Royal Economic Society’s panel on Brexit

Soumaya Keynes

On 23 June, the UK will decide whether or not to leave the EU. While the general population is divided on the issue, the overall consensus among economists at a session on Brexit at the Royal Economic Society’s annual conference was that Britons should vote to stay in the EU. This column presents the views of the four panellists at the session on the trade implications and the economic and political economy costs of Brexit.

Should the UK remain a member of the EU or leave the EU? On 23 June, Britons will go to the polls to answer precisely that question, choosing between the options: "remain a member of the European Union" and "leave the European Union".1 Britons are divided; as of 20 March, the Financial Times poll of polls showed that 44% want to stay, 40% want to leave, and 16% are undecided.2 Economists seem to be much more confident. On 22 March at the Royal Economic Society’s annual conference, a show of hands revealed that the vast majority of economists in the audience thought Britons should vote to remain in the EU.

The four panellists at the session, titled “Brexit?”, offered reasons for the apparent consensus (aside from the number of European economists in the room). Brexiteers argue that by leaving the EU, the UK could regain control over its economic policy, and negotiate a new, better trade deal with Europe. Richard Baldwin (Graduate Institute, Geneva) argued that this is a false hope.

The reason for the confusion is that these people are thinking of trade as it existed in the 20th century, when goods were made in one place and sold in another. In that world, the economic barriers to trade were at the border, in which case it makes sense to think of Britain haggling with the EU over tariffs and quotas. But we are not in that world anymore. In a world of 21st century trade, supply chains are increasingly integrated across borders; “the trading system is being used to make stuff, not just sell it”. Trade barriers are no longer in the form of tariffs, but common minimum standards, meant to assure producers that their supply chains will function, and that they will be able to do business abroad.

While 21st century trade agreements consist of common standards, negotiating opt-outs makes less sense. If British businesses want to maintain their role in global commerce, they will need access to the single market. But, as Baldwin explained, “the only way to access the single market is to follow its rules”. And without membership of the EU, the British government would have to accept the EU’s common standards, but give up its seat on the negotiating table. In other words, it would have to obey, without a say.

Watch an interview with Richard Baldwin recorded at the RES conference below

Next, John Van Reenen (London School of Economics) outlined just how much he thought Brexit would hurt the British economy. Although it would bring some economic gains, in the form of a lower fiscal contribution to the EU (around 0.3% of GDP) and slightly boosted growth from stripping away some regulations, these would not outweigh the economic costs. After accounting for the loss of trade with the EU, lower foreign direct investment and lower immigration, he reckoned that GDP would be between 1.3% and 2.6% of GDP lower (£850–£1,700 per household in Britain, per year), rising to between 6.3% and 9.5% after accounting for the dynamic effects of Brexit on productivity (Dhingra et al. 2016).

Given the economic costs (and a separate audience survey revealed that everyone in the audience believed that Brexit would be costly in the short and medium run), why do so many Britons want to leave? A helpful tweeter offered an answer: “even if this bullshit was true, its [sic] a small price to pay for democracy, sovereignty and to control our borders”. Van Reenen accepted the legitimacy of this position (though no doubt it could have been more politely expressed). People may not like the levels of immigration associated with EU membership, and may be concerned by the democratic deficit involved where so few are taking decisions on behalf of so many. But he thought the role of economists should be to make the price of exit as clear as possible, and so help people to decide whether the (non-monetary) benefits of leaving the EU are worth the costs.

Watch an interview with John Van Reenen recorded at the RES conference below

Next, Swati Dhingra (London School of Economics) delved into the detail of the economic costs associated with Brexit. Immigration boosts productivity by allowing workers to sort efficiently into the right jobs (Di Giovanni et al. 2014), and3 immigrants from the EEA make a positive contribution to the UK public finances (Dustmann and Frattini 2014), so curbs on immigration would be costly. Fears that immigration hurts employment among natives also seem misplaced (Wadsworth 2015). Bruno et al. (2016) found that joining the EU boosted inward flows of FDI by around 20% once a country joined the EU. On the assumption that leaving the EU would reduce them by as much, and combined with estimates from a cross-country growth regression, Dhingra calculated that households would lose out by at least £453 per year on average from the loss of FDI.

Dhingra also explored whether Britain would be able to negotiate better trade deals with non-EU trade blocs outside of the EU. Eurosceptics’ concern is that when EU representatives negotiate trade deals with other governments, they barter on behalf of lots of diverse countries, diluting Britain’s interests. Dhingra finds that far from being a downtrodden partner, agreements negotiated between the EU and other trade blocs tend to benefit Britain more than the average European country. Whereas the impact of trade agreements on imported products has reduced (quality-adjusted) prices for British consumers by 36%, the reduction is just 14% on average for the whole of the EU (Breinlich et al. 2016). As the UK makes up only 18% of the EU’s single market, the chances that it could negotiate much better terms with a country as large as America are slim; Dhingra noted that negotiating a new trade deal with America immediately after leaving the EU could impinge on Britain’s sovereignty by just as much as any current arrangement with the EU.

Watch an interview with Swati Dhingra recorded at the RES conference below

Finally, Enrico Spolaore (Tufts University) offered the political economy angle. Europe has historically faced a dilemma. Integration brings economies of scale, as countries do not have to fiddle with different commercial and legal rules, and they can share resources to fund common security systems. But there is a cost: pooling the preferences of large numbers of different people means making single decisions on behalf of increasingly diverse groups of people, none of whom like compromise. At some size, these (unquantifiable) costs will outweigh the benefits.

At the moment it might seem that Britain has the best of both worlds: it benefits from economic integration through its access to the single market, but does not compromise in either the Schengen area or the euro. But even if Britain’s set-up is acceptable now, one might still worry about a creep towards an ever-closer union. Spolaore’s view was that despite early ideas for a “chain reaction”, where plans for integration would snowball irreversibly, experience so far suggests little appetite for this within Europe (Guiso et al. 2014). Fears over an ever-closer union therefore exaggerate the centrist dynamics within the EU; its vast cultural differences mean that we are not on the verge of a European super-state.

Watch an interview with Enrico Spolaore recorded at the RES conference below

The panellists emphasised the huge uncertainties involved with Brexit; any figures cited were estimates with huge error bars attached to them. Any macroeconomic forecast is difficult, but in this case it is made harder by the uncertainties and disagreement within the ‘Leave’ campaign regarding the type of arrangement Britain would get outside of the EU. As remarked by Richard Baldwin, it would seem wise to decide which exit to take before leaving the building.

References

Breinlich, H, S. Dhingra and G. Ottaviano (2016), “How have EU’s Trade Agreements Impacted Consumers?”, CEP Discussion Paper, March 2016.

Bruno, R., N. Campos and S. Estrin (2016), “Gravitating Towards Europe: An Econometric Analysis of the FDI Effects of EU Membership”, mimeo.

Guiso, L., P. Sapienza and L. Zingales (2014), “Monnet’s Error?”, Economic Studies at Brookings.

Dhingra, S., G. Ottaviano, T. Sampson and J. Van Reenen (2016), “The consequences of Brexit for UK trade and living standards”, CEP Discussion Paper, March.

Di Giovanni, J., A. Levchenko and F. Ortega (2014), “A global view of cross-border migration”, NBER Working Paper, March.

Dustmann, C. and Frattini (2014), “The Fiscal Effects of Immigration to the UK”, The Economic Journal 124(580), pp. F593-F643.

Wadsworth, J. (2015), “Immigration and the UK Labour Market”, CEP Election Analyses Series.