On Brexit and trade - why this is a difficult discussion
One of the problems we have with the trade debate in the Brexit discussions - on either side of the argument, by the way - is that the analysis always presumes a continuation of the status-quo, especially an unchanged composition of industrial activity. Other uncertain assumptions, of course, relate to future trading relations with the EU and the content of bilateral or multilateral free-trade deals, which are not knowable now. Britain's current industrial structure has grown to what it is today as a result of over 20 years of single market integration. While there are Brexit scenarios that would indeed produce a nasty economic shock because of the forced speed of adjustment, we find it hard to see that the long-term trajectory of the British economy would necessarily be negatively or positively affected by Brexit. In the long run, economic theory would suggest that economic growth is a function of innovation and skills, neither of which should be affected by Brexit. We think the short-term risk is a good enough argument against Brexit, but in the long run it probably does not matter because "stuff happens" that forces adjustment.
After the UK Treasury report on long-term scenarios - which we think falls into the above mentioned trap - we now note a comment by Martin Sandbu who looks at the UK trade volumes and growth rates to debunk the argument of Brexiteers who compare the stronger growth rates of non-EU trade with those of EU trade. There is, of course, a volume effect - in absolute terms, EU trade is growing by more than non-EU trade - and the non-EU trade will eventually reach a plateau with lower growth rates. He also makes a Balassa-Samuelson effect argument according to which the tradable sector drives up prices in the non-tradable sector, which is about 88% of the economy. So there are large and complex interactions between the two. If one tries to isolate the 12% figure for the export share in overall economic activity, one understates the impact on the wider economy.
We think the latter argument is indeed interesting, and would merit further investigation. On the former, however, we feel this rests on too many assumptions about the future of trade, especially with the EU. We have no insights about a post-Brexit trading regime except that we find it hard to imagine that the UK would end without a more or less reasonable trade agreement.