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BREXIT
Policy analysis from the Centre for Economic Performance

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CEP BREXIT Analysis
‘ECONOMISTS FOR BREXIT’: A critique
Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen
May 2016
Paper No' CEPBREXIT06:
Full Paper (pdf)

Tags: brexit; referendum

Press Release - Friday 27th May 2016

'Economists For Brexit': A critique

New analysis by the Centre for Economic Performance

The handful of economists who support the UK leaving the European Union (EU) argue that by unilaterally abolishing all import tariffs, Brexit would boost the economy by 4% - a result that is in sharp contrast with all other economic analysis.

The latest in a series of #CEPBrexit reports, published by the Centre for Economic Performance (CEP) at the London School of Economics, explains how the 'Economists for Brexit' fail to grasp basic facts about the nature of regulation, product standards and international trade.

A more realistic assessment shows that Brexit plus 'unilateral trade liberalisation' would still lead to a drop in UK living standards. The new CEP report shows that:
  • The only modelling details provided by 'Economists for Brexit' come from Professor Patrick Minford of Cardiff University, who argues that after leaving the EU, the UK should unilaterally abolish all trade protection. Under this 'Britain Alone' policy, Minford describes his model as predicting the 'elimination' of UK manufacturing and a big increase in wage inequality. These outcomes may be hard to sell to UK citizens as a desirable political option.

  • CEP's analysis of the 'Britain Alone' policy predicts a 2.3% loss of income compared with staying in the EU. This is only 0.3 percentage points better than Brexit without unilaterally abolishing tariffs, which would result in a 2.6% income loss. Taking into account the Brexit-induced effects of uncertainty and productivity losses due to lower trade and foreign investment further increases the economic losses.

  • Minford's results stem from assuming that small changes in trade costs have tremendously large effects on trade volumes: according to his model, the falls in tariffs become enormously magnified because each country purchases only from the lowest cost supplier.

  • In reality, everyone does not simply buy from the cheapest supplier. Products are different when made by different countries and trade is affected by the distance between countries, their size, history and wealth - the 'gravity relationship'.

  • Trade costs are not just government-created trade barriers. More realistic approaches that allow for product differentiation and gravity predict that after Brexit, the UK will continue to trade more with the EU than other countries as it remains our geographically closest neighbour. Consequently, we will be worse off because we will face higher trade costs with the EU.

  • Minford also assumes that the prices of goods and food would fall by 10% after Brexit. This comes from bizarrely attributing all producer price differences between the EU and low-cost countries to EU trade barriers, rather than the fact that there are huge differences in product quality between goods produced and sold in different countries.

  • Single Market rules (for example, over product safety) facilitate trade between EU members as it creates a level playing field. Minford's assumption that the Single Market merely diverts trade from non-EU countries is contradicted by the empirical evidence.

  • Minford also overlooks the loss in services trade that would result from leaving the Single Market, such as 'passporting' privileges in financial services.
Thomas Sampson comments:
"Using an approach that does such violence to basic facts of economic life is why Minford's 'Liverpool model' has such an awful record of analysing major policy changes. His model was predicting enormous job losses from the introduction of the National Minimum Wage in 1999. In the event, multiple studies have shown there was effectively no increase in unemployment."

CEP director John Van Reenen adds:
"Minford's style of work was popular in some quarters in the 1970s. In those days, economic analysis did not need to be well-grounded in facts and data, and could rely on highly simplified theories. The revolution in recent years has been the explosion of data and empirical techniques for its analysis."

Swati Dhingra says:
"Minford's model is inconsistent with two basic facts about international trade: first, that trade satisfies the gravity equation; and second, that the EU has been trade-creating, not simply a tool for trade diversion. This is why his model gives such unreliable predictions of the consequences of Brexit for trade and living standards.

"When we analyse the same scenario using modern economics that incorporates advances in our understanding of international trade data since the 1960s and a more realistic assessment of how UK 'unilateral trade liberalisation' could actually work, we find (alongside just about everyone else) that Brexit leads to a decline in UK living standards."

Gianmarco Ottaviano concludes:
"Minford's approach of downplaying the empirical analysis of the impact of trade seems to be predicated on the view that because statistical analysis is imperfect, it can safely be ignored. But such statistical biases may just as easily reinforce rather than weaken the case for remaining in the EU."


For further information, contact:

Swati Dhingra on +44 (0)20 7955 7804, Email: s.dhingra@lse.ac.uk

Gianmarco Ottaviano, Email: g.i.ottaviano@lse.ac.uk

Thomas Sampson on +44 (0)20 7955 7408, Email: t.a.sampson@lse.ac.uk

John Van Reenen on +44(0)7803 614137 / +44 (0)20 7955 7049, Email: j.vanreenen@lse.ac.uk

Helen Durrant on +44 (0)20 7955 7395; Email: h.durrant@lse.ac.uk

Romesh Vaitilingam on +44(0)7768 661095, Email: romesh@vaitilingam.com