The Alternative Brexit Economic Analysis (ABEA): a rejoinder to our critics
Two of the four authors of the ABEA are members of Economists for Free Trade (EFT), namely Roger Bootle and Patrick Minford. The other two, myself and Gerard Lyons, are not members of EFT, but contributed in a personal capacity.
The ABEA makes four main points. First, the recent Whitehall analysis (which has not been officially released and hence has not been subject to proper scrutiny) has produced results that should be taken with a pinch of salt, rather than as fact. Indeed, the UK economics establishment has a poor track record of forecasting, and a long history of being wrong on the key economic issues of the day. This itself should make us wary of the commonly-held view that GDP will be significantly lower than otherwise in any Brexit scenario.
Second, a closer look at the published studies – and some detective work on the leaked Whitehall analysis was necessary – finds some specific flaws. In particular, the Whitehall report does not model what the government is actually trying to achieve, namely a comprehensive free trade deal with the EU, covering both goods and services, and a significant reduction in barriers to trade with the rest of the world.
What’s more, some of the assumptions are highly dubious. For example, it is wrong to assume that, in a ‘no deal’ scenario, the UK government would always choose to impose damaging new tariffs on imports from the EU, rather than maintain the level playing field required under WTO rules by eliminating tariffs on imports from the rest of the world. These studies also typically assume that Brexit would be used as an opportunity to severely restrict immigration in ways that harm the economy, even though future policy in this area would be entirely in the hands of the government of the day to decide.
Third, we understand that officials are now using the Global Trade Analysis Project (GTAP) model. Crucially, the ABEA uses this same model, but different scenarios and assumptions, to argue that Brexit would have positive long-term impacts on the UK economy.
Depending on the inputs, the net boost to GDP might be in a range of 2% to 4% over 15 years, relative to remaining in the EU. Or it could be more, or slightly less. But it would be positive. The key point here is not to debate the exact number. Instead, it is to show that alternative modelling produces very different results from those suggested by the latest Whitehall analysis, which predicted a decline in GDP of between 2% and 8%.
Fourth, in all of this, it is vital not to lose sight of the wider economic and political benefits of Brexit. The UK’s departure from the EU is a once-in-a-generation opportunity to create a more open and dynamic Britain, adopting policies that better suit our own economy. This includes many aspects that are hard, perhaps even impossible, to quantify. It would therefore be wrong to place a lot of weight on the results of disputed Whitehall modelling that does not grasp fully the changing global economy and opportunity that lies ahead, and which suggests that the level of GDP might be a few percentage points lower over a period when the economy could otherwise be expected to grow by around 30%.
As might be expected, some economists and others have challenged the analysis in the ABEA. Most of the exchanges have been constructive (hat tips here to Chris Giles and Jonathan Portes in particular). This is welcome, although one also hopes that the Whitehall analysis will be subject to the same scrutiny when it is eventually published.
Nonetheless, there are several lines of attack on the ABEA that, in my view, miss some very important points.
For a start, some have argued that it is wrong even to attempt to model any alternative to the three ‘off the shelf’ options (essentially ‘Norway’, ‘Canada’ or ‘WTO rules’) in the Whitehall analysis. This is because, it is assumed, the UK government has little chance of getting the bespoke deal it is seeking. But the purpose of scenario analysis is to look at a range of possible outcomes, not to close them down by pre-judging the results of negotiations that have not even begun.
A more serious criticism, perhaps, is that the ABEA may have mispresented what current government policy is. The report summarises the benchmark trade policy assumptions of the Government as ‘general free trade with the non-EU world’ plus a ‘close relationship with the EU’, such as ‘Canada +’. It then suggests that this can be approximated with ‘unilateral free trade’, where all discriminatory tariff and non-tariff trade barriers are eliminated. This assumption helps to produce the modeling result that GDP might be 4% higher.
Clearly this is a simplification. The government has stated that it will retain some barriers and trade defences. But the report allows for this too. As the ABEA says, if the combined impact of tariff and non-tariff barriers is reduced by half, rather than eliminated completely, the net boost to GDP would still be 2%. Crucially, this change does not affect the conclusion that the UK would be better off.
Similar points apply to other modelling assumptions. For example, the report assumes ‘for the purposes of modelling that border costs are effectively zero’. This is not, of course, to say that they are actually zero, but that over time they will be diminishingly small. Indeed, they have been falling for many years, due in part to advances in technology.
This seems a far more reasonable assumption than in other studies which take it for granted that there will be a huge increase in non-tariff barriers after Brexit. The head of the HMRC has testified on multiple times to various Select committees, highlighting the strong position the UK is expected to be in for any new border arrangements. And even adding something back in for border costs, the results of the ABEA would still be positive.
Lastly, some critics have seized on comments made later in the report, including suggestions for the deregulation of the domestic economy, estimates (published separately by EFT) of the costs and benefits of migration, and the precise wording of legal documents. However, these factors are neither part of the main analysis, nor required to arrive at the range of 2-4% for the potential boost to GDP.
What’s more, as the report itself says, the authors do not necessarily agree on all aspects. Indeed, they may have different views on the best future path to take to realise the full benefits that Brexit will offer. But I’m sure we’d all accept that only a small minority of UK firms sell directly into the EU single market and the bulk of future world growth will come from outside. Hence the vital importance of future policies best suited to our domestic economy and to positioning the UK to succeed globally – as well to ensuring a good future relationship between the UK and rest of the EU.
Overall, I wholeheartedly support the central arguments, methodology and conclusions of the ABEA. You don’t have to accept every word of the alternative analysis to prefer it to the official version. But do please read it yourself, and make up your own minds.