U.K. Trade Policy After Brexit Must Reckon With Gravity
Posted by hkarner - 22. März 2017
Source: The Wall Street Journal
Countries export more to big economies than they do to small ones—a pattern May and Trump should keep in mind
To boost trade after Brexit, the U.K. will have to grapple with a powerful force: gravity.
Economists have for decades observed that the volume of trade between economies is tightly linked to their size and proximity. Countries export more to big economies than they do to small ones, and they trade more with neighbors than with markets further away.
For the economists who first discerned them, these patterns recalled the effect of gravity on celestial bodies in classical physics, where the force exerted by one object on another is determined by mass and distance. This phenomenon helps explain why the U.S.’s biggest trading partners are China and Canada and why the U.K. exports more to Ireland in a year than it does to India or Brazil.The role of gravity in international trade highlights a potential problem for Prime Minister Theresa May as she begins complex negotiations to withdraw the U.K. from the European Union. The EU is big and nearby, making it a critically important trade partner for the U.K. Self-imposed barriers to trade with Britain’s closest neighbors may have an outsize effect on the economy that won’t easily be overcome by inking new deals with nations farther away.
Similar concerns could arise around President Donald Trump’s trade policies, which are geared toward eliminating deficits in trade with a neighbor, Mexico, and big economic rivals, China and Germany.
“Putting up trade barriers or starting a trade war is going to be bad. And it’s going to be worse if you do it to your near-neighbors,” said John Van Reenen, a professor of economics at the Massachusetts Institute of Technology.
The Trump administration says rewriting trade deals is necessary to protect American jobs. In fact, from the gravity perspective, the U.S.’s massive economy may give it more leverage against its trade partners.
The idea that international trade could be mapped and predicted by describing gravity-like relationships between countries is generally credited to a Dutch economist, Jan Tinbergen, who in 1969 shared the first Nobel Memorial Prize in economics.
“People discovered that they had a benchmark for thinking about trade between countries,” said Keith Head, professor of Asian commerce at the University of British Columbia. Economists augmented Tinbergen’s framework, layering on adding explanations of how commerce between countries is influenced not just by size and distance but also by language, culture and government policy.
Some economists say that understanding how gravity shapes trade was influential in encouraging countries to form regional pacts with big blocks of trading partners, a multilateral approach to trade policy that the Trump administration rejects in favor of bilateral ties.
In a recent paper, Monique Ebell, a research fellow at London’s National Institute for Economic and Social Research, used gravity models to project the impact on U.K. trade of different post-Brexit scenarios. She found that exiting the EU’s single market for goods and services and replacing it with a standard trade deal would reduce the U.K.’s trade with EU members by as much as 45% over the long term. She also found that trade deals with emerging markets farther away, and with the “Anglosphere” that includes the U.S., Canada and Australia, wouldn’t offset the loss.
An analysis by the London School of Economics found that new trade barriers with the EU would reduce British income per person by between 6.3% and 9.5% over the long run, depending on the type of Brexit deal struck.
Ms. Ebell stressed that estimating the effects on a country of quitting the single market is difficult because no state has done it before. The single market not only eliminates tariffs on goods and physical impediments to free-flowing trade, such as border checks, but also dramatically reduces regulatory and other nontariff barriers. She added that her work is based on the EU’s roughly 50 existing trade agreements that fall far short of EU membership and broadly neglect services, in which the U.K. excels.
Mrs. May says she will pull the U.K. out of the single market as well as the EU’s customs union, whose members share a common external tariff. However, she has said she is seeking a much more comprehensive trade deal with the EU than any signed before, aimed at maintaining close economic links. European officials say the U.K.’s goal of untrammeled single-market access while restricting immigration will be hard to reconcile.
Some economists are skeptical about the influence of gravity in the modern world, where the costs of communicating over vast distances or transporting goods to far-flung markets have fallen dramatically.
Patrick Minford, professor of economics at the U.K.’s University of Cardiff and a free-trade advocate, said gravity models also underestimate the importance of competition in global commerce. Cheaper or better products and services come to dominate world markets, whether they are produced in a neighboring country or in a market farther away, he said.
Gene Grossman, professor of international economics at Princeton University, added that predicting how leaving the EU will affect British trade is inherently uncertain because it isn’t clear what sort of deal the two parties will eventually strike.
Economists broadly agree, though, that policies that limit trade have costs, and that a far-reaching deal on trade between the U.K. and the EU is desirable, even if it proves tough to negotiate. “If cool heads prevail, most benefits can be maintained,” said Mr. Head.