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EU Referendum: wilful stupidity

2016-04-29 04:44:50

Economists for Brexit have published a pamphlet with a briefing from each economist covering areas including regulation, trade, jobs and investment, immigration, the City, EU budget, EU funding and a comprehensive post-Brexit economic forecast.

Offering us his wisdom on the options for Brexit and trade is Patrick Minford, Professor of Economics at Cardiff University and former economics advisor to Margaret Thatcher. He asks, in a rhetorical fashion: "What would be the effect of simply 'walking away' from the EU?"

We should think of it, he writes, as abolishing the 1972 European Communities Act, not negotiating any new agreements with the EU or anyone else, and putting up no UK trade barriers at all. His detailed model calculations then show we would receive a welfare gain of four percent of GDP and consumer prices would fall eight percent.

From anyone else, this would doubtless be treated as the ravings of a lunatic, but this is not a lunatic. It is Minford, former advisor to Thatcher, and the doyen of the "free trade" claque which hovers around the IEA in London. Within the "bubble", he is treated with something akin to reverence.

Nonetheless, what's on offer from Minford and his associates is nothing short of lunatic. His scenario is based on what he calls his "Liverpool" or "Computable General equilibrium" (CGE) economic model which relies on the assumption that when the UK leaves the EU, it abandons the EU's protected economy and reverts to "world prices" for both its exports and its imports.

The unilateral removal of all tariffs enables us to buy goods and services at "world prices". This supposedly gives us the eight percent drop in consumer prices. On the other hand, though, our exporters are no longer servicing a protected market and are forced to sell at world prices.

In this scenario, many of our manufacturing enterprises would no longer be competitive and would fall by the wayside. However, Minford would have it that the UK would make up for the loss of production by switching into higher value services. This miraculously produces a nation-wide productivity gain, which lifts GDP by the four percent he predicts.

The point to make here is that Minford is not arguing for Brexit. He is exploiting the opportunity afforded by Brexit to promote his own "free trade" agenda, delivering what he calls "Breset". This amounts to a complete almost revolutionary restructuring (or "re-set") of the UK productive economy. It means that "Brexit is a shock a good shock". 

Minford nevertheless concedes that there may be some "short-term uncertainty", but reassures us that this "can be handled". Yet this is all on the basis of a model that is, according to the Financial Times, by no means reliable. The four percent gain in GDP is pure speculation, relying entirely on the assumption that the UK manufacturing sector can smoothly transition from production to services and that the workforce can be retrained and redeployed into an entirely new sector, which can then absorb a hitherto unproven demand.

From there, if it is at all possible, it gets worse. Asking what other trade agreements would be needed, Minford's advice is "none". We already sell all our non-EU exports and all our exports of services around the world under WTO rules, he says. "That accounts for about 70 percent of all our exports. Now the other 30 percent, to the EU, would join in".

Minford, however, is mistaken in assuming that the bulk of our trade is conducted under WTO rules. He makes the common error of believing in a non-existent binary structure for world trade. This is one in which international trade is regulated either via the mechanism of the preferential trade agreement (also known as the free trade agreement) or solely under WTO rules. In his book, there is nothing in between.

The truth is very different, as we point out in an earlier post: there are all manner of trade agreements, bilateral, plurilateral and multilateral, lying outside the WTO framework. These create complex networks of trade relations. So prevalent and important are these, it can be said that there is not a single advanced economy in the world that relies exclusively on WTO rules.

That Minford would have us rely on the WTO creates a gap in his scenario of monumental proportions. Should we simply "walk away" from the EU, as he proposes, a range of non-tariff barriers both regulatory and procedural would take immediate effect. These would bring UK exports to the EU almost to a complete halt. By any measure, the WTO option would be a disaster.

As if this wasn't bad enough, Minford fails to recognise that the relationship with the EU is far more than one of partners in a trade agreement. We engage in a huge range of shared enterprises from research to air traffic control, and many other things the continuation of which must be assured through negotiation prior to our formal withdrawal.

In this lies extreme peril. Far from "walking away" from the EU, the UK would be obliged to undertake a complex series of negotiations. Yet, under the Article 50 regime, negotiations are initially limited to a two year period, which can only be extended by unanimity. But not only would it be unwise for the UK to seek an extension as the price demanded might be unacceptably high. Furthermore, Reuters yesterday was indicating that there was no appetite for granting any extension.

Yet, without we well-crafted exit plan, with substantial concessions to put on the table to expedite negotiations, it is extremely unlikely that any settlement could be concluded within the time period. Confirmed by Reuters, this means that Britain could be cut adrift without any preferential relationship with its biggest trade partner.

In fact, it is being suggested that the initial negotiation period would only be sufficient to allow us to deal with issues such as residual EU budget payments to and from Britain, the pensions of British EU civil servants and relocation of EU agencies based in the UK. On 1 July 2018, or thereabouts, Britain would become a "third country" in EU parlance.

What is so terribly dangerous is that people such as Minford seems completely unaware as to what that would entail. In one of his other publications, Minford talks about it being "highly unlikely" that the EU would raise trade and regulatory barriers against UK exporters in such an event.

What he does not understand is that the EU wouldn't "raise" these barriers, as such. They are already in existence, and automatically to any "third country" - which the UK would become. Obeying the very WTO rules about which he is so keen, the EU could not apply a preferential regime to the UK. To do so would discriminate against others something not permitted by those rules.

Additionally, the EU itself is facing an existential threat, in the Brexit could become the trigger for other member states to leave, thereby triggering a collapse of the Community and especially so if any country can get a better deal outside the EU than in.

Under such circumstances, what Minford is proposing is potentially catastrophic - exactly the opposite of what we need in a referendum campaign. Where there is a crying need to de-risk Brexit in order to reassure voters that leaving is a safe option, he seems to be doing the opposite. In promoting his own agenda, he is going out of his way to maximise risk and increase uncertainty.

This is unacceptable. Academics have no business being unaware of the consequences of their proposals. And someone relying on the prestige of his academic position and title has no excuse for not knowing the specifics of trade agreements, and their relevance to our exit options.

It is said of us all that ignorance of the law is no defence (in the commission of a crime). Similarly, ignorance of key issues in an academic promulgating exit scenarios is no excuse for getting it wrong. Minford should be applying academic rigour to his work, in which event he would know that the WTO option was a non-starter. 

His failure to do his job properly is more than just mere error. It is wilful stupidity.