Vlogs on the Brexit Debate Huw Edwards Loughborough University 26 March 2016

Vlogs on the Brexit Debate No 1. The Political Economy of Trade Relations.

The Political Economy of Trade Relations This talk is an introduction to understanding the schools of thought underlying the Brexit debate. In some countries, trade policy is dominated by protectionist/anti-globalist thinking. In the UK, that is different. There are two main classes of UK thought. I will class them as: –Trade Unilateralists –Trade Constructivists.

Schools of thought not really represented in the Brexit Debate 1. Autarkists. –Belief that a country should aim for self- reliance wherever possible. –Popular with some Marxist/Leninists, Maoists or extreme nationalists. –Not economically successful. Ignores the basic economics of comparative advantage and specialisation. –Associated with failure (North Korea?).

Schools of thought not really represented in the Brexit Debate 2. Protectionists. –A country should trade, but should also protect certain industries. –In developing countries, this became associated with ‘crony capitalism’. –In developed countries, groups facing economic decline (farmers, miners, steelworkers) have been protected at times. –Some of the ‘Old Labour’ opponents of EEC entry were protectionists. –RIPOSTE TO PROTECTIONISTS: The standard view of trade theory (the Stolper-Samuelson theorem) is that, if a country liberalises trade, there will be winners and losers. –But the winners can afford to compensate the losers. –This is an argument for free trade and against protectionism, but only in an economy where the government intervenes in other, more efficient ways. It is not an argument for pure laisser-faire.

Schools of thought not really represented in the Brexit Debate 3. Old-Style Mercantilists (17 th and 18 th century). –Believe the aim of trade is to pile up a surplus. –Trade surplus=you accumulate gold (used by other countries to pay for your goods). –The gold can be used to buy influence or pay for wars. –It is surprising how many engineers and businessmen still think the purpose of trade is to export (rather than to import)!

Schools of thought not really represented in the Brexit Debate 4. New-Style Mercantilists (21 st century). –Trade policy is to make my country richer at the expense of the neighbours. –Trade deals have ‘winners’ and ‘losers’, not just within countries (as in the Stolper-Samuelson theorem, see above), but countries can win or lose. –The more extreme protagonists of this view (Donald Trump?) see trade deals as a zero-sum game. This is wrong. –More realistic people see trade deals as a positive-sum game (both countries can gain), but there is still scope for bargaining over the spoils. –Trade realists (see later) agree this can be the case, but believe that the purpose of international trade policy is to persuade neo-mercantilists to act in a pro-trade way.

The Brexit Debate Protagonists Two main schools: ‘Free Trade’ Unilateralists. Believe the UK should unilaterally declare ‘free trade’ and avoid agreements. [Examples: Patrick Minford, Nigel Lawson]. Trade Constructivists. Believe the UK needs to enter into agreements in order to promote trade. [Examples: Peter Mandelson. VOX EU trade economists. LSE team (Ottaviano et al)]

The Brexit Debate Protagonists First, the common ground: ‘Free Trade’ Unilateralists and Trade Constructivists both believe trade is good. Free Trade Unilateralists usually found this on the great 19 th Century Free Trade debate (around the repeal of the Corn Laws in 1846), and upon classical trade theory. Trade Constructivists supplement this with more recent work on geography and trade, trade with economies of scale and intra-industry trade.

The Brexit Debate Protagonists The disagreement: Free Trade Unilateralists see any form of protection as damaging if a country is ‘small’. If your neighbours believe otherwise, they are hurting themselves. There is no reason for you to follow suit or join them. Trade Constructivists believe that even ‘small’ countries can have valid (from a selfish viewpoint) reasons to protect themselves at their neighbours’ expense. But the gains from agreeing not to do so are big (usually bigger than in the Free Trade Unilateralists’ models).

The Brexit Debate Protagonists For fans of game theory, we can see this debate as follows: A Free Trade Unilateralist believes that one country’s choice of policy is independent of its neighbours’ policy, and that, if it is not captured by vested interests, it will choose free trade.

Free Trade Unilateralism: the Trivial Game

A prefers not to impose a tariff, regardless of what B does.

Free Trade Unilateralism: the Trivial Game If B is rational (or not captured by vested interests) both countries will engage in free trade.

Trade Constructivism: the Prisoner’s Dilemma Game

Country A will always Impose a tariff.

Trade Constructivism: the Prisoner’s Dilemma Game Noncooperative equilibrium is bad.

Trade Constructivism: the Prisoner’s Dilemma Game Cooperative equilibrium is bad. This solution requires A trade agreement

Positions on Brexit Free Trade Unilateralists do not like the EU. Trade Constructivists can be pro- or anti-EU. But most of the leading constructivist voices are pro-EU (at least in the sense of supporting British influence remaining within the EU). We will examine these positions further in subsequent talks.

Positions on Brexit To summarise: The EU debate within Britain is not between pro- and anti- trade lobbies. It is partly between people who believe that ‘free trade’ is something which a country can declare unilaterally, and those who believe that it is a goal towards which we can only work by patient and successive trade negotiations. The former camp are Eurosceptic. The latter camp may include divisions between those who see EU membership as a step in the ‘right’ direction and those who see it as a mistaken step.