Tuesday 7 November 2023

The IEA, trade and Brexit

The IEA report: Has Brexit really harmed UK trade? Countering the Office for Budget Responsibility’s claims, released yesterday, was comprehensively trashed within hours. The author, Catherine McBride, tries to show that “Brexit has not had a major detrimental effect on UK–EU trade.” In fact, it confirms the opposite.  Why? Because the report has to distort reality in order to reach the conclusion it does. Several respected economists have dismissed it as a joke, but it isn’t really a laughing matter.

This is Jonathan Portes, a Professor of Economics at King's College London:

His point is that the 2015-19 period figures (Table 6) are adjusted for inflation while the 2019-22 figures are in current prices. See the trick?

The 36-page effort is by Catherine McBride. She essentially argues that trade with the EU and trade with the rest of the world have both been equally impacted over the last few years and therefore Brexit can't be a factor. That is what it all boils down to.

Ms McBride is described as an economist who works for the IEA, the shadowy think-tank at 55 Tufton Street that has pushed for Brexit for decades so hardly unbiased. She used to "work in the equity and commodity derivative markets in London" and is a 'fellow' of the Centre for Brexit Policy.  She also writes for Briefings for Britain and GlobalBritain - both known sources of disinformation on Brexit.  I am not sure she is really an economist.

The sub-title is: Countering the Office for Budget Responsibility’s claims.  I ask you, really?

Let’s begin with something which I think is uncontroversial. Erecting trade barriers, all other things being equal will reduce trade. I don’t believe anyone would disagree with that, and it follows that the higher the barriers (tariff and non-tariff) the more trade will be reduced.

Next, the more of your external trade barriers (whatever they are) are erected against, the more trade will be reduced. Again, uncontroversial I would have thought.

Brexit erected quite significant non-tariff (and some tariff) barriers against half of our external trade but the paper concludes, "Data from 2019 to 2022 indicates that the trade in both goods and services between the UK and EU hasn’t shown a discernible Brexit effect." 

One of the main criticisms is that it uses both current prices and inflation-adjusted (CVM) figures and the accompanying press release (Brexit leaves UK trade unscathed, finds new IEA report) tries to suggest exports have actually increased since 2019. 

But Table 3 of the report shows that trade has fallen: 

And don't forget, this is relative to how things actually were in 2022, not how they could or should have been. For example, Germany's exports to the EU in the first six months of 2022 were 23% higher than the same period in 2019.  Looked at like that, trade is 30% below where it might have been absent Brexit.

But Ms Macbride is suggesting that because EU trade and RoW trade have performed more or less the same in both current prices and CVM, Brexit cannot be a factor. She was a City trader. I doubt if she has ever set foot inside a factory of any kind in this country and certainly hasn’t ever worked in one or spoken to anyone who has. 

I know this because she has no idea how deeply integrated we are with EU suppliers.  She doesn't even acknowledge the problem at all.

If you make the source of the intermediate parts you need to make the goods you're exporting to the rest of the world harder to obtain, those exports will also be affected. She makes the assumption that our exports to the RoW consist of wholly British-sourced parts or produce. This is well wide of the mark. Moreover, what about the automation systems, spare parts, technical support, consumable parts, etc that you need to keep your operation going at optimum efficiency?

The report makes some surprising assumptions and assertions. For example, it admits there are new compliance costs to UK- EU trade after Brexit, but argues before 2021 they were paid notionally by all taxpayers as part of the UK’s membership fees. Now they’re paid by the exporters or their customers. This is disingenuous. They’re always paid by the customer, whether by taxes or not  - and the exporter is no longer on a level playing field and is less competitive.

Next, on page 15 it says, “There are other issues that have changed UK trade statistics that have nothing to do with Brexit, most notably UK companies moving their factories to eastern EU countries or to Asian countries."

But there is zero doubt (none) that Brexit has accelerated this move by UK companies into the EU, the report doesn’t accept the need to avoid trade barriers means Brexit was always bound to change the trickle into a flood.  It even talks of Belgium “becoming” a distribution hub in Belgium for UK pharmaceutical companies but doesn’t ask why. This has happened to lots of sectors because it’s easier to send one truck with one consignment than it is to do paperwork for hundreds of different products being sent groupage. We know this.

Imports of clothing from EU sources have fallen (page 14) while imports from Asia have increased. The report puts down to Rules of Origin but doesn't concede that this must also apply to other sectors as well.

The Treasury numbers from 2016 are attacked even though they're an average of forecasts from a lot of leading and well-respected economic forecasters. 

At one point, in an attempt to undermine the OBR’s supposition that our GDP will be 4% lower by 2031 than it otherwise would be, the report (page 26) says there is no 'counterfactual' - evidence that things would have been different had we remained in the EU.

But there is. John Springford at the Centre for European Reform (CER) created a counterfactual by developing his doppelgänger system of tracking nations with economies similar to ours. More. This suggested the U.K. economy was already 5% lower by June 2022. But Brexiteers rubbished that and said it was wrong.

What’s notable about the report is that they don’t make their own estimates only rubbish others.

I think we can safely say that the IEA is essentially admitting that Brexit has failed. If you need to produce a 36-page report, not to trumpet the success of your favourite project, but to deny it’s as bad as your opponents have always suggested it would be. Not only that but having to use dubious figures to do it, you are not winning the argument.


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