When I started this blog, the idea was to document the impact of Brexit on the British economy, polity, and society so as to be able to assess its possibly subtle and long-term effects. Somehow – I guess – I was expecting there to be similar blogs from the pro-Brexit side celebrating in return the positives resulting from Britain’s exit from the EU. While I always was convinced that the negatives would outweigh the benefits, I was not excluding – indeed actually expecting – some of the Brexit benefits the ‘Leave’ campaigns promised to be realised.
A Brexiter government like Johnson’s – wedded, as they were, to a hard Brexit – could of course not do much to avoid damaging trade and the economy. What such a government could have done, though, was to use the instruments of the state to deliver on those promises that it had control over. The most obvious one perhaps would have been the £350m a week for the NHS. While the £350m a week figure was inaccurate and EU membership never prevented the government from properly funding the NHS anyway, given that a sizable proportion of the British public came to believe that slogan, the government did have it in its power to find £350m a week somewhere, invest in the NHS and then claim that thy delivered on the promise. That did not happen (even though Brexiters continue to claim it did).
Similarly, on ‘levelling up’ the government could have invested money in the North of England and then claiming that Brexit had worked, even it that money may have meant higher public debt, higher taxes, or cuts elsewhere. That too did not happen.
On immigration, another big Brexit promise, the government could have decided against leaving the Dublin Convention – that allowed the UK to return asylum seekers to EU countries – and thus avoiding – after 13 years in power – having to come up with yet another three-word slogan while watching immigration becoming another obvious Brexit failure.
Yet, as a result of the incompetence or unseriousness of Brexiters in office, my self-imposed task of documenting the Brexit impact has become a challenge not so much because of the difficultly of weighing up the positives and the negatives, but rather due to the sheer amount of damage Brexit is doing up and down the country, left, right and centre, and across sectors. If my goal was to show Brexit damage, rather than assessing Brexit impact, I was certainly spoilt for choice. To cite the perhaps most comprehensive and systematic source, the Davis Downsides Dossier now records 1419 Brexit downsides against just 32 upsides, while official reports on Brexit benefits mostly talk about blue passports and pint glasses.
So, nearly three years on from real existing Brexit, I sometimes feel like my work here should be done. Given the egregious nature of Brexit failure, we should all be able to accept that Brexit has not worked, and we could move on to solving some of the real issues that need solving. An by and large, the British public seems to agree with my assessment. Polls seem to confirm that most people now consider leaving the EU was a mistake (54% of people according to latest polling).
Yet, despite the egregious failure of the project – both on its own terms and on the terms of those who were opposed to it –, there remains a sizable part of the population who still see it as the right decision (34% according to the same poll). There may be many reasons for that assessment – amongst other things the argument that Brexit never was about the economy, but about “sovereignty.” There is some truth to that claim in the sense that the single most important reason Leave voters gave for their choice was the ‘taking back control’ argument (49% according to this source), with only 6% saying they voted to leave thinking it would be good for the economy. The reality, of course, is that Brexit was very much sold as a ‘no downsides’ endeavour (a statement that David Davis distances himself from now), that would turn the UK into a ‘nimble,’ prosperous and powerful Global Britain, doing more business and more trade thanks to new Free Trade Agreements (FTAs).
As none of these promises have been obviously met – and some obviously betrayed – and given that honesty is not an option, Brexiters become more and more inventive in their attempts to justify the unjustifiable. This can be illustrated by a new report from the Institute for Economic Affairs (IEA) on post-Brexit trade, which provides a perfect case study in ‘post-truth economics,’ which the Brexit saga has given rise to alongside post-truth politics.
The IEA Brexit Miracle Report
The new report by Catherine McBride entitled ‘Has Brexit Really Harmed UK Trade? Countering the Office for Budget Responsibility’s claims’ is a truly fascinating piece of post-truth economics. As the (largely rhetorical) question in the title and the sub-title suggest, the aim is to demonstrates – come what may! – that it has not. As such, the report provides evidence for a genuine economic miracle: It is possible to erect trade barriers with your largest trading partner without that having any negative impact on trade flows and your economy! The report’s revolutionary findings could lead to rethinking decades – nay centuries! – of arguments in favour of free trade! Coming from the IEA, that is truly astonishing!
Sarcasm aside, before I delve into the details of the report, it is worth noting the context and tone of the report. As the subtitle suggests, this report saw the light of day because pro-Brexit IEA felt the official statistics used by the government’s own experts painted too negative a picture. So, it is a purely defensive piece of work. That in itself tells us something about how Brexit is going.
Similarly, given the sheer effort that went into trying to rebut the OBR’s findings, the headline finding of the report sounds rather underwhelming: “Contrary to initial concerns, Brexit has not had a major detrimental effect on UK–EU trade.” Two interesting points about this statement: ‘Contrary to initial concerns’ seems like an odd statement given that the whole case for Brexit was made – certainly in the way the IEA made it – on a promise to boost trade and economic growth. So, IEA certainly never told us about these initial concerns. Secondly, the best case for Brexit three years on seems to be that it has had no ‘major detrimental effect.’ Just think about that for a minute.
Now, as for the arguments made in this new report, I will start with the (fatal) flaws and then turn to the tricks used to make us believe the unbelievable, before addressing the new post-truth rhetorical devices employed to make us accept the unacceptable.
The flaws
I identified three fundamental errors in the ‘analysis’ (I put analysis in inverted commas, because it really just amounts to summing up trade volumes and values and eye-balling differences in percentage changes) provided in the report – each one of which in itself fatal to any hopes for the analysis to produce any meaningful findings. (I have written about the Brexiter Economics of Patrick Minford, David Frost, Graham Gudgin, and Steven Tombs which all make similar mistakes, but it would seem that pro-Brexit economists do not read my blog).
Benchmark year
First, the ‘analysis’ assumes that the benchmark for assessing post-Brexit trends in trade should be the last full year of trade data immediately before Covid and Brexit, namely 2019. That is an odd choice, because it cuts off a period where Brexit had already had a negative effect on UK trade and thus sets a low bar for post-Brexit trade. The best and most sophisticated econometric attempt to measure this that I am aware of remains Mustapha Douch and Huw Edwards’ analysis using a synthetic control model. Their findings are summarised in a submission of evidence to Parliament (here).
What their findings tell us regarding the appropriate benchmark year, is that it should be chosen earlier than 2019 – indeed even before the referendum. Their work shows an impact of (the risk of) Brexit as far back as the General Election of May 2015. The risk of Brexit happening was enough to make companies change their investment and trade decisions to hedge their bets. In the IEA report, McBride gives the example of Jaguar Land Rover moving the ‘production of the new Land Rover Defender to Slovakia in December 2015’ - well before the Referendum – as evidence that the UK’s regulatory and tax environment, not Brexit, triggered that move. Douch and Edwards work, suggest that it may typically be the sort of decision that was already influenced by the possibility of Brexit and would perhaps have gone the other way were there not a Brexit referendum looming a few months later.
Regardless, by 2019, UK trade was already lower compared to what it would have been without the Referendum campaign and the chaotic years that followed. Choosing 2019 as a benchmark means setting the bar very low for Brexit success, which – again – tells you something about Brexiter confidence in their project.
McBride does acknowledge that to assess trade flows, the date of the referendum should be looked at too. But she brushes aside any impact by stating that “In 2015, before the Brexit vote, all commodity exports to the EU were £132.9 billion, but by 2019 they had risen to £170.7 billion, a rise of 28.4 per cent.” There are various things wrong with this statement. For one the global evolution in commodity prices would have to be taken into account; for the other stockpiling is a well-documented phenomenon – especially in the run up to the original 29 March 2019 Brexit deadline – and would have had a significant impact on post-Referendum, pre-Brexit trade (see here box 1); But most importantly – and this is the trick used throughout the report – reporting trade figures in Sterling after Brexit is deeply misleading, due to the impact of Brexit on Sterling (see below).
A binary world trade view
The second fundamental flaw concerns the geographic comparison. What McBride does is comparing trends in UK-EU trade to trends in trade between the UK and the rest of the world (RoW). This betrays the typical Brexiter economics assumption of a Ricardian world where trade in finished goods takes place between dyads of countries. That leads to the illusion of a complete isolation of UK-RoW trade from any impact of Brexit. Thus, McBride posits (p.24) ‘only the UK’s trade with the EU would have been affected by Brexit.’
I have written about this flawed assumption before – which not just the IEA but also serious economists make. But in a nutshell, the fact is that trade in the 21st century is not 19th century style Britain exporting cloth to Portugal and importing wine from there. Rather, trade increasingly takes place in complex Global Value Chains (GVCs) where intermediary products cross multiple borders multiple times before finally being assembled into a finished good and then sold in various markets. That means – again as Douch and Edwards have shown – that Brexit does not affect trade just with the EU, but also with other countries that are part of our supply chains. So, comparing UK-EU trade with UK-RoW trade, assuming that the latter provides a benchmark for what would have happened without Brexit is fundamentally flawed.
Growth is success
The third fatal flaw concerns the definition of success. McBride essentially – implicitly – defines Brexit success as growth in trade between the UK and the EU on par with or above growth in trade with the RoW. So, if UK-EU trade after the end of the transition period in January 2021 grew as or more strongly than trade with the RoW, this is taken to show that Brexit was a success – or at least did not do any harm. Or in McBride’s own terms (p.13) ‘UK exports to both EU and non-EU countries followed similar patterns, so any decline in exports in 2020/21 cannot be blamed on Brexit but was presumably due to other factors.’
Again, that’s a nice, simple, and comforting view of the world. But sadly, the world is neither nice, nor simple, let alone comforting: The only valid benchmark for judging whether Brexit was an economic success or not is to compare the trade performance of real existing Brexit Britain with the counterfactual Britain that stayed in the EU. At the risk of repeating myself, the only way to get close to that counterfactual is to use sophisticated econometric methods such as the synthetic control method. That method is not perfect, but it is the only serious attempt to estimate what would have been without Brexit and hence the only type of analysis of post-Brexit trade patterns worth doing.
These fatal flaws set aside, there are several interesting tricks being used in this report to make the case ‘that the trade in both goods and services between the UK and EU hasn’t shown a discernible Brexit effect.’
The tricks
Keeping it (too) simple
Basically, the claim that there is no discernible Brexit effect on UK trade is based on a very simple comparison of the percentage change in the value of trade between the UK and the EU from 2019 to 2022 with the same figure for trade between the UK and the RoW. McBride finds that “exports to EU destinations increased by 13.4 per cent while exports to non-EU countries increased by only 5.7 per cent.” This, according to her approach, is evidence that there is no Brexit effect, because if “Brexit were a major disrupter of UK trade, we could expect to see a divergence between UK trade with EU destinations and UK trade with non-EU destinations” (p.8).
For the reasons mentioned above (2nd fatal flaw): Actually, we would not. But the passage where these arguments are made is interesting because of another simple trick, namely reporting figures in current Sterling values. That’s always going to draw a rosier picture than warranted due to the decline of Sterling since 2016.
On the day of the Referendum results Sterling fell about 10% within hours of the referendum. It is currently trading at 1.23 to the dollar compared to 1.46 in June 2016 before the referendum (see here). That is a 16% decline. Compared to 7 May 2015 – date of the 2015 General Election –, the drop is even steeper (22%). So, a 28.4% rise in exports in sterling terms has to be put into the context of the declining value of the pound. UK exports are worth more in sterling terms, simply because the same quantity of merchandise sold on the world markets will generate more Sterling, because it takes more of the weaker sterling to purchase it (or – more likely scenario – converting the foreign currency used to purchase it will generate more Sterling).
McBride herself acknowledges that. She admits that “if we use deflated data then exports to EU countries fell by 7.2 per cent but decreased by 9.8 per cent to non-EU countries. This again makes it difficult to claim Brexit has hurt UK–EU trade.” (p.8). So, the argument here is that given that the decline in trade with the EU was less than the decline in trade with non-EU, there is no Brexit effect. The fact that her own calculations show that when adjusting for inflation a growth in trade between 2019 and 2022 with both EU and non-EU countries turns into a decline is not being commented on. She probably hopes that by that point in the report, readers will be so fixated on the (flawed) comparison of UK-EU and UK-RoW trade that they will forget what the negative sign in front of the figures means – namely that Brexit Britain is trading less than before exiting the EU even when comparing to the already reduced levels in 2019.
As a result, she confidently concludes “there has been no real disparity between UK trade with EU and non-EU countries. Nor has there been a sharp fall in UK–EU trade either at the aggregate or sector level despite it now being seven years since the vote to leave the EU and three years since the UK actually left.”
Why exactly a real terms decline of 7% with the EU and of nearly 10% with RoW is not considered a sharp fall and leads the IEA to the headline that UK trade was ‘unscathed by Brexit’ remains – of course – McBride’s and the IEA’s secret.
Reducing the problem to an accounting issue: Rules of Origin
The other trick the report uses is to point out that much of the decline in trade is due to the new rules of origin (RoOs) contained in the Trade and Cooperation Agreement (TCA). Indeed, these rules imply that exports that previously may have shown up in the statistics as UK exports are now recorded as goods from third countries. So, the decline in UK-EU trade in sectors like exotic fruit and clothing is merely an accounting artefact due to a change in what does and what does not count as UK product. Thus, McBride states “UK exports of clothing have halved from over £5 billion to just over £2 billion post-Brexit. However, these goods have been made outside the UK since the 1990s and under the TCA Rules of Origin will now be recorded as exports from the country of their manufacture.”
The problem with that argument, however, is that reducing the issue of rules of origin to a pure artefact of recording ignores the fact that these changes do come with very real impact on companies. In fact, under the TCA, reexporting goods without transformation (triangular trade) does not qualify for the preferential tariff but implies full tariffs. So, any company specialising in importing goods that do not comply with RoOs from third countries and re-exporting to the EU will now face tariffs, which also invalidated McBride’s claim that ‘[a]s the UK and EU have tariff-free and quota-free trade, only non-tariff barriers could reduce UK trade with the EU.’ (p.27). For some goods, tariffs still apply.
False proxies
Another trick – or maybe just lazy economics – is to extend the arguments made from trade to investment in order to attack the OBR’s famous 4% long-run decline in productivity prediction. McBride rejects the OBR’s prediction ‘that lower trade would be caused by lower investment in the UK due to Brexit uncertainty’ (her words not OBR’s).
She rejects that prediction stating that ‘[i]t has been suggested by the OBR that two fifths of the impact from Brexit on UK relative productivity occurred between the Brexit referendum in 2016 and the signing of the UK–EU TCA in December 2020, caused by lower investment which in turn caused lower trade’ (emphasis added); and to continue ‘[t]his is not apparent in the trade data: UK–EU trade continued to grow from 2015, before the Brexit referendum, until 2019.’ So here the fact that trade – in current prices – did not decline is used as a proxy to reject the OBR’s claim about impact of investment on productivity.
If you look at the OBR report that McBride cites, it becomes clear, that the OBR’s formulation (p.46) about the link between investment and trade is subtle: “In 2023, imports fall by 4 per cent, dragged down by lower consumption and investment, while exports fall by 6.6 per cent. […] Exports return to growth from 2025 onwards while import volumes continue to fall, partly due to the fall in import-intensive components of business investment as the temporary capital allowance measure ends.”
So, it is clear that the OBR does of course not claim that lower investment is the only factor affecting trade – as McBride suggests –, and that investment is expected affect imports rather than exports. So, the problem with McBride’s trick is that none would claim investment is the only factor affecting trade – trade can decline when investment is up if other factors (new trade barriers for instance) are erected. Conversely, trade is a poor proxy for investment, given that many other things (e.g., new trade barriers for instance) will affect trade independently from investment. Therefore, refuting OBR predictions about investment and productivity based on trade data is fundamentally flawed or dishonest or both.
Instead, McBride should have looked at post-Brexit investment directly. Let us do that her for the sake of completeness.
Investment
A fairly recent brief by PNB Paribas on the impact of Brexit on Foreign Direct Investment (FDI) into the UK makes for interesting reading. The report draws a positive picture stating that ‘the UK is still attractive for foreign investors.’ Indeed, comparing FDI flows between 2009 and 2015 to those between 2016 and 2022 the brief finds ‘that inflows (i.e., investments in the UK by non-residents) rose from 1.6% of GDP from 2009 to 2015 to 3.1% from 2016 to 2022.’ So, is McBride right to rebut the doomsayers after all?
Digging a bit deeper in what PNB Paribas find, the answer is clearly ‘no.’ In fact, breaking down the FDI inflows makes it clear that the overall increase is very largely driven by FDI capital inflows, which went up from 1.6% of GDP between 2009 and 2015 to 2.6% between 2016 and 2022.
What does that mean? The capital part of FDI includes the money that goes into corporate equity, i.e., foreign companies buying stakes in British companies.
This considerable increase in FDI flowing into existing British companies is indeed partially a direct effect of Brexit. In fact, the two most obvious reasons are a very weak Sterling compared to other currencies – most importantly USD – and relatively low stock exchange valuations of British companies. This makes UK companies very attractive targets for foreign takeovers. As Joshua Warner from City Index puts it: “A US company, for example, scouring the UK for a target can get much more bang for its buck because the dollar has strengthened so much against the pound.” Therefore, the continuing attractiveness of the UK as a destination for FDI seems to be primarily a result of the fact that the British economy is struggling and therefore British companies are a bargain.
So, are the FDI figures good news for the UK economy? Will such takeovers create new jobs? Some will, but only if they come with investment in productive capacity rather than investors merely taking advantage of an arbitrage situation. The fact that real business investment (foreign and domestic) in the UK remained +1.2% below its third quarter 2016 peak suggests that increased FDI does not help overcome a decline in business investment in productive capabilities, which in turn will affect productivity growth. In other words, instead of many new jobs and investments in productivity enhancing technologies, many – but not all – foreign takeovers may rather lead to restructurings and layoffs, to the repatriation of profits from the UK to the buyer’s headquarters, and ultimately to a shift away of the centre of corporate decision making from Britain to the acquiring country. Taking back control and all that…
Evolving post-truth economics
Deep down, I feel, McBride and the IEA know that the figures provide pretty clear evidence that Brexit has not been good for the UK trade performance. Rather than honestly admitting that and thinking about ways of addressing the issue, the IEA dives deeper down the rabbit hole of post-truth economics. Two new rhetorical tricks are used in the report: Firstly, an interesting new ‘social justice’ claim that UK exporters should pay for border checks; and secondly, an equally interesting new claim that trade is overrated anyways.
A Brexit ‘user pays principle’
The report acknowledges that there are some new costs for exporters as a result of new trade barriers. But these are spun as a positive change towards a ‘user pays approach’ to UK-EU trade. McBride states (p.7) “While the UK was a member of the EU, taxpayers were paying for that membership. Among the beneficiaries were firms trading with the EU. These companies now have to pay for their own compliance when they trade with the EU as all companies do when they trade with non-EU countries. These costs will be either passed on to their customers as higher prices or absorbed as a business expense, but these costs will no longer be paid by all taxpayers.”
So, EU membership is now presented as having been unfair, because taxpayers were footing the bill for Single Market (SM) access, while companies benefited from it. The suggestion seems to be that this is somehow a case of freeriding that may be unfair for people who do not export. Indeed, the EU membership fee is considered constituting a ‘subsidy’ for importers and exporters.
This is a truly extraordinary argument. Not only does it ignore the fact that many companies – although not all! – are UK taxpayers too; but also the estimated £250m a week cost of EU membership gave British people and businesses access to such a variety of things, that the cost of frictionless trade with the SM – which was mainly a cost of regulatory alignment and enforcement – can hardly be seen in isolation, or without considering the benefits to consumers in terms of choice and lower prices. Assuming for a minute that such a calculation made any sense, whether or not each individual exporter’s tax contribution – and hence contribution to the membership fee – was lower than the gains generated from trade with customers inside the SM – and thus constituted a ‘subsidy’ – is far from obvious.
And even if it did, the benefits not just to the firm but the country almost certainly would outweigh the cost of that ‘subsidy.’ To take an everyday example: I’ve been staying in Paris on study leave for the past month (I know citizen of nowhere and all that). Before Brexit, I could have used my data roaming without any extra charge. Now my mobile provider charges me £.1.67 a day. So, Brexit has a very real cost for me, namely £1.67 a day. That’s £11.69 a week. Conversely, while an EU member, not having to pay this amount was one thing the membership fee paid for. If we multiply that by the UK population of 67.3m, the country as a whole benefited from £786.73m a week in saved roaming charges. So, saving on roaming charges alone would have made the membership fee worth it roughly three times over. Yes, I know all 67.3m Brits are never overseas, or actually use mobile data, but the point of this admittedly somewhat frivolous example is that £250m a week is not all that much in comparison to the variety of things Brexit membership paid for. So, taxpayers paying for SM access for exporters and importers probably was not such a bad deal.
Trade is overrated
The other astonishing argument made in the report is that, actually, too much trade is not a good thing. McBride states: ‘It has also been claimed by some economists that the UK’s trade intensity is too low, and that this is both a bad thing and due to Brexit.’ Yet, ‘[c]ountries with high trade intensity are more susceptible to external shocks.’
This is an astounding new argument given how much was made of Global Britain and the new trade agreements that were going to provide us will all those new business opportunities, suggesting becoming an export economy was part of the plan. That’s not going to happen and Brexiters know it. So, their arguments now evolve towards a more isolationist position where trade is overrated and what is needed instead is low taxes and deregulation to boost economic growth (see p.30).
The spinning-head strategy
It has taken me a considerable amount of time to go through this latest IEA report, get my head around the arguments, think about their validity, and then assess them against what serious research has found. More time, perhaps, than I should spend on these types of things I guess – but definitely more time than the average UK citizen will ever spend engaging with assessments of Brexit impact on the UK economy…and that is exactly what Brexiters are banking on. Flooding the public sphere with a never-ending stream of newspaper articles, op eds, reports, TV and radio interviews repeating the same debunked arguments over and over again. They simply make one’s head spin. And that is what they are meant to do. So, I feel this blog can now play a role not so much in compiling factual information about the impact of Brexit, but rather pushing back against the post-truth economics and politics that Brexit has given rise to.
To be sure, this may have a counter-productive effect. Trying to assess the validity of the arguments, I maybe contribute to providing visibility to these falsehoods, which is oxygen to the populist fire of rather than extinguishing the flames with – what I hope is – cool and rational reasoning. Indeed, the post-truth type lies that Brexiters spew out into the public domain live off publicity – positive or negative. Just like honest attempts to debunk Johnson’s £350m a week lie actually helped that claim to become more popular, so my blogging about the IEA report may only make it more visible. It is the bitter irony of debunking populist lies, that few people will remember the details, and many people will remember that there was a ‘debate,’ a ‘controversy’ around the impact of Brexit on trade. However strong the evidence is stacked against the Brexiters’ false claims; however convincing – or not – my counter arguments may be; in a polarised society people pick sides on affective and ideological grounds not based on rational argumentation.
So, keeping the Brexit debate alive by engaging with Brexiter propaganda may very well lead at one point to a reignition of the vitriol and venom of the post-Referendum years. Indeed, another recent rhetorical strategy by Brexiters has consisted in what Chris Grey calls the Brexiter Blackmail: ‘Let’s move on, lest we will use the media outlets we control to poison the public debate again.’
Still, I remain convinced that on balance moving on is the wrong thing to do and we should continue to ‘bremoan.’ The far-right populists running the country will have won when we stop challenging them. When we are too exhausted, tired, and demoralised to even argue with them anymore. While that is sometimes difficult to do, I am hoping with my posts I can help others a little bit to stop their heads from spinning.