Thursday, 18 July 2019

Checking the assumptions

Yesterday, there was an exchange of views in the media between the Chancellor, Philip Hammond, and the member of parliament for the eighteenth century, Jacob Rees-Mogg about the impact of a no-deal Brexit on the economy.  The former stated a negative impact of £90 billion, whilst the latter claimed a positive impact of £80 billion.  Clearly, both of those things can’t be true, but that doesn’t mean that either of them is ‘right’ either.  The problem with making projections is that they’re always going to be based on mathematical models, and those models are always going to be based on a series of assumptions; the difference between the two positions is based on the differences in the assumptions that they make.  The fact that the consensus of economists is closer to the position of Hammond than Rees-Mogg doesn’t make the consensus right; there could be an element of groupthink at work.  But the obvious reality that the Brexiteer position is an outlier should give some cause for detailed scrutiny to say the least.
At the heart of the difference in positions is the question of the value of new vs existing trade deals.  One thing both sides appear to be agreed on is that ‘free trade’ is a good thing which generates economic prosperity, although there is a question in my mind about whether it is always the good thing that it’s presented as being; that’s a question for another day.  If we start from a position of accepting that free trade can and does boost economies, then the difference between the two positions comes down to an assessment of which route offers the greatest amount of free trade.  Part of the Brexiteer argument has always been that the freedom to strike trade deals with a much wider market than that offered by the EU will lead to more free trade than the restrictions placed on us by membership.  And if some free trade is good, and a lot of free trade is better, then the logical conclusion is that completely free and open trade globally is best of all.  At a superficial level, that is the ‘attraction’ of Brexit.  There are two not insignificant problems with it, though.
The first is about what is the best route to opening up more trading freedom between countries.  Is it by taking the large trading blocs which currently exist and negotiating comprehensive deals between them, such as that recently signed by the EU and Mercosur, or is it by doing away with trading blocs like the EU and Mercosur and starting again at the level of individual states?  Asking the question is almost enough to answer it; a negotiation involving only two parties acting on behalf of 28 and 4 member states respectively is almost invariably going to be easier than having 32 countries each trying to negotiate individual agreements with the other 31.
And the second is about depth rather than breadth; ‘free trade’ is about more than tariffs and quotas; it’s also about standards, rules and regulations.  The ‘depth’ of the free trade arrangement between the 28 EU member states is much greater than that between the EU and, say, Canada (which increasingly seems to be the model put forward by the Brexiteers), but increasing depth necessarily requires increasing alignment in a whole range of areas.  Rules end up being made jointly rather than unilaterally, and it is precisely that to which Brexiteers object.
In the light of those two factors, the claim by Rees-Mogg that no-deal produces more economic benefits than continued membership depends on an assumption that increased breadth with countries further away more than compensates for reduced depth with countries on our doorstep.  One of the things that I learned in Maths many years ago is that any result which fails the ‘reasonableness’ test (never mind what the numbers say, does it look or feel credible?) probably contains an error in the workings somewhere.  The Rees-Mogg claim seriously fails the reasonableness test, making it look like a number generated to try and ‘prove’ a point rather than one which owes anything to the normal rules of mathematics.
For all their talk about the glorious benefits of the trade deals which the UK will be able to negotiate in the future, I’m not convinced that free trade is actually of much importance to the Brexiteers at all.  If it really was the driving force that they claim, they would be pushing for more deals like the EU-Mercosur deal, and for those deals to be deeper, rather than seeking to walk away from them and start again with a clean sheet (which is more or less what WTO terms means).  Prioritising breadth globally over depth regionally is a characteristic more associated with wanting to secure an advantage by working to looser rules than those binding other countries than with wanting to increase trade.  It makes eminent sense to a country which is – or believes that it is – in a position to impose its will and its trading terms on weaker countries.  That is, of course, exactly the trade model on which the British Empire was built (and the one which Trump is attempting to pursue using America’s might).  That’s at the heart of the Anglo-British not-nationalists-at-all Brexit fantasy – a yearning for the past ‘glories’ of empire, and an unwillingness to accept the realities of the twenty-first century.  But believing really hard doesn’t create a power and influence which no longer exist and producing numbers which are simply unbelievable doesn’t turn fantasy into reality.

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