As Johnson’s government turns up the heat on no deal rhetoric, an old trope has returned to temper fears: don’t worry, once they know we are serious about walking away, German car manufacturers will come to the rescue. More broadly, so the argument goes, the UK’s trade deficit with the rest of the EU gives the British government a substantial advantage in any negotiation, because European exporters stand to lose more than British exporters from any uniform reduction in the volume of trade.
There are two obvious problems with this. The first is that the argument confuses absolute values with proportions. Yes, the U.K. exports less to the rest of the EU than vice versa, but the EU represents a substantially larger proportion of the U.K.’s export market than the other way round. 46% of U.K. exports go to the EU, whereas only 8% of rEU exports go to the U.K. Once you factor in U.K. exports that go to countries which the U.K. has trade arrangements agreements with by virtue of EU membership, the figure for the U.K. is even larger.
But the second problem is perhaps more fundamental. Why do exports matter more than imports? ‘They sell more to us than we sell to them’ could easily be rephrased as ‘we get more of our stuff from them than the other way round’. If a good is being is being imported, it must represent some kind of a gain for the consumer: either in price, quality, choice or simply availability of a particular commodity. If this were not the case, why would anyone buy the good? Replacement, where possible, would come at a cost. And the sudden shock of a disruption to trade could lead to shortages. What’s more, long supply chains dependent on imported goods would mean disruption would hit export industries too.
Brexiteers seem to have fallen for the old mercantilist fallacy: that national wealth, like that of an individual firm, comes from accumulating profits (in this case from exports) rather than efficient resource allocation. But this mercantilism is in fact rather selective. The very same Brexiteers explicitly reject this argument when arguing in favour of the so called WTO option.
Their argument relies heavily on modelling done by Patrick Minford, which assumes the U.K. will embark on unilateral free trade. The idea here is that while the U.K. could not force other countries to eliminate barriers to U.K. exports, the U.K. could unilaterally eliminate barriers to imports. The argument does not take into account non tariff barriers (particularly in the form of regulatory alignment) which do require agreement, but let’s leave that one aside. The point is that for unilateral free trade to represent a gain, you have to assume that reducing import costs is beneficial. So much so that it might be worth giving up the leverage of being able to reduce barriers in order to get a trade agreement. This is what Daniel Hannan, Jacob Rees Mogg, John Redwood and others have argued.
The logical corollary of this is that increasing such costs represents a harm. This is surely hard to reconcile with the first, previously mentioned plank of no deal rhetoric: that the UK’s trade deficit is a negotiating advantage, because all that really matters is exports. You could perhaps try and make an exotic argument about both being important, but one mattering more than the other, but at that stage the arguments become increasingly arbitrary. The only realistic way of reconciling these two views is to say that yes, exports aren’t really the source of wealth, but perhaps the rest of the EU is stupid enough to think that that is the case. But perhaps this is just taking bad arguments a bit too seriously.
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