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The Research Brief: trading insults over UK-EU relations

Your weekly dose of policy thinking.

By Spotlight

Welcome to the Research Brief, where Spotlight, the New Statesman’s policy section, brings you the pick of recent publications from the government, and the think tank, charity and NGO world. See more editions of the Research Brief here.

What are we talking about this week? “Has Brexit really harmed UK trade? Countering the Office for Budget Responsibility’s claims”, a new paper by the IEA.

The International Energy Agency? No, not that one. This is the Institute of Economic Affairs. Their publications have been featured in the Research Brief before. It’s the free-market think tank that has acted as incubator for some of the wackier ideas emerging from the Tory Party in recent years – unfunded tax cuts and “Trussonomics”, anyone? – based on the famous Tufton Street in Westminster, the Mecca for libertarian policy wonks. It’s been hugely influential over the years, with an outsized role in pushing Thatcherite, monetarist and market-based solutions to all kinds of policy problems for more than five decades.

Got it. So what is it saying about Brexit and trade? The IEA was generally big on Brexit as an opportunity to slash regulations and unleash those entrepreneurial “animal spirits” supposedly held back by Brussels. Its post-Brexit model was one in which there would be free-trade deals with the rest of the world, and a new “Global Britain” would create a “Singapore-on-Thames”. But post-Brexit free-trade deals have been few and far between, especially the coveted transatlantic agreement that the Biden administration has seemingly no interest in whatsoever. And, if anything, the post-Brexit arc of the British state has leaned towards more market intervention, higher spend, more tax and increased expectations from a market-sceptic citizenry, rather than a free-market renaissance.

But this report by the free-market economist Catherine McBride, says leaving the EU hasn’t really hampered UK-EU trade in a significant way. That thesis – not one you hear every day – has got the approval of the Trade Secretary (and no doubt future Tory leadership hopeful) Kemi Badenoch, who told an event that “we should stop talking ourselves down” and that “contrary to media reports and… establishment voices, the data says Brexit has not had a major impact on UK-EU trade”.

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Fantastic. All’s well that ends well? Not quite. The paper’s claims run contrary to the Office for Budget Responsibility (OBR) data, which shows a marked contraction in cross-Channel economic activity, especially relative to other EU countries, and a much slower UK-EU trade rebound from Covid-related slow-downs than our competitors in neighbouring advanced economies.

Why is there an OBR vs IEA discrepancy? To be clear, the IEA report, in its own words, “does not claim there has been no impact on UK trade from Brexit” and concedes that “there will still be compliance costs of calculating Rules of Origin values, obeying Sanitary and Phytosanitary regulations, and possible customs inspections”. Different-sized companies will be able to absorb the extra workload, cost and process associated with exporting to or importing from the EU to different extents, it adds.

But – the paper is keen to state – the cost burden of EU trade is now covered by importers and exporters themselves, rather than being “paid by all taxpayers” as a cost of the EU membership subscription (like Netflix or Amazon Prime, except you get access to a 500-million-person single market instead of unlimited episodes of The Office).

So it admits Brexit has had an impact on importers and exporters but says that’s a fairer way to spread costs? That’s one point, but it also says that “UK goods exports to EU countries increased by 13.5 per cent and to non-EU countries by 14.3 per cent between 2019 and 2022”. On services, it cites similar Office for National Statistics data that reports “service exports to the EU increased by 14.8 per cent from 2019 to 2022”.

Doesn’t sound like a disaster. Not on the face of it. But a fair few economists and trade specialists took to Twitter/X to berate the paper. David Henig, the UK director of the European Centre for International Political Economy, said it “should be a humiliation for [the Trade Secretary] to be associated with such shoddy research” and “deny economic reality”.

Ouch. Why’s he so down on the figures? Henig says the growth in the numbers is down to inflationary effects. Jonathan Portes, a New Statesman contributor and professor of economics at King’s College London, has shared a thread hoping to debunk the think tank’s stats. He says the IEA is measuring post-Brexit trade without adjusting for inflation (meaning they get a higher nominal figure, which is in fact lower in real terms), and measuring pre-Brexit trade while accounting for inflation (meaning they get a lower figure).

Post-Brexit trade data that is adjusted for inflation seems to show a -7.2 per cent drop in exports and a slight bump in imports of 1.4 per cent. Comparative numbers from Germany, also shared by Henig, suggest German trade with the EU has ballooned since 2019 relative to any UK figures, whether adjusted for inflation or not.

In a sentence? A pro-Brexit free-market think tank has downplayed the economic downsides of leaving the EU, only to be quickly and predictably battered over the numbers by Remain-oriented economist types.

Read the full report from the Institute of Economic Affairs here.

If you have a report, briefing paper or a piece of research that you’d like featured in the Research Brief, get in touch at spotlight@newstatesman.co.uk.

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