25 April 2016

Britain’s GDP could survive Brexit


The main reasons we joined the EU and the main things we’ve got out of it (and there are many good things we’ve got out of our EU membership) aren’t about economics. In the same way, the main reasons for leaving aren’t economic either. We should leave because we’ve achieved all we can inside, because it’s time to get out of the way and allow the European project to be completed, and because there are new opportunities in the wider world.

The main way the economics matters is pragmatic. Even if we felt the UK’s strategic goals, in terms of promoting our values and ideas around the world, protecting our security and developing ourselves, were in the future best served outside the EU, if leaving would impose enormous economic costs it might simply be too expensive an endeavour. You can’t hope to promote your values very effectively if you are poor and internally chaotic.

Fortunately there is good reason to believe that over the medium-term – say, by around 2030 – UK GDP will be about the same whether we Leave the EU or Remain. After that, we might even find we gained GDP.

We can see the intuition for why that might be fairly straightforwardly. Whereas ten years ago, around 50% of UK trade was with the EU, that’s now down to about 40% and, as the rest of the world grows faster than the EU over the next 15 years, by 2030 it will be down to about 30%. So we will have more than twice as much trade with the rest of the world as we have with the EU.

That means that on the trade side of Brexit, we’d only have to gain half as much value, per unit of trade, with the rest of the world as we lost with the EU (because there’s twice as much rest-of-the-world trade). Is that plausible? I think it fairly clearly is. The EU’s overt tariffs on manufactured goods are rather restricted these days — only around 1%. The Single Market in services is (as everyone notes) incomplete, but in any event the UK would be likely to get good trade agreements in key services such as finance. The UK has converted the EU to an economic philosophy rather similar to ours, so we will not find it terribly onerous to meet EU standards for exporting.

On the other side of the equation, there should be solid new opportunities to make trade deals with countries like Japan and Australia. Without 27 other parties getting in the way with their own complex interests, trade deals should be quicker. I would also expect us to make preferential deals with new EU-style partners. I see no realistic prospect of the UK wanting to “go it alone” in the world.

But suppose that we did choose to “go it alone.” What that would mean is that the UK would adopt a trade stance like that of New Zealand, in which we stripped away all our tariffs. The Treasury’s Brexit impact assessment considered a “WTO” scenario in which the UK chose not to have any preferential trade deals post-Brexit. I think that’s highly implausible, but if did do that we certainly would not adopt the absurd stance modelled by the Treasury, in which we imposed higher tariffs on everyone else under that option, to keep them as bargaining chips for trade deals we never made!

We’d only adopt a WTO-only stance if we wanted to strip tariffs away. Discussion of the Treasury document noted that economists are fairly agreed that more open economies are likely to have higher GDP. Well, yes – and they’d also agree that if we stripped all our tariffs away (contrary to the Treasury’s assumption) we’d have higher GDP not lower. The result would be more like the kind of model produced by Patrick Minford over the weekend.

Now I don’t believe we would do that. But that’s because I think the UK would prefer to enter into new strategic partnerships (e.g. perhaps with Canada and Australia). In other words, I think we could get the kind of GDP boost unilaterally abolishing tariffs entirely would produce, as Minford suggests. But we wouldn’t do that because we’d think doing something else would be even better.

Thus, through some combination of new free trade deals, unilateral tariff reduction and new preferential partnerships, we should be able to do better on our non-EU trade if we are outside the EU. It seems very plausible that we should be able to gain at least half as much per unit of non-EU trade as we lose on EU trade.

There are other gains for us as well. With the UK gone from the EU, the non-Eurozone EU will fairly quickly disappear – every current non-euro EU member will choose between euro Membership and Norway-style EEA membership. Once the Eurozone and the EU become the same thing, that will solve much of the Eurozone dysfunctional governance issues. The Eurozone will have a parliament and a president. It will be able to raise taxes and debts. All that will allow the Eurozone to grow faster — which will be to our benefit as well.

Furthermore, the ability to focus our regulation more on our own domestic needs and (crucially) to change or reverse regulation quickly when it is misguided (which the UK is good at and the EU notoriously bad at) should allow for greater regulatory efficiency, boosting domestic growth.

I don’t claim that these various economic gains from leaving the EU are decisive as a reason to go. Neither do I claim that they will add up to large increases in GDP. Furthermore, it should not be doubted that firms are currently set up to take maximum advantage of our EU membership, not Brexit, so leaving will be likely to involve some disruption and shifting of investment around. The consequences of that might be 2% or so lost GDP over the first two or three years after we vote to Leave.

But by 2030 there is good reason to believe that GDP should be about the same, whether we Leave or Remain. That is what I believe and what other economists such as Gerard Lyons, Roger Bootle, and Mervyn King believe. We can leave the EU without that materially damaging our economy over the medium-term.

Andrew Lilico is Chairman of Economists for Britain