Ahead of the release of the latest IEA offering on trade and Brexit let's briefly talk economic studies, and why any reputable economic model will find trade deals doesn't replace a loss of trade with the EU - 1/
Economic models equate barriers with growth in trade - the fewer the barriers - whether tariffs, regulations, services access - the more trade grows. Which seems obvious. Distance is also a factor - the gravity effect - more trade with closer countries 2/
If we substitute EU membership of friction free goods trade and easy access on services, with an FTA that introduces checks, different regulations, and lack of access to some services that must inevitably affect trade flows and hence growth 3/
Can new Trade Agreements make up for this? Unfortunately the amount of market opening in these is often not significant and the markets distant. The US is huge but doesn't open up much in a trade agreement, NZ is already open 4/
Any reputable economic model will therefore show a loss of growth from leaving the EU, especially if we also lose access to EU-3rd country agreements. However, that isn't quite the end of the story, for trade is only one determinant of growth 5/
Domestic policy changes could therefore balance to a degree the loss of trade. However then we need to get into specifics of what these changes are, as it is easy to say regulatory changes, harder to deliver these. 6/
To-date the IEA / Legatum work relies on the UK joining a regulatory alliance with other countries, but there are only 2 main regulatory powers, EU and US. Forming a 3rd seems extreme wishful thinking, and moving away from EU regs will increase barriers 7/
The Minford / Econs for Free Trade work throws all sorts of incorrect assumptions into their model (no new barriers with the EU, fewer barriers elsewhere) to get their spectacular growth result. 8/
Now there are many critics of economic models, who say they don't have a great record of forecast. Certainly the specific numbers shouldn't carry huge weight, hence reverting to the idea of barriers to trade. That's where we need to focus. 9/ end
