Boris Johnson Meets with Prime Minister of Australia Scott Morrison in Downing Street on June 15, 2021. Picture Credit: Wiktor Szymanowicz/Future Publishing via Getty Images

Australia is not a goldmine

Trade with Australia is good for Britain, but it can’t replace Europe

Artillery Row

Patrick Minford has claimed that the UK’s new free trade agreement with Australia will boost Britain’s economy by £69 billion — the equivalent of three per cent of GDP. With all due respect to Professor Minford, this bears no resemblance to reality. 

You don’t need to be an economics professor to see why distance still matters

Minford’s figures come from his own report for Civitas in which he argues that because Australia can pretty much provide all the food we need (a dubious claim in and of itself), food prices will fall by two per cent, ultimately leading to a three per cent increase in GDP. The reason for this is because farming in the UK will become completely unviable, meaning that farmers sell their land and we start becoming far more productive as a result by building homes and offices and the like.

Now, Minford is right to point out that agriculture is pretty insignificant to the UK’s economy in GDP terms. We also do need to desperately build more homes in order to end the housing crisis and increase productivity, but sadly it’s simply a fantasy that the FTA with Australia would achieve this.

There are further issues with Minford’s article. He claims that “Civil servants… are transfixed by a ‘gravity theory’… biased towards Europe”. Minford is insinuating that the gravity model is something invented by mandarin remoaners. 

However, there is a great deal of evidence as to the accuracy of the gravity model. Essentially, like with objects in space, size and distance really do matter when it comes to trade. 

As such, you’re much more likely to do more trade with big countries that are close to you than you are with small countries on the other side of the world. What is more, it is not  the recent invention of disgruntled civil servants, it has an impressive historical pedigree going back decades.

It is worth pointing out at this point that Minford only mentions geographic proximity when he refers to the gravity model, completely ignoring the impact of size. This is of course convenient for him as it allows him to overlook the fact that one, there is a massive trading block next door to the UK and two, that Australia has a relatively small population. 

In his article for the Critic he seems to dismiss the gravity model out of hand. In his Civitas paper he is more nuanced but argues that because the UK economy is dominated by services, then the gravity model  doesn’t really apply. Again, Minford’s claim is not backed up by reality as the gravity model still holds for services trade.

You don’t need to be an economics professor to see why distance still matters when it comes to services — professionals still have to travel long distances to ply their trade in a country at the other side of the world and even if done remotely there is the issue of time differences. Then taking in trust, language barriers, and cultural differences one can see why it is more likely that services trade will take place between neighbours.

Minford’s article suggests he appears to have difficulties accepting the world as it is. He writes “Should we really believe that our entire trading relationship with Australia can only be worth a few billion pounds?” Professor Minford might not like it, but trade between the UK and Australia is just shy of £15 billion.

He also claims that the gravity model should be replaced with the classical model based on competitive advantage. This is a false dichotomy where Minford would have us choose one or the other, but this is the wrong approach. Of course competitive advantage is important, but we cannot defy gravity.

The simple truth is that an FTA with a relatively small economy on the other side of the world which removes barriers and addresses a few non-tariff barriers will never bring the huge economic benefits which Minford claims. 

This is not to disparage the Australia deal (I worked on it). The deal with Australia can and should be built on, focussing on improving services trade by making it easier for UK services firms to do business in Australia and vice versa. This would bring further economic benefits to Britain, but still nowhere near the level suggested by Minford.

Free trade is a wonderful thing

This does also highlight the outdated thinking about trade and FTAs, with many commentators thinking it’s all about tariff reduction. In reality, tariffs on most (non-agricultural) goods are already very low and so the biggest frictions are caused by non-tariff barriers such as regulations.  The UK would do well to focus on these in future trade deals and working with other countries and at the WTO to work towards mutual recognition of standards and qualifications in order to really increase trade.

Finally, Minford claims that the modest benefits of a trade deal put forward by the government are the result of civil servants who hate Brexit, are biased in favour of the EU, and who are determined to thwart Global Britain. Not only is this insulting to hard working and politically neutral civil servants, it’s just not true. 

You can point out the importance of trading with the EU while also wanting to pursue free trade with the rest of the world. It is a good thing that the UK is seeking trade deals with other nations and there is every reason to believe that they will be a success. A trade deal with India, for example, has the potential to be very significant for Britain, as will joining CPTPP.

Free trade is a wonderful thing. It has lifted countless people out of poverty and has created wealth on a scale unprecedented in human history. We should want much, much more of it. However, we should make the case for it based on evidence, and not on flights of fancy.  

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