Civitas Report: From Irrelevance to Misrepresentation

In 2016, Civitas found itself in an economic tug of war during the EU referendum. Having commissioned a report from an alleged economist, Brexiteers hijacked the report as a means to score economic points against Remain. How did this paper from an allegedly left leaning independent, suddenly find itself in the midst of the biggest decision to face the UK public in a generation?

Not that I’m actually even the first person to do this and others have correctly cited the most glaring omissions in the report. Which is that the EU trades the vast majority of it’s trade, with itself.

..the EC has concluded 37 agreements, most of them with small economies…the aggregate GDP of all the countries with which Chile had agreements in force is $58.3tn, Korea’s totalled $40.8tn, Singapore’s $38.7tn and Switzerland’s $39.8tn.

Falsehoods: The Variables

Where to start on this one? From a research paper and analysis perspective, this looks like it was written by a 5 year old. Let’s remember a few things here.

The total EU GDP, which is the measure cited in the commentary, completely forgets the sum of $16.16 GDP of the member states. As Remainers have repeated countless times, the EU isn’t a single country. Unlike, Chile, Korea, Singapore and Switzerland. It can and does trade internally. This exists with Multilateral Trade Agreements too, where multiple countries negotiate under one agreement. This is a horrific omission which is capable of dismissing the paper in it’s own right. Basically, you have to be stupid to believe it on this alone. However, as a critical thinker, I’m always keen to understand why, and so should you, so I continue.

History of the Report

The original report was written in 2014 and republished, unamended by Civitas in 2016. Yet, nothing materially changes in the report of 2014, which used data from 2012. Yet,since then, we’ve had many changes, including CETA — Business are now able to trade under the provisional regulations of CETA signed on the 15th Feb 2017 (after the report). That adds $1.7 tn to the figure.

If you crunch the 2016 numbers with all the trade agreements in force, comparing apples with apples, you get the true figure of nominal GDP, which is (compared to Switzerland here) currently standing is:

GDP: Not a measure of Trade.

Now, here is probably the single biggest destructor of this Civitas report. GDP is not a measure of trade. GDP is a measure of the wealth of the nation in question. Some Brexiteer economic advisers on Quora have chosen not to put folk right on this. I wonder why? Staying silent on such falsehood professionally positions someone as complicit in the propagation of false information and arguably risks an assertion of professional negligence levied against them.

In any event, there are several ways to measure GDP, none of them directly relate to foreign trade.

  1. Income approach — how much everyone made within the confines of the country
  2. Expenditure approach — how much everyone spent within the confines of the country
  3. Nominal — the monetary value of all goods and services provided within the confines of the country
  4. Real — adjusted value of GDP relative to the change in currency value (something affecting us atm, but more naturally impacted by inflation)

You can have a completely closed economy, which does not trade with the rest of the world (as China was, up until 8 years ago) and have a sky high GDP. This only works as an inference in open economies, and even then, only in part (as internal-only trade is counted towards GDP). It means nothing to trade agreements, nor trade numbers. Hence, to make an assertion that trading with a higher number of countries, of higher total wealth, is better because they have a higher GDP is garbage. It’s like trying to sell to rich business people. Them having the money is one thing, them giving it to you is quite another.

There is a defined metric when it comes to trade and potential for trade.

Trade-to-GDP ratio

The idea being that the higher the ratio compared to GDP, the more important the trade to the country. I’ll see your list of two, half partisan economists and Norman Lamont, and raise you. This ratio was even covered as the potential for “willingness to trade” in a paper by Waugh (Associated Professor of Economics) and Ravikumar (VP and Deputy Direct of Research in the Fed, University of Arizona) in 2016.

Specifically:

You’ll note the Civitas paper doesn’t reference this, nor anything like this, even once.

Simple one, if value of trade is £50bn and GDP is £100bn, then the ratio is 50/100 = 1/2. If an economy is a fifth of that size. the ratio and willingness to trade is £10bn/£20bn = 1/2. Both the same, yet, the GDP value is £100bn in the first case and £20bn in the second case. Do Brexiteers not see that? If they can’t cope with the absolute basics, what hope do they have of coping with complex economic arguments? None whatsoever!

I’ll repeat what I said previously. GDP is a useless measure of trade and trade potential. It is only one variable in an economy open to trade and the dependent variable itself bears no relation because of this.

Let’s put it this way. All the money you take home. Do you immediately spend 100% of it on stuff you may or may not need? If you choose to buy everything to your pay cheque’s capacity, and are left with no savings, then your GDP is equal to your willingness to trade. Otherwise, if you even spend money to keep your house running (e.g. giving some to a joint account or the kids) it simply isn’t. This is where the ratio comes in.

Balance of Trade: The Clue is in the Name

This is the real important variables. How much trade is actually being done by the other countries. It isn’t the total wealth of the GDP of their markets.

All the countries mentioned in the report have a net positive balance of trade (Singapore carried just under $8 billion for the year — a very small surplus). The UK imports more than it exports so does not play a zero sum game in this.

The question is whether the UK can capitalise on the same markets these other markets have. However, they have to negotiate all the FTA’s these other countries have. Otherwise the UK is back of the line.

To assess the impact, we need to look at the effect of trade agreements. They make a significant difference to an economy, depending on how exposed it is to foreign countries. An FTA can remove import duty to the value of 20% or more. The net effect is zero if the removal is zero if they mutually trade the same amounts. However, the vast majority of FTA’s are asymmetric. Not because of the agreement, but because of the amount of trade the businesses within the countries actually do. For example, the UK carries a negative balance of trade (trade deficit) with the EU of £200 billion every year (£500 billion imports v £300 billion exports). The effect of trade tariff introduction at 10%, would result in an increase of expenditure for UK businesses, in the form of duty of £20 billion. How’s that possible? We trade out 300 billion which is taxed at 10% (so UK manufacturers pay £330 bn to then reclaim it through a price increase to European distributors) and UK imports of £500bn are taxed at £50bn (which is paid for by UK consumers ultimately) making £550bn. This means the total balance of trade is now 550–330 = £220 bn!! An increase of 10%.

Trade agreements do not limit any country from trading with another nation unless there is a WTO (or other) sanction in place. The UK can trade with anyone now. As explained in the last point, all an FTA does is lower the barrier to trade across financial, legislative, academic and social lines. We could always trde with the rest of the world. There is nothign stopping us doing that now. The thing we could not do was introduce a trade agreement that circumvents the EU trade agreement with the third party, by using preferential lines (like selling large parts of our infrastructure and even hypothetically selling the NHS, abroad say, during a privatisation exercise).

Sourcework

Michael Burrage. Regarded as a sociologist academic, though his undergraduate degree is in Sociology, Economics and Policy in 1963 (note the year — 53 years before the referendum. It pre-dates our membership of the EU itself by a decade).

Michael Burrage also doesn’t hold a doctorate or a masters research degree and it arguably shows since he didn’t peer review his paper, nor accept reviewed criticism before he published it (peer review is absolutely 100% necessity in academic works otherwise it’s not published material and doesn’t add to the body of knowledge-it’s totally discreditable). Which is shocking for someone who’s an academic. His LinkedIn lists him as being in LSE for 6 years but only contributing on 6 occasions as a research fellow. He wasn’t working full time there. This isn’t uncommon, as universities like to maintain industrial links (which is no bad thing) but they don’t claim to endorse any research, since the one thing most of industry can’t do well, is research.

So economics is definitely not his strong point and arguably in my opinion, neither is research, regardless of the Fullbright scholarship he got in 1963.

All this helps to explain the poor collation and analysis. What is even worse, is that Mr Burrage has been labelled a number of things by Leavers, all of which are untrue, which is hardly a surprise, since their campaign was fought on every bigger lies:

  • EU Analyst — He is not an EU analyst
  • Statistical Analyst — He’s not. He had someone else do this (Acknowledgements at the beginning)

This leads us to the problematic position of having to infer one of several possible positions:

  • That he doesn’t know what he’s talking about
  • He didn’t proof read his team’s work
  • He didn’t have his work peer reviewed — this we know he attempted, but did not address, nor incorporate the feedback identified.

Burrage and Civitas completely underestimated the importance of their report. The 2014 report, republished in 2016 was used as some form of stick to attempt to beat Remainers with and had so many glaring problems that Remainers who have capability saw right through it. Our mistake was assuming Leaver’s were not stupid, since those who believed this report, clearly were. It’s horrifying that decisions of this magnitude can be made and pushed on the level of lies and misinformation Leave threw, but there we go.

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