Lord Mandelson sneered at Brexit supporters this week for failing to understand the complexities of modern trade and how leaving the EU would trigger years of renegotiations that would leave us with a far worse deal than we have inside the EU. Alas Lord Mandelson is a victim of the mandarin-centric fallacy that trade only happens after governments have arranged it in the best interests of their citizens.
This fallacy is demonstrated by two facts. The first is that around 70 per cent of UK trade is conducted without any trade agreements under WTO rules: namely, all our services trade (43 per cent of the total) and all our goods trade with non-EU countries (half of our trade in goods). Yes, there are quite a few EU trade agreements with third countries but they tend to be marginal for our trade, being mostly with small former colonies of EU states.
The second fact is that the one big trade deal we do have — with the EU — is a bad one. In more than a decade and a half of research (set out in my book Should Britain Leave the EU?), I have found that it is a source of damaging protectionism. The EU is a customs union, which works by creating a protective wall (with tariff and non-tariff barriers) against third countries while allowing its members to trade freely with each other but at prices inflated by protection. This protectionism is projected to raise our cost of living by 8 per cent, with much of these higher prices going direct into our EU partners’ pockets. It also twists our economy out of shape, encouraging industries in which we perform worst at the expense of those — mostly service industries such as hi-tech design, education and the City — where we perform best. The overall cost of this deal to our citizens is 4 per cent of GDP.
But many people worry about the post-Brexit world. Will we not be out in the cold, without ability to access world and EU markets? Hardly, when 70 per cent of our trade is already doing just fine. As for a trade agreement with the EU on the other 30 per cent, my calculations assume we do not negotiate one: for to do so would immediately incur the same costs we face from being part of the EU customs union! We will, of course, continue to trade with the EU but at world prices, not prices inflated by protection.
In practice there will be compromise agreements because UK industries protected by the EU will clamour for financial help to get through the post-Brexit adjustment. But deals such as this will only reduce our gains in the short term. In the long run, the Brexit trade liberalisation will bring us substantial benefits.
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Patrick Minford is professor of applied economics at Cardiff Business School