Why a 'hard' Brexit won't work (despite being right on nearly everything about trade theory)

Probably the most important single insight that an introductory course can convey about international economics is that it does not change the basics: trade is just another economic activity, subject to the same principles as anything else.

If you're going to write about trade (and don't want to start with David Riccardo) then Paul Krugman, who got his Nobel Prize for writing about trade, is as good a place as any to start. And Krugman's opening point is that international boundaries don't change the fundamentals of economic theory. There is no essential (economic) difference between me buying something from Basingstoke and me buying something from Beijing. As far as theory is concerned, therefore, making this comparison practically as well as theoretically true should be the point of trade policy. Any other approach would be against the interests of the buyer (and, therefore, by extension favouring the interests of the seller) and bad for the economy.

The problem with trade is that, as they say on Facebook, it's complicated. It's not complicated because Krugman is wrong, it's complicated because sellers - producers - in various nation states and groups of nation states have persuaded their government (quite often - as with US sugar producers - through the extensive use of cash money as a persuader) that their particular business is peculiar and it will not benefit consumers to have access to all the world's production of that good or service. These persuasive folk have spun the point of trade 180 degrees - it's all about national competition, a global race as David Cameron kept telling us. Britain is competing with China and India and the USA and Mexico - we must back our producers even if it means ordinary Brits having to pay more for stuff. Here's Krugman again:

After all, the rhetoric of competitiveness, the view that, in the words of President Clinton, each nation is “like a big corporation competing in the global marketplace”, has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially one of competing on world markets, that the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi, and are unaware that anyone might seriously question that proposition.

Again, Krugman is right - the point of trade is imports, the stuff us consumers buy, not exports. For sure we need the exports so we can pay for the imports but if we're running a gap in favour of exports then this is simply money that UK consumers would otherwise have spent on buying stuff (this is one reason why China becoming a net importer of goods sometime in the next decade or so is a very significant event - we'll need to find a new set of folk to buy stuff off). So when you hear that familiar Brexit Ultra argument, "they export more to us than we do to them so they need us more", smile sweetly because they've entirely missed the whole point of trade.

The problem, however, is that this position on trade utterly dominates debate - far from us seeking a trade policy that makes buying from Peshawar more like buying from Penge, we seek instead a policy that ossifies difficulties in exchange by pretending that international trade follows a different set of economic rules (or, more to the point, a set of rules defined without reference to economic theory by lawyers and bureaucrats, often at the behest of well-connected lobbies for business interests) to national trade. Here Scott Sumner sums up all this:

Over the past 200 years, debates about trade have occurred on two levels. Academics insist that unilateral free trade is the best option. However the “very serious people” (VSP) who conduct real world trade negotiations act as if open markets are a “concession”. They act as if we were doing other countries a favor by letting them export goods to our market. They view the academic perspective as hopelessly idealistic, even as the VSPs have worked hard to gradually move the world toward the same goal of freer trade, one agreement at a time.

Sumner goes on to say that the VSPs' chickens are returning to roost as first Trump then the EU succumb to managed trade - mercantilist - arguments. The most striking thing about the Brexit debate isn't its economic illiteracy (on both sides) but rather that, in the real world, neither side seems remotely interested in open markets. Indeed many of the arguments should have been put to bed while Wellington's boot was used to describe the oppression of the Corn Laws. Trade is only possible because of incredibly complicated sets of rules contained in huge tomes that only a few are able to understand. It's sad that governments - because of the effectiveness of business lobbies and the delusion of competition between nations - have created the situation where this sclerotic, rules-bound system makes it possible that a willing buyer in the UK is unable to get her goods from a willing seller in France (or for that matter The Phillipines). Anyone who thinks such a system is a good idea is, in my view, the worst sort of deluded fool. And, you'd hope that intelligent people would be trying to make sure such a system didn't come to pass.

It is, depressingly, what we've got. And the lawyers and bureaucrats aren't about to let something like 200 years of solid evidence backing up the best of economic theory get in the way of their lovely rules (there's a whole new can filled with self-interested worms right here). So the job isn't served by doing the right thing in terms of the evidence (more free trade, more open markets, lower tariffs, fewer regulations) but by making sure that, in the case of Brexit, the UK can leave the EU without a bunch of rules merchants crashing our economy simply out of spite. This is the only reason why a "no deal" option should be avoided - international trade still operates in an essentially mercantilist manner with the interests of producers sat round the table alongside the lawyers and bureaucrats and this means any settlement will, wrongly, be concluded on the basis of 'competitiveness', 'export' and 'protection' rather than in the interests of consumers.

....