Free trade is worth billions
Ministers need to send Brexit modelers back to re-do their sums
Getting Brexit done was always about selling global Britain, as much as releasing ourselves from the EU trade bloc. Boris Johnson was always the man to sell Britain in the same way he championed London as Mayor; there’s nothing he likes more than selling sunny optimism. Which is why it baffles me that he allows such miserable projections for the benefits of Free Trade Agreements to be put out in his name.
Newly appointed minister for “Brexit opportunities” Jacob Rees-Mogg, should overhaul official methods for modelling the benefits from new trade deals.
The “gravity theory” model used by civil servants is biassed towards Europe
I’ve taken a much closer look at the Free Trade Agreement struck with Australia over the Christmas period, and found that officials have got their sums wrong by billions of pounds. Official modelling of the UK-Australia deal predict a minuscule boost of 0.08 per cent to UK GDP, despite the obvious and historic relationship between our two countries (one wonders if future sales of Kylie Minogue tracks could account for most of this projected gain). Should we really believe that our entire trading relationship with Australia can only be worth a few billion pounds?
I conducted my own analysis using a different methodology and determined that this Trade Agreement alone is set to bank the UK more than £69 billion in cash and add 3 per cent to UK GDP — 37 times more than official projections. Much of the discrepancy is down to a form of institutional Remainer-ism that has a bias towards doing business with the EU while ignoring the benefits of trade with the rest of the world. 60 per cent of British business is done with the world beyond the EU, but you wouldn’t know it if you looked at official calculations.
Civil servants putting together models for Free Trade Agreements are transfixed by a “gravity theory” which underpins all their calculations. This model is biased towards Europe. Gravity theory is based on the assumption that the closer you are to us, the more trade we will do. It puts far too much emphasis on geographic proximity, overlooking the supply of products and services that many people will want to buy. Proximity is substituted for competitive advantage, where one country has a product or service produced more cheaply or of better quality than another.
This thinking is a poor predictor of how markets actually work
This thinking is misplaced and a poor predictor of what will actually happen and how markets work. Using a different approach (“the classical model”) gives you a much more accurate and positive outlook. This model, which I use at Cardiff University, looks at supply rather than geography. A good example of this is the City of London, a huge exporter of UK services: it offers a large supply of financial and business services on the back of a big supply of skilled labour and well-sited land, and it enjoys demand from all over the world where there is a need for these services.
For readers not of an economic mindset, this isn’t simply a dry account of different economic models. Our place in the world beyond EU borders depends on our enthusiastically embracing global trade.
If we want to get close to understanding the real benefits of trade we need to look at much more than global proximity. My colleagues and I at Cardiff University have placed “gravity” and “classical” models side by side and analysed how well they predict economic reality. The results are not good for gravity modellers.
Our model shows itself a better predictor of economic gains using past performance. It is a surprise, then, that this isn’t the basis for official projections of the benefits of global Free Trade Agreements struck by the UK Government. Officials tucked away inside departments are convinced that the gravity model is right despite the facts not fitting the awkward reality. Ministers charged with selling the benefits of Brexit, and our role as a trading superpower, need to send these officials back to re-do their sums.
We desperately need more money to super charge our economy and strike deals with faraway lands that will bring cash to our shores. It should be the ambition of our time.
My analysis takes into account the supply of things we might want to buy and sell, showing bigger gains in excess of £69 billion, more than enough to fund a few tax cuts for hard up Brits. We need an urgent reset to recognise the big gains to be made from ambitious Free Trade Deals with the world, not just our European neighbours. Adopting a better model to project the huge benefits of global trade is the antidote to widespread institutionalised Brexit “misberalism”.
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