There is a degree of consensus among economists that a Brexit will make us worse off. The exception is recent work by Economists for Brexit. Their forecast of income gains from Brexit contrasts with all other economic analysis, explain Thomas Sampson, Swati Dhingra, Gianmarco Ottaviano and John Van Reenen.
The possibility of the UK leaving the European Union (EU) has generated an unusual degree of consensus among economists. Acrimony and rancour surrounded debates around austerity and joining the euro, but analysis from the Bank of England to the OECD to academia has all concluded that Brexit would make us economically worse off. The disagreement is mainly over the degree of impoverishment (for example, Dhingra et al, 2016a; OECD, 2016; HM Treasury, 2016; PWC, 2016; NIESR, 2016).
Perhaps the one exception is the recent and much-publicised work of ‘Economists for Brexit’ (2016). Since any coherent economic case for leaving the EU was been largely ‘missing in action’, it is refreshing to get some clarity over the Leave campaign’s vision of the UK’s post-Brexit economic arrangements.
The only modelling details provided by Economists for Brexit come from Professor Patrick Minford of Cardiff University (Minford, 2015; 2016; Minford et al, 2016). He argues that Brexit will raise the UK’s welfare by 4 per cent as a result of increased trade. So where exactly does he get his numbers from and why are they so different?
The ‘Britain Alone’ Policy: A hard political sell?
Minford’s policy recommendation is that following a vote for Brexit, the UK should not bother striking new trade deals but instead unilaterally abolish all its import tariffs (let’s call this policy ‘Britain Alone’). The UK would simply pay the tariffs imposed by other countries on UK exports. This is usually the worst-case scenario that other economists have examined.
This would be a pretty hard sell to UK citizens. Minford admits his model predicts that the policy would cause the ‘elimination’ of UK manufacturing and a large increase in wage inequality. But although he is relaxed about these outcomes, we suspect that voters in Port Talbot and elsewhere in Britain wouldn’t be so impressed.
Indeed, we know of no cases where an industrialised country has ever implemented full unilateral liberalisation – and for good reason. Persuading other countries to reduce their trade barriers is easier if you can also say you’re going to reduce your own as part of the deal. If we’re committed to go naked into the world economy, other countries are unlikely to follow suit voluntarily.
But putting political reality aside, standard economics does suggest some benefits from ‘unilateral trade disarmament’. For example, in our work back in March (Dhingra et al, 2016a, Table 2) we also look at what would happen if the UK eliminated all tariffs after Brexit. Looking solely at the short-run static effects, we find that if the UK trades under World Trade Organisation rules following Brexit, but maintains import tariffs, income per person falls by 2.6 per cent. Under the ‘Britain Alone’ scenario of unilateral liberalisation after Brexit, UK real incomes still fall by 2.3 per cent. In other words, there is a gain of only 0.3 percentage points from eliminating tariffs compared to just trading under WTO rules and the British people are still considerably worse off as a result of Brexit. The mystery is why Minford can generate effects thirteen times are large.