A short primer for Philip Hammond on the benefits of free trade deals

A short primer for Philip Hammond on the benefits of free trade deals

The news concerning the negotiations is at present confusing. Different sides put out different leaks and we all remain none the wiser. However the EU is at least engaging seriously with the UK and for the present that has given a number of people hope that something can be agreed.

How strange, then, that at this very point, Philip Hammond chose to take aim at the effect of free trade deals on the UK economy and assert there was “a lack of substance in the free trade narrative”. In that, he drew on what many economists believe were flawed assumptions underlying the Treasury forecast, particularly when it comes to Free Trade. For there is a great deal of substance underlying the belief in the beneficial effects of Free Trade, too much of which has been ignored.

Looking back, it’s worth reminding ourselves of the repeal of the Corn Laws in 1846 when tariffs on imported grain were eliminated. This move led to decades of growth that persisted until after the turn of the century. Singapore unilaterally eliminated all tariffs and other trade barriers with the result that their GDP per capita grew from 72 percent that of the UK in 1992 when they agreed their first free trade deal with ASEAN to 155 per cent that of the UK today. The same story has been repeated by New Zealand and Australia. The Australian government recently commissioned an independent report that showed the enactment of liberal trade policies had boosted Australian GDP by a remarkable 5.4 per cent.

Furthermore, Free Trade modelling by economists independent of the government and other quasi-governmental bodies produce benefits from Free Trade Agreements significant greater than the astonishingly low 0.2% of GDP that Mr Hammond claimed. The well-known World Trade Model at Cardiff University – a model which has over the years achieved a great deal of success in its forecasting – predicts a long-term boost to the UK economy of 4 per cent of GDP. Even the Centre for Business Research at Cambridge University estimated a boost to UK GDP of up to 2 per cent.

It is, of course, all about the assumptions you make. That the Treasury model could be so far apart from these real world and independent modelling results rests on their key assumptions.

First, there was the strange assumption that the UK would stay aligned to the EU’s existing tariffs barriers. Then hidden deep within the 156-page Treasury forecasting report and technical annex of last November were three other assumptions that collectively reduced what otherwise would have been the output of the model by a staggering multiple of sixteen. They were that despite the UK’s long-standing liberal stance on trade, the UK would eliminate only half of the existing EU non-tariff barriers in negotiations with non-EU countries; on top of that, they assumed the UK would be able to achieve Free Trade deals amounting to up to only half of our non-EU trade; finally they assumed that undefined ‘implementation difficulties’ (subjective or what?) would result in a paltry quarter of any Free Trade deal ever being implemented.

Interestingly, this report didn’t even consider that achieving a Free Trade deal with the United States alone would be equivalent economically to achieving Free Trade deals with the entire world, something on which most Free Trade modellers agree. This is because the vast US economy could supply virtually every good that the UK currently imports. Moreover, the US market trades pretty much at world market prices that are lower than those in the EU market because of the EU’s enormous protectionism. The reality of this is that the US is a microcosm of the rest of the world, something not considered by the Treasury report.

Then there is the interesting question of immigration. The Treasury model assumes there will be zero immigration in future from EEA countries, a remarkably ‘helpful’ assumption because it allowed the authors to forecast a reduced population which in turn reduces GDP. Yet this is counter to announced government policy. Of course, the final induced hit to the UK’s GDP is that the report left out any savings from the UK no longer paying its annual contribution to the EU budget – £19 billion gross.

As we head, I hope, towards a Free Trade deal with the EU, it is worth reminding ourselves that Free Trade has brought huge benefits to the world in recent decades. Importantly it has reduced global child poverty by half and improved the living standards of the poor. How strange then that some Conservatives should seek to denigrate the positive effects of Free Trade for the UK post-Brexit, whilst saying they support it elsewhere. I have no doubt that the UK will benefit enormously from Free Trade. As a natural Free Trader and the fifth largest economy in the world and the fifth largest export destination, we will also re-inject a new dynamic into the global economy.

Perhaps the last word should be from Nobel Laureate Paul Krugman (no fan of Brexit, I hasten to add), who said about the Treasury forecasts: “I have worried in all this about motivated reasoning on the part of people who oppose Brexit…” Or as Boris Johnson would put it, the ‘doomsters and the gloomsters.’