{"id":773,"date":"2017-04-19T11:18:40","date_gmt":"2017-04-19T10:18:40","guid":{"rendered":"http:\/\/blogs.sussex.ac.uk\/uktpo\/?p=773"},"modified":"2017-12-12T17:07:13","modified_gmt":"2017-12-12T17:07:13","slug":"will-eliminating-uk-tariffs-boost-uk-gdp-by-4-percent","status":"publish","type":"post","link":"https:\/\/blogs.sussex.ac.uk\/uktpo\/2017\/04\/19\/will-eliminating-uk-tariffs-boost-uk-gdp-by-4-percent\/","title":{"rendered":"Will eliminating UK tariffs boost UK GDP by 4 percent?  Even \u2018Economists for Free Trade\u2019 don\u2019t believe it!"},"content":{"rendered":"<em>Share this article: <\/em> <a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-facebook nolightbox\" data-provider=\"facebook\" target=\"_blank\" rel=\"nofollow\" title=\"Share on Facebook\" href=\"https:\/\/www.facebook.com\/sharer.php?u=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;t=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21&#038;s=100&#038;p&#091;url&#093;=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;p&#091;images&#093;&#091;0&#093;=http%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Ffiles%2F2017%2F01%2FAlan-Winters-100w.jpg&#038;p&#091;title&#093;=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;margin-right:5px;\"><img alt=\"Facebook\" title=\"Share on Facebook\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/facebook.png\" \/><\/a><a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-twitter nolightbox\" data-provider=\"twitter\" target=\"_blank\" rel=\"nofollow\" title=\"Share on Twitter\" href=\"https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;text=UK%20Trade%20Policy%20Observatory%20blog\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;margin-right:5px;\"><img alt=\"twitter\" title=\"Share on Twitter\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/twitter.png\" \/><\/a><a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-reddit nolightbox\" data-provider=\"reddit\" target=\"_blank\" rel=\"nofollow\" title=\"Share on Reddit\" href=\"https:\/\/www.reddit.com\/submit?url=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;title=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;margin-right:5px;\"><img alt=\"reddit\" title=\"Share on Reddit\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/reddit.png\" \/><\/a><a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-pinterest nolightbox\" data-provider=\"pinterest\" target=\"_blank\" rel=\"nofollow\" title=\"Pin it with Pinterest\" href=\"https:\/\/pinterest.com\/pin\/create\/button\/?url=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;media=http%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Ffiles%2F2017%2F01%2FAlan-Winters-100w.jpg&#038;description=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;margin-right:5px;\"><img alt=\"pinterest\" title=\"Pin it with Pinterest\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/pinterest.png\" \/><\/a><a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-linkedin nolightbox\" data-provider=\"linkedin\" target=\"_blank\" rel=\"nofollow\" title=\"Share on Linkedin\" href=\"https:\/\/www.linkedin.com\/shareArticle?mini=true&#038;url=https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773&#038;title=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;margin-right:5px;\"><img alt=\"linkedin\" title=\"Share on Linkedin\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/linkedin.png\" \/><\/a><a class=\"synved-social-button synved-social-button-share synved-social-size-32 synved-social-resolution-single synved-social-provider-mail nolightbox\" data-provider=\"mail\" rel=\"nofollow\" title=\"Share by email\" href=\"mailto:?subject=Will%20eliminating%20UK%20tariffs%20boost%20UK%20GDP%20by%204%20percent%3F%20%20Even%20%E2%80%98Economists%20for%20Free%20Trade%E2%80%99%20don%E2%80%99t%20believe%20it%21&#038;body=UK%20Trade%20Policy%20Observatory%20blog:%20https%3A%2F%2Fblogs.sussex.ac.uk%2Fuktpo%2Fwp-json%2Fwp%2Fv2%2Fposts%2F773\" style=\"font-size: 0px; width:32px;height:32px;margin:0;margin-bottom:5px;\"><img alt=\"mail\" title=\"Share by email\" class=\"synved-share-image synved-social-image synved-social-image-share\" width=\"32\" height=\"32\" style=\"display: inline; width:32px;height:32px; margin: 0; padding: 0; border: none; box-shadow: none;\" src=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-content\/plugins\/social-media-feather\/synved-social\/image\/social\/regular\/64x64\/mail.png\" \/><\/a><p><img loading=\"lazy\" class=\"size-full wp-image-501 alignright\" src=\"http:\/\/blogs.sussex.ac.uk\/uktpo\/files\/2017\/01\/Alan-Winters-100w.jpg\" alt=\"Image of Alan Winters\" width=\"100\" height=\"130\" \/><\/p>\n<p><em>19 April 2017<\/em><\/p>\n<p><em>L. Alan Winters CB,\u00a0Professor of Economics and Director of UKTPO.<\/em><\/p>\n<h4><em><strong>In this blog, Professor Winters responds to Patrick Minford\u00a0<span class=\"s1\">and\u00a0<\/span><span class=\"s2\">Edgar Miller\u2019s recent paper on unilateral free trade in relation to Brexit.<\/span><\/strong><\/em><\/h4>\n<p><em>Economists for Free Trade\u2019s<\/em> Patrick Minford recently suggested that the UK should<\/p>\n<blockquote><p>simply eliminate our tariffs on them [the EU], and by implication \u2013 under WTO rules \u2013 on everyone else. By doing so, we would achieve free trade for our consumers with one quick move [and increase consumer welfare by 4%] Minford (2017).<\/p><\/blockquote>\n<p>This, he explains in a fuller exposition, is achievable \u2018via Unilateral Free Trade\u2019 \u2013 see page 8 of Minford and Miller (2017), henceforth referred to as M&amp;M.<\/p>\n<p>But this claim is misleading or worse:<\/p>\n<ul>\n<li>It is based on a very particular view of the world economy,<\/li>\n<li>Even in M&amp;M\u2019s own analysis, the benefits of 4% of welfare (or GDP) depend on far more than \u2018simply eliminating tariffs\u2019; they also require deeper integration with the EU and a race to the bottom on standards;<\/li>\n<li>M&amp;M assume that the devaluation of sterling will have no effect on the prices of UK imports!<\/li>\n<\/ul>\n<p><!--more--><\/p>\n<h2>The Minford Model<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a><\/h2>\n<p>Patrick Minford\u2019s model of the world economy divides the economy into four sectors: \u2018non-traded and three traded ones, viz. primary, basic (unskilled-labour-intensive) manufacturing and services and other (skilled-labour-intensive) manufacturing.\u2019 (M&amp;M, p.28, although on p.20 they refer to \u2018three traded goods, agriculture, manufactures and services\u2019) \u00a0Within each sector UK production and all world trade are presumed to be indistinguishable \u2013 buying health services from, say, the USA is the same as buying education from, say, Sri Lanka. Of course, all models make approximations and assumptions (they are <em>models<\/em>, not reality), but it is important to ask whether the assumptions represent behaviour reasonably well.<\/p>\n<p>In Minford\u2019s case, this high level of aggregation is critical because he also assumes that each country purchases these aggregate goods only from the lowest cost supplier, which, in turn, results in even small changes in trade costs having huge effects on the direction of international trade. But in reality, we do not simply buy from the cheapest supplier. Products are different when made in different countries \u2013 e.g. the differences in quality between Indonesian and Italian shoes \u2013 and this is compounded when we recognise that one country\u2019s bundle of, say, skilled-labour-intensive manufacturing is different from another\u2019s.<\/p>\n<p>Moreover, trade is affected by the distance between countries, their size, history and wealth (the \u2018gravity relationship\u2019). Trade costs are not just government-created trade barriers but include things such as time in transit, exchange rate risk, redress in case of error, etc. Product differentiation and gravity are incorporated into modern trade models, and these predict that after Brexit the UK will continue to trade more with the EU than other countries because it remains geographically close, large, rich and of a similar cultural background. Consequently, we cannot just avoid higher trade costs with the EU by increasing trade with, say, China.<\/p>\n<p><img loading=\"lazy\" class=\"aligncenter size-large wp-image-774\" src=\"http:\/\/blogs.sussex.ac.uk\/uktpo\/files\/2017\/04\/trade_illustration_final-1024x722.jpg\" alt=\"Trade illustration\" width=\"800\" height=\"564\" srcset=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/files\/2017\/04\/trade_illustration_final-1024x722.jpg 1024w, https:\/\/blogs.sussex.ac.uk\/uktpo\/files\/2017\/04\/trade_illustration_final-300x211.jpg 300w, https:\/\/blogs.sussex.ac.uk\/uktpo\/files\/2017\/04\/trade_illustration_final-768x541.jpg 768w\" sizes=\"(max-width: 800px) 100vw, 800px\" \/><\/p>\n<p>Single Market rules have two purposes: first, because they apply across the whole EU, they facilitate trade between members by eliminating duplicate testing and certification and increasing competition between suppliers. Second, many of them provide reassurance about the quality of goods and services \u2013 e.g that paint on toys is lead-free, that food-stuffs are traceable back to their origin, that airlines compensate for delays. Minford\u2019s assumption that the Single Market merely diverts trade from non-EU countries is simply contradicted by the empirical evidence.<\/p>\n<h2>Getting 4 percent gains requires more than unilateral liberalisation<\/h2>\n<p>M&amp;M\u2019s headline result is that UK \u2018unilateral free trade\u2019 will increase UK GDP by 4% relative to the status quo. <strong><em>But a careful reading of their technical Appendix B shows that there is far more to it than this \u2013 indeed, that gaining 4% requires more integration with Europe than the UK has at present!<\/em><\/strong><\/p>\n<p>Modelling exercises proceed by postulating a \u2018base-line\u2019 outcome for the economy and then changing policies and seeing how much the economy changes from the base. Once the model is defined, the key input is the estimate of how much policies change. In M&amp;M UK trade restrictions are assumed to add 10% to the cost of imports. This estimate reflects the assertion that EU protection is currently equivalent to a tariff of 20% and that international pressure will reduce this to 10% within a decade! But the estimate of 20% arises by attributing <strong><em>all<\/em><\/strong> the differences in producer prices between the EU and low-cost countries to EU trade barriers, ignoring the obvious differences in safety, quality, product mix etc.<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a> The elimination of the remaining 10% amounts to abolishing all such differences.<\/p>\n<p>It is impossible to know exactly what causes prices to differ, but the extra costs of meeting the (often beneficial) high standards needed to sell in the EU must be part of it \u2013 for example, not using leaded paint on toys, not using hormones in beef, or fitting emission controls on cars. <strong><em>M&amp;M\u2019s<\/em><\/strong> <strong><em>\u2018unilateral free trade\u2019 implies eliminating these price differences and so<\/em><\/strong> <strong><em>explicitly includes the removal of all such standards imposed on imported goods.<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a> <\/em><\/strong>See Note 1 to the table on p. 25 which says that under \u2018unilateral free trade\u2019 the \u2018UK eliminates its non-tariff-barriers (NTBs) with all countries. But Note 1 then goes on to say that the estimate also assumes \u2018Broad free trade agreements to be pursued (on investment, agriculture services, property rights, etc) with ROW [rest of the world]. EU agrees zero tariff FTA with UK without conditions; imposes no NTBs on UK (cannot anyway).\u2019<\/p>\n<p><strong><em>The term \u2018unilateral free trade\u2019 is thus doubly misleading<\/em><\/strong>: <strong><em>first, it presumes agreements with reciprocal liberalisations with (all?) the UK\u2019s trading partners<\/em><\/strong>, including the EU, and second, on the EU, it is just plain wrong. Unless the UK and EU sign an FTA that explicitly removes all EU non-tariff barriers to exports from the UK, WTO rules prevent the EU from eliminating barriers on the UK alone. If achieved, <strong><em>eliminating all tariffs and non-tariff barriers between the UK and the EU would imply deeper integration than the EU Customs Union and Single Market currently deliver, but coupled with a race to the bottom on standards!<\/em><\/strong><\/p>\n<p><strong><em>In summary, it does matter (a lot) if the EU will not play ball. There is no rosy alternative, even in \u2018Economists for Free Trade\u2019s peculiar model.<\/em><\/strong><\/p>\n<h2>The effect of devaluation<\/h2>\n<p>Having previously been criticised for predicting that unilateral liberalisation will more or less eliminate UK agriculture and manufacturing, M&amp;M assure us now that manufacturing will be just fine: short run (five years) profits will increase by around \u00a323 billion per year! (p.26) The saviour is the devaluation of sterling. The table on p.26 assumes that the devaluation of 15% relative to pre-referendum days will add 15% to the prices that UK manufacturers can earn in each of their home, EU and rest of the world markets. No evidence suggests that exchange rate changes pass through so completely to the export prices of manufactures \u2013 precisely because, unlike M&amp;M\u2019s assumption, goods are not homogeneous. Moreover, M&amp;M make no allowance for the way in which devaluation will increase the input costs of manufacturers and, before long, their wage bills as real wages start to make up some of the losses that devaluation imposes on them.<\/p>\n<h3><strong>Footnotes:<\/strong><\/h3>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> This and some of the other criticisms made in this section have been made previously by Sampson et al (2016), but have been rejected by Minford.<\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> \u2018if we base our estimates solely on OECD prices \u2026. we obtain a price discrepancy at the border or factory level of around 20 per cent.\u2019 (p.18)<\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> M&amp;M write of maintaining UK standards (p. 19), but this is misleading to the extent that any UK standard raises the cost of producing any good or service for sale on the UK market. They all have to go in M&amp;M\u2019s scenario.<\/p>\n<h3><strong>References:<\/strong><\/h3>\n<p>Minford Patrick (2017) \u2018Even if the EU will not play ball, our optimal strategy is still unilateral free trade\u2019, <a href=\"http:\/\/brexitcentral.com\/eu-not-play-ball-optimal-unilateral-free-trade\/\">http:\/\/brexitcentral.com\/eu-not-play-ball-optimal-unilateral-free-trade\/<\/a><\/p>\n<p>Minford, Patrick and Edgar Miller (2017) \u2018WHAT SHALL WE DO IF THE EU WILL NOT PLAY BALL? UK WTO Trade Strategy in A Non-Cooperative Continent\u2019, <a href=\"https:\/\/static1.squarespace.com\/static\/58a0b77fe58c624794f29287\/t\/58e770b8e3df286cf6c93008\/1491562708766\/What-shall-we-do-if-the-EU-will-not-play-ball.pdf\">https:\/\/static1.squarespace.com\/static\/58a0b77fe58c624794f29287\/t\/58e770b8e3df286cf6c93008\/1491562708766\/What-shall-we-do-if-the-EU-will-not-play-ball.pdf<\/a><\/p>\n<p>Sampson, Thomas, Swati Dhingra, Gianmarco Ottaviano and John Van Reenen \u2018Economists for Brexit: A Critique\u2019 Brexit Briefing Paper No. 6, Centre for Economic Performance, LSE, <a href=\"http:\/\/cep.lse.ac.uk\/pubs\/download\/brexit06.pdf\">http:\/\/cep.lse.ac.uk\/pubs\/download\/brexit06.pdf<\/a><\/p>\n<p><em>Disclaimer:<\/em><br \/>\n<em>The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.\u00a0<\/em><\/p>\n<p>Republishing guidelines<\/p>\n<p>The UK Trade Policy Observatory\u00a0believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement.\u00a0For online use, this should be a link to he original resource on the our website. We do not however, publish under a Creative Commons\u00a0license. This means you CANNOT republish our articles online or in print for free.<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\"><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Share this article: 19 April 2017 L. Alan Winters CB,\u00a0Professor of Economics and Director of UKTPO. In this blog, Professor Winters responds to Patrick Minford\u00a0and\u00a0Edgar Miller\u2019s recent paper on unilateral free trade in relation to Brexit. Economists for Free Trade\u2019s Patrick Minford recently suggested that the UK should simply eliminate our tariffs on them [the EU], and by implication \u2013 under WTO rules \u2013 on everyone else. By doing so, we would achieve free trade for our consumers with one quick move [and increase consumer welfare by 4%] Minford (2017). This, he explains in a fuller exposition, is achievable \u2018via Unilateral Free Trade\u2019 \u2013 see page 8 of Minford and Miller (2017), henceforth referred to as M&amp;M. But this claim is misleading or worse: It is based on a very particular view of the world economy, Even in M&amp;M\u2019s own analysis, the benefits of 4% of welfare (or GDP) depend&#8230; <a class=\"read-more btn btn-default\" href=\"https:\/\/blogs.sussex.ac.uk\/uktpo\/2017\/04\/19\/will-eliminating-uk-tariffs-boost-uk-gdp-by-4-percent\/\">Read More<\/a><\/p>\n","protected":false},"author":213,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[130195],"tags":[96141,123527,132164,147852,133698],"_links":{"self":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/773"}],"collection":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/users\/213"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/comments?post=773"}],"version-history":[{"count":7,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/773\/revisions"}],"predecessor-version":[{"id":1377,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/773\/revisions\/1377"}],"wp:attachment":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/media?parent=773"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/categories?post=773"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/tags?post=773"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}