‘Brexit’s 7 per cent Boost – The Impact on the Whole Economy Matters, Not Just the Sectors’
Friday 10th November: As some MPs call on the government to publish 58 individual ‘sector studies’, Patrick Minford* explains that what matters is the whole economy not the individual sectors. The impact studies will have little of value on the sectors and less on the whole economy.
As with all things Brexit a great hoohah has developed, this time over the ‘sectoral studies’, whatever they may be, that the Department for Exiting the EU has done. These ‘studies’ may amount to little more than rough thoughts and a few very rough estimates of the Brexit effect in each industry. We do not even know what industries these are. Furthermore since this sort of detailed analysis is extremely hard to do because the data in each sector is so different and usually not easily available for what one needs to do the job; these ‘studies’ are probably not too informative.
The whole controversy, however, misses the main point which is that we should not care about sectoral effects but rather we should care about effects on the whole economy and national welfare. This is the reason for doing things at the national policy level. Having determined the national interest the next step is to consider how to help those who lose from the change, but do so in a way that does not hold up national progress or stop all sides from pressing ahead and taking advantage of the new opportunities.
Let us remind ourselves what national welfare gains Brexit brings. Free trade brings down prices for consumers and enhances competition domestically as producers from around the world come into our markets at world prices, no longer at artificially high protected prices. This will raise productivity and living standards. Better regulation made by our own government according to our own interests as consumers and producers will also drive down costs and raise productivity. Stopping subsidised unskilled immigration from the EU will make the bottom end of our labour market more effective: higher productivity and training and more domestic supply of work. On top of this we will get our EU budget contribution back. In my Politeia paper on all this and in subsequent papers* I have mentioned that my research team’s estimates for these gains totaled around 7 per cent of GDP.
How does this translate into sectoral issues?
Well, it is pretty obvious that the sectors protected by the EU- that is farming and manufacturing, both to the tune of 20 per cent, raising their prices by this much- will face more competition, which will force them to raise productivity to compete. They will complain about that but from our national viewpoint we need them to bite the bullet. We can also have a rather clear conscience about the help we are giving them to cope with that because the Brexit devaluation of around 15 per cent has given them a huge boost as long as it lasts which will probably be from five to ten years, as long as Brexit is taking effect. This boost is occurring now, well before they will have to react to the extra competition, so that gives them a lot of resources meanwhile to help them up their productivity game.
What of the other sectors? No doubt they too will complain as is human nature in the face of any change to the status quo. But of course they will benefit from lower costs as prices tumble for the greater competition! This includes all our service sectors, including the City where the usual grandees chunter on about the ‘disaster’ that will befall them. These service sectors by and large are already subject to world free trade; no one protects them and specific regulations on them are generally regarded by the industries as market-friendly. They are likely to expand as protection falls elsewhere.
The City is worried that the EU may turn protectionist against it by not awarding ‘equivalence’ which is what enables other non-EU countries to sell into the Single Market. However for the EU to do this would be illegal under WTO rules as discriminatory, as well as damaging to the EU itself by reducing its access to the world’s number one financial centre. Of course the EU might try some of it on even so; but what the City grandees fail to understand is that even in this case we do not care. The City sells in all the markets of the world at world prices, competing with the likes of New York, Singapore and Hong Kong, to mention but a few big competitors. It can sell any amount the EU decides not to buy in all those other markets at the same prices! Total world demand and supply will not change if the EU switches some of its demands to EU producers; it is just a switch and small at that relative to the world market as a whole.
So when DexEU eventually releases these ‘studies’, the reaction is likely to be a mixture of disappointment that they are so weak, as well as a cats’ chorus of sectoral industry demands for ‘compensation’. These of course must be ignored as should the mass of other special pleading we are getting from vested interests of all kinds as we move towards this transforming Brexit revolution in our economic affairs.
*Professor Patrick Minford is Chairman of Economists for Free Trade and Professor of Applied Economics at Cardiff University, whose interests include monetary economics, macroeconomic modelling and trade economics. His recent Politeia publications include ‘Trading on the Future: Brexit trade options and the UK economy’, and ‘Flawed Forecast: The Treasury, the EU and Britain’s future’.