and productivity losses due to lower trade and foreign investment further increases the economic losses. 
   
• Minford's results stem from assuming that small changes in trade costs have tremendously large effects on trade volumes: according to his model, the falls in tariffs become enormously magnified because each country purchases only from the lowest cost supplier. 
   
• In reality, everyone does not simply buy from the cheapest supplier. Products are different when made by different countries and trade is affected by the distance between countries, their size, history and wealth - the 'gravity relationship'. 
   
• Trade costs are not just government-created trade barriers. More realistic approaches that allow for product differentiation and gravity predict that after Brexit, the UK will continue to trade more with the EU than other countries as it remains our geographically closest neighbour. Consequently, we will be worse off because we will face higher trade costs with the EU. 
   
• Minford also assumes that the prices of goods and food would fall by 10% after Brexit. This comes from bizarrely attributing all producer price differences between the EU and low-cost countries to EU trade barriers, rather than the fact that there are huge differences in product quality between goods produced and sold in different countries. 
   
• Single Market rules (for example, over product safety) facilitate trade between EU members as it creates a level playing field. Minford's assumption that the Single Market merely diverts trade from non-EU countries is contradicted by the empirical evidence. 
   
• Minford also overlooks the loss in services trade that would result from leaving the Single Market, such as 'passporting' privileges in financial services.

Full paper

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