On Brexit Trade Theory It Helps To Get Trade Theory Right

The Evening Standard seems to employ someone called Grant Lewis to slag off any argument Brexiteers might have concerning the possibilities for trade post sovereignty restoration. Hmm, in a paper edited by George Osborne this isn’t all that much of a surprise, that someone at least is so employed. But it does have to be pointed out that when pirouetting through a subject it does help to know the dance steps. When squawking about trade theory it is an aid to have a knowledge of trade theory. Not, sadly, something greatly on show here:

Brexiteers like to tell us all that they are free traders. But, as with just about everything else in the echo chamber they’ve built for themselves, the claim fails to stand up to even the most cursory scrutiny.

As the UK attempts to find a second-rate substitute for a trade relationship with 500 million people right on our doorstep, in the second stage of the Brexit negotiations, you’re likely to hear a lot of nonsense from the Outers on the subject. These are the biggest whoppers to watch out for:

Let us just pick the one here:

6 Distance no longer matters

Utter nonsense. There is a rock-solid statistical relationship that the degree of trade between countries is in large part determined by geographical proximity. There is a reason that the UK exports around four times more to Ireland than to India. And it’s got nothing to do with the lack of an FTA with India.

No, The gravity model of trade does not say that geographical proximity is the only, nor even the major, driver of trade nor its volume. Rather, it says economic distance is:

In attempting to understand the pattern of trade in a globalised world, economists tend to use the gravity model. This was first presented in 1962 by Jan Tinbergen, who proposed that the size of bilateral trade flows between any two countries can be approximated by employing the ‘gravity equation’, which is derived from Newton’s theory of gravitation. While planets are attracted to each other in proportion to their sizes and proximity, so too are countries.

Relative size is determined by current GDP, and economic proximity is determined by trade costs – the more economically ‘distant’ the greater the trade costs.

NB:

The model is flexible in that ‘distance’ between countries can include a range of relevant variables, including cultural and political differences between trading nations.

That we share a language – actually a heck of a lot of cultural stuff – plus quite a lot of diet etc with New Zealand, while it’s purely geographically very distant, makes it potentially closer in economic distance than parts of MittelEuropa. Possibly.

It was certainly true that there was more trade between Norfolk and the Frisian islands than there was between Norfolk and Bedfordshire despite the greater geographical distance in the first. Sailing ships, even of the 9th and 10 th century type, reduced economic distance rather better than mule trains.

And what’s the thing we’ve done in these recent decades? That’s right, the shipping container. Something which has reduced geographic distance – as long as you’re on the container network – to an irrelevance in determining economic distance. Amusingly, the first modern container ship setting forth onto the oceans (actually, a seaside canal but still) 6 months before the EC was set up to promote the wrong sort of gravity model of trade.

Now, myself, I’d be more than willing to believe that Lewis is just a tad mistaken here. But given Osborne editing the paper I doubt it.