The Conservative Party may have survived the mid term local elections without too much damage. The torture continues in Cabinet. The schism over the Customs Union continues to threaten the future of the Prime Minister.
Free of the EU and the Customs Union, the UK will be able to set up trade agreements around the world without the restrictions imposed by European tariffs and regulation. Truly global Britain will thrive on the world stage. The world will become our oyster, or so we are led to believe.
Martin Donnelly, former permanent secretary in the trade department, said recently, "swapping the benefits of full EU membership in exchange for bilateral trade deals at some future date was rather like rejecting a three-course meal now in favor of the promise of a packet of crisps later."
A little harsh? Perhaps. The risk is, we will lose trade with the EU but struggle to compensate with new deals in other trade areas. We reject a three course meal, not for a packet of crisps, but for a two course set menu option at a much lower price.
In a recent paper, we analyse UK exports in 2017 with the Gravity Trade Model. We ask the question to what extent does the Gravity Trade Model explain the pattern of UK trade? Will we really be better off outside of the EU and the Customs Union? Not really. You can read the more complete note with data sets here. It doesn't bode well for Brexit. Beware, it's a bit geeky! What does the gravity model tell us about UK trade.
The *gravity model of international trade* in international economics is a model which predicts bilateral trade flows based on the economic sizes, using GDP and distance between two countries. We analyze the pattern of UK exports in 2017 using the model and conventional regression analysis. The model works well. Size of country GDP is the dominant determinant of trade. Distance adds to the performance of the model.
"There are no new territories behind a magic wardrobe..."
There are just 195 countries in the world. Together they have a combined GDP of $80 trillion dollars in 2017. The top 50 economies account for over 95% of world GDP. There are no new territories behind a magic wardrobe once we leave the Customs Union. The UK trades with all of the countries among the top 50. In 2017 UK exports of goods were valued at £342 billion. Using the model we can determine in which countries the UK trades well. Conversely we are able to determine in which countries the UK under performs.
Barriers to trade ...
Using the parameters within the regression model we can determine which are the countries in which we are over performing and those in which we are relatively under performing.
As one might expect, the UK over performs in the major EU countries including Germany, France, Ireland and the Netherlands. The UK also over performs in trade with Hong Kong, Singapore and Australia. Trade with North America i.e. the U.S.A. and Canada is adequately represented.
There are some surprises in the list. Qatar, Oman, Hungary, Morocco, Macedonia and Kuwait are surprisingly ranked in the UK top 50 trading countries. Some are missing or suggest we are under weight in Argentina, Colombia, Venezuela, Peru, Iran, Philippines, Vietnam and Bangladesh. Sanctions and embargoes can be a barrier to trade sometimes!
"Dropping a BRIC..."
Significant shortfalls in performance can be identified in trade with Brazil, Russia, India and China. However, membership of the EU does not explain the shortfall. Germany does much better than the UK in the BRIC countries despite the so called restrictions imposed by European tariffs and regulation
German Exports to the China, India and Brazil were over four times higher than that of the UK last year. German exports to China were valued at almost $100 billion dollars compared to less than $25 billion for the UK. Exports to Brazil were valued at almost $10 billion compared to $2.5 billion for the UK. Exports to India for the UK were valued at $6 billion dollars, German exports to India were valued at $12 billion dollars.
Trade with Russia for the UK was worth just $4.4 billion dollars. For Germany, trade with Russia was valued at almost $30 billion dollars. Product mix and capacity may provide a better explanation of the comparative shortfall in UK performance in the BRIC countries. Neither of which will be enhanced by the decision to leave the EU.
There is no economic nor business argument to leave the customs union...
Analysis of UK trade and the Gravity trade model suggests there is no business argument, nor is there an economic argument to leave the EU. Neither is there an argument to leave the customs union, in fact quite the reverse.
We divide the arguments for Brexit into four boxes, Social, Political, Economic, and Business. The Social, largely about immigration, the Political, about who governs Britain. Argue about this as you will. For the Economic and Business case, there is no argument to leave the EU and certainly no argument to leave the customs union.
No need for a ring fence around the Irish Sea. The existing ring fence around the EU customs union will enable truly global Britain to thrive. That's all for this week ... have a great weekend.
The Saturday Economist
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