The Past Speaks

In previous blog posts, I have discussed how the Commonwealth looms large in the imagination of many advocates of Brexit.  The coalition that supports Brexit is, of course a diverse one that included libertarian millionaires to hard-core leftists who see the EU as a capitalist plot. However, one important strand of the pro-Brexit thought holds that when Britain joined the European Economic Community in 1973, it was severing its historic ties to the economies of the Commonwealth. People in this camp seem to think once Britain leaves the EU, it will be easy for the country to capitalise on the goodwill that exists towards Britain in the Commonwealth by negotiation free trade agreements with these nations, some of which have large and fast-growing economies.  As I and other commentators noted before the referendum, whenever people on the right-wing of the Conservative Party mention Brexit, the word “Commonwealth” is never far behind (see here).

For the time being, I will leave aside the issue of whether there is actually much goodwill towards Britain in the countries of the New Commonwealth, as opposed to the Old Dominions, where most of the population is of British stock. I’ll also leave aside the issue of whether it is possible for Britain to have strong ties with both the Commonwealth and the EU: the fact that Winston Churchill fought to preserve the British Empire and advocated the creation of a United States of Europe suggests that ties to the two blocs are not mutually exclusive. I’ll also leave aside the question of whether it is worth sacrificing the access the UK has to nearby access in the hopes of negotiation potential trade deals with distant markets. Instead, I will direct your attention to an excellent recent piece on Vox.Eu on the 1930s, when Britain and the Commonwealth countries negotiated a series of deals designed to redirect trade so that it remained within the boundaries of the Empire-Commonwealth. In the piece, which summarizes a full-length paper, Alan de Bromhead, Alan Fernihough, Markus Lampe, and Kevin O’Rourke shows that the protectionist trade policies introduced in the wake of the 1931 Ottawa Economic conference did indeed help to redirect British trade towards Commonwealth countries and away from foreign countries , including its neighbours in continental Europe. The authors conclude that tariff policy matters a great deal more than earlier economic-historical research had suggested. Earlier studies had suggested that the policies implemented after 1931 were not responsible for the shift in British trade towards Commonwealth countries and that other variables explain the shifts.  The new research shows that trade policies mattered more then and likely is more important as a determinant of international trade patterns in the present than we used to think.

So what is the significance of this research to the ongoing debate about the likely impact of a hard Brexit on intra-EU trade?  If trade policy matters more than previous thought, it suggests that a hard Brexit would have more implications for firms than some appear to believe.

One school of thought I have encountered recent goes like this: “Sure a hard Brexit in which we leave the Single Market isn’t ideal, but it’s not going to affect trade too much. Trade policy does affect trade that much- our trade pattern is pretty much a function of underlying fundamentals. For the last 200 years, the UK had done about half of its peacetime trade with Europe and about half with the outside world and that’s just dictated by geography.  Trade policy and membership in the Single Market can move the needle a little bit, but overall isn’t doesn’t matter. Therefore, relatively little trade with the created or destroyed by the distortions that would result from a change in trade policy.”

The new research shows why this seemingly plausibly line of reasoning, which I’ve heard from many smart people, doesn’t really work. A great deal of money at stake here and we need therefore need to redouble our efforts to ensure that the UK remains in the Single Market, or at least the Customs Union.