Paul Krugman: Brexit Meets Gravity: "These days I’m writing a lot about trade policy. I know there are more crucial topics, like Alan Dershowitz. Maybe a few other things? But getting and spending go on; and to be honest, in a way I’m doing trade issues as a form of therapy and/or escapism, focusing on stuff I know as a break from the grim political news...
...Anyway, as Britain’s self-inflicted Brexit crisis (self-inflicted with some help from Putin, it seems) comes to a head, it seems to me worth trying to explain some aspects of the economics involved that should be obvious–surely are obvious to many British economists–but aren’t, apparently, as obvious either to Brexiteers or to the general public. These aspects explain why Theresa May is trying to do a soft Brexit or even, as some say, BINO–Brexit In Name Only; and why the favored alternative of Brexiteers, trade agreements with the United States and perhaps others to replace the EU, won’t fly.
Now, many of the arguments for Brexit were lies pure and simple. But their claims about trade, both before and after the vote, may arguably be seen as misunderstandings rather than sheer dishonesty. In the world according to Brexiteers, Britain needn’t lose much by leaving the EU, because it can still negotiate a free trade agreement with the rest of Europe, or, at worst, face the low tariffs the EU imposes on other non-EU economies. Meanwhile, Britain can negotiate better trade deals elsewhere, especially the US, that will make up for any losses on the EU side. What’s wrong with this story? The first thing to understand is that the EU is not a free trade agreement like NAFTA; it’s a customs union, which is substantially stronger and more favorable to trade.... The EU sets common external tariffs, which means that once you’re in, you’re in: once goods are unloaded at Rotterdam they can be shipped on to France or Germany without further customs checks. So there’s much less friction. And frictions, not tariffs, are what businesses are complaining about as Brexit draws near. For example, the British auto industry relies on “just-in-time” production....
TOne of the best-established relationships in economics is the so-called gravity equation for trade between any two countries, which says that the amount of trade depends positively on the size of the two countries’ economies but negatively on the distance between them.... While America offers a market comparable in size to that of the EU, it’s much further away, so that even if the UK could make an incredible deal with us, it wouldn’t be worth nearly as much as the customs union they have. All of this explains why May is trying to negotiate a deal that keeps the customs union intact. But that, of course, ain’t much of an exit: Brussels will still set UK trade policy, except that Britain will no longer have a vote. So what was the point of Brexit in the first place?
Good question. Too bad more people didn’t ask it before the referendum.
#shouldread
