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Paul Krugman’s Mistake Concerning The Costs Of Brexit

Paul Krugman – given that he is a very good trade economist – makes exactly the right point in his piece detailing the costs, variously, of Trump’s trade war and Brexit. He distinguishes, as he should, between tariff costs and trade costs. The two are not the same, the one is simply a subset of the second. Further, it is trade costs which matter, not tariffs. This is a point we have made here before:

For his conclusion to be correct then it must have been true that the total costs of trade were rising in that time period. Total costs being tariffs plus transport. Only if the total costs were rising was protection rising. The tariffs are only part of the story. And as it happens total protection was falling over this time period. The falls in the costs of transport – for the US externally primarily the steam ship – were greater than the rises in the tariffs. Thus the US was becoming more open to trade at this time when industry was booming and growing to world class levels.

So, I agree with this point:

No, not really, because Brexit isn’t about higher tariffs; it’s about higher trade costs, higher costs of doing business across borders. And that makes a huge difference.

Yep, agreed. But only agreed so far as he goes. For this doesn’t go far enough:

But Brexit won’t raise prices by imposing a tariff, which will generate government revenue. It will, instead, make doing business more expensive: extra paperwork, longer waits for trucks waiting to be onloaded and offloaded, higher invisible costs of trading services. So you need to add the rectangle in Figure 1 labeled “government revenue” to the overall economic losses.

Because there is more to business costs, the thing we’re actually worried about, than simply trade costs. For example, the costs of according to EU bureaucracy – to the extent that native British would be lower – should also be included in business costs. And as a cost load which lightens as it fades away. What’s the value of being able to landfill again instead of being forced into the more expensive recycling? Not having to accord to the more stupid of the renewable energy stuff? Pick your own examples of course.

The point being that once we go beyond mere tariffs to the business costs of the regulatory system then we’ve got to look at the business costs of the regulatory system, don’t we? And there’s absolutely nothing at all to insist that the total costs of leaving the EU are higher than the costs of staying in.

Actually, the guy who has studied this in detail, rather than working from incomplete first principles, is Patrick Minford. And he says the nett effect is 3% of GDP in favour of leaving. That the business costs of being in are greater than those of being out.

And that’s before we start to talk about not having to keep paying for being in…….

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5 years ago

And the non-tariff costs of leaving will only increase if *we* *chose* to impose those non-tarrif costs, just as with tariff costs.

5 years ago

Jgh is right, this is again the opponents of Brexit offering the false choice of a Britain doing at least as much wrong as the EU already is. Krugman assumes Britain will impose needless inspection of imports AND conduct them less efficiently than the EU does. (Though again, “being able to landfill again” makes me wonder if you think a large percentage of Britain’s eco-radicals will respond to Brexit by immediately moving to the Continent. The US can’t even get rid of the ones who promised to leave if Trump were elected!)

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