Brexit: the trade deficit is not a source of strength

I’ve tried to stay out of the whole Brexit debate. Firstly because life is too short to go that particular rabbit hole and secondly because I can’t really think of anything that I could say that would sway the views of the more determined members of either camp.

For what’s it worth, I thought yesterday’s Treasury analysis was a solid bit of economic work that, like all solid economic work, suffered from being used as political ammunition. Would Brexit make the typical household some £4,300 a year worse off by 2030? Probably not, no forecast or analysis can be that precise. Calling that number a “fact” is to render the word “fact” meaningless. But did it broadly get the direction right? More likely than not.

Cards on the table, my gut feeling is that neither Leave nor Remain would make a major difference to the UK economic outlook in the long term. I think the balance of probability is that a Leave vote in June would see the UK worse off in the longer run, probably to the tune of a few percentage points of GDP relative to the case of a Remain vote. But I’m far from certain about that — the cost could be smaller (if I’m honest I struggle to see a realistic scenario in which Leave becomes an actual economic positive) or it could be much larger.

What I’m more convinced of is that in the short run — say 2016–2020 — Brexit would come with an economic cost.

But that analysis (to give gut feel a more fancy term than it deserves) isn’t the point of wading into this particular quagmire. No, this blog post is inspired by what inspires all the best blog posts; something has annoyed me.

Over the past few days I’ve repeatedly heard the claim from the Brexit camp that the UK’s trade deficit with Europe would be an asset in any negotiations over exit.

The argument, which has the benefit of being simple to make in a TV studio, is that “we buy more stuff from Europe than they do from us — therefore it would be in the EU’s interest to conclude a trade deal quickly”.

Brexiters boil it down to: if they wouldn’t give us free access to sell our financial services in Europe, we won’t let them have free access to sell German cars or French cheese here. Chris Grayling went further this weekend and argued that with French and German elections on the horizon, politicians there wouldn’t be able to threaten something that would cost jobs there.

At best this is a partial analysis. There are several missing elements not least that not all trade deals are created equal and it is very hard to see how we could retain full access to the single market without accepting all that entails — i.e. free movement of labour and a common standards on rules and product regulation. At which point a cynic would ask — what was the point of Brexit?

More generally this is an argument that the threat of a British tariff on German cars would win us a good deal with the EU. Or, to put it another way, this is argument that requires British politicians to say to the public — in order to win the market access that we previously enjoyed we are now going to have to threaten to raise the price of the goods that you buy. Tariffs create winners and losers — and a political coalition focussed on winning market access for financial services at the costs of higher prices for consumers is unlikely to be a sustainable one.

Of course there are plenty of genuine liberals backing Brexit who see an open trading economy emerging from Brexit. One that doesn’t respond to foreign tariffs and presumably is open to immigration. Personally, I’m not convinced that vision would win out.

The whole point of the debate at the moment is that we know — at least in the short term — what Remain looks like, we don’t know what Leave looks like. That creates the kind of uncertainty which delays investment decisions and which would get worse after a Leave vote as we entered into months or years of talks.

And it’s this uncertainty which takes me to my biggest problem with the “the trade deficit is a strength” argument. It ignores the elephant in the room which the large UK’s current account deficit (of which the trade deficit is just part).

This is something I’ve been fretting about for a long time and which the Treasury has conveniently now acknowledged is a potential issue:

The UK’s current account deficit means it is also a net borrower from the rest of the world. In turn, this implies the UK is exposed to changes in the perceived riskiness of lending to the UK. This exposure has been noted by the Governor of the Bank of England, who has said “the possibility of a risk premium being attached to UK assets because of certain developments exists, and that plays into the riskiness of the situation”. In other words, if concerns about lending to the UK increase, investors will require a return — or premium — for bearing that risk, making it more expensive for the UK to fund its current account deficit.

That to me, is the best economic argument against a Leave vote — why trigger an event that could lead to a reassessment of UK risks by global investors when you are “dependent to the kindness of strangers” for funding?

I am more than happy to listen to a argument that starts with the premise that Brexit would bring costs and risks but that those costs are worth paying and the risks are worth taking. I’m utterly fed up with arguments that assume that Brexit would be quickly followed by a good deal with the EU and then allow the UK to start reaping the benefits of the global economy.

Argue to take a risk if you want to, don’t pretend the risk doesn’t exist.

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