The Economic Consequences of Brexit

Brexit would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD, particularly other European countries. In some respects, Brexit would be akin to a tax on GDP, imposing a persistent and rising cost on the economy that would not be incurred if the UK remained in the EU.

brexit to 2030

By 2020, GDP would be over 3% smaller than otherwise (with continued EU membership), equivalent to a cost per household of GBP 2200 (in today’s prices). In the longer term, structural impacts would take hold through the channels of capital, immigration and lower technical progress. In particular, labour productivity would be held back by a drop in foreign direct investment and a smaller pool of skills. The extent of foregone GDP would increase over time. By 2030, in a central scenario GDP would be over 5% lower than otherwise – with the cost of Brexit  equivalent to GBP 3200 per household (in today’s prices). The effects would be even larger in a more pessimistic scenario and remain negative even in the optimistic scenario. Brexit would also hold back GDP in other European economies, particularly in the near term resulting from heightened uncertainty would create about the future of Europe. In contrast, continued UK membership in the European Union and further reforms of the Single Market would enhance living standards on both sides of the Channel.

brexit costUseful links

The Economic Consequences of Brexit: A Taxing Decision, OECD Policy Paper

To Brexit or not to Brexit, a taxing decision, remarks by Angel Gurrìa, OECD Secretary-General

Trade cycles

Click to download the book

In The Third Policeman, Flann O’Brien describes the first All Irish Bicycle, 100% locally sourced and made of cast iron. Including the tyres and pump. Given the state of Ireland’s roads at the time, the riders’ atoms got all mixed up with the saddle’s and they gradually turned half-bike themselves, even having to lean against the wall outside the pub so as not to fall over.

O’Brien had a wonderful imagination, but you can guess where he got some of his ideas from. In 1932,  a few years before he wrote his masterpiece, the Irish government imposed 43 new tariffs on imported goods, including bicycles from Northern Ireland, then as now part of the UK. A reporter from The Irish Times (where O’Brien published a kind of forerunner to blogs) described how people covered their new bikes with mud to make them look old, and as Joe Joyce remarks, the main impact of the measures was to “boost an emerging smuggling industry which proved more durable than many of the protected manufacturers of the day”.

That conclusion is similar to a point made by US Trade Representative Ron Kirk last week when, with several other ministers and WTO chief Pascal Lamy, he was presenting a report just published by the OECD-led International Collaborative Initiative on Trade and Employment (ICITE): protectionism doesn’t protect anybody, it only puts up prices. Those Irish bike buyers didn’t want to pay more for protected bikes, and nobody apart from O’Brien’s mad protagonists would buy a bike on the basis that it contained no imported rubber and metals. Quite the contrary. The site of one manufacturer I looked at when preparing this article boasts that it “sources from the best suppliers around the world”, having just explained a couple of lines higher that it’s “home of some of the UK’s most famous bicycle brands”.

These days, it would in fact be hard to find a manufactured product that was made entirely by local firms from local components in any country. At last week’s meeting, New Zealand trade minister Tim Groser pointed out that in the space of 20 years, the import content of exports (the Japanese gears on those British bikes for instance) had doubled to 40%. So if you want to export, you have to import, and if you want to encourage domestic production, you need access to competitively priced intermediate goods from around the world – microprocessors, steel, cloth, whatever.

That doesn’t just apply to manufacturing. Services form the greatest share of most countries’ GDP and are increasingly being traded internationally. To stick with Ireland, it is the world’s second biggest exporter of business services after India according to the report, but it also has the world’s highest share of imported business services in output (along with Luxemburg).

What about the workers? As the title suggests, Policy Priorities for International Trade and Jobs focuses on employment, looking at the impacts of international trade on employment and working conditions, as well as growth more generally. It says that openness pays. Another minister attending the meeting, Canada’s Ed Fast, said that abolishing 1800 tariffs had helped his country create 12,000 new jobs during his government’s time in office so far. The report itself looks in detail at a dozen OECD and non-OECD countries and also includes results from a broad sample of 30 open and closed economies around the world over a 30-year period.

It concludes that whatever the criterion, trade is beneficial overall, and the effects can be felt quickly. In Africa, for instance, a one percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of around 0.5% per year. Some arguments in the report are probably familiar to people interested in globalisation issues, but the scale of the impacts may not be. For example, between 1970 and 2000 workers in the manufacturing sector in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region.

The conclusions concerning offshoring and outsourcing are encouraging too. Studies for the UK, US, Germany and Italy suggest that off-shoring of intermediate goods has either no effect or positive effects on both employment and wages. And with so much talk of sweatshops and other negative impacts, another surprise is that trade tends to improve working conditions whether the measure is injuries on the job, child labour, informality, or effects on female labour.

So, should countries just open up to international influences and all will be well? Pascal Lamy argued that globalisation makes labour markets more volatile and many jobs more precarious. In reply, OECD Chief Economist Pier Carlo Padoan reminded everybody that the benefits of an open trade policy depend on a whole series of other policies, starting with labour market measures to aid those negatively affected, but also covering investment, governance and social protection.

Useful links

You can find a four-page summary of Policy Priorities for International Trade and Jobs here

OECD work on trade and jobs

OECD work on trade liberalisation

GE crops: good for farmers, good for the planet?

What was the 18th century French historian Pierre Jean-Baptiste Legrand d’Aussy talking about when he said : “The pasty taste, the natural insipidity, the unhealthy quality, which is flatulent and indigestible, has caused it to be rejected from refined households and returned to the people, whose coarse palates and stronger stomachs are satisfied with anything capable of appeasing hunger.”

Well done if you recognised the potato, newly introduced into France at the time.

Comments like Legrand d’Aussy’s raise a smile today, but in fact we’re far more conservative about food now than in previous generations (when was the last time you knowingly ate a crow?). For example, over the years, most of the 7000 or so edible plants farmers have cultivated have been marginalised, and a few major crops and animals assure most food supplies.

The big difference is in the variety of ways ingredients are processed by the food industry, and, more recently, in new ways of producing food.

The most controversial of these is genetic engineering, GE. Supporters see it as continuing a long line of technical innovations that have boosted agricultural productivity and contributed to improved food security. Opponents argue that we don’t know enough about the consequences of GE crops and it’s foolish to push ahead, especially when so many other solutions to food security are underused. 

The National Research Council of the National Academies has just published a report on the economic and environmental impacts of GE crops looking at the impacts of GE in the US. (In other OECD countries, notably in Europe, consumer hostility means that GE crops are less widespread than in the US.)

According to the NRC, there are significant environmental benefits.

Insecticide use has declined since GE crops were introduced, and farmers who grow GE crops use fewer insecticides and herbicides that linger in soil and waterways. In addition, farmers who grow herbicide-resistant crops till less often to control weeds and are more likely to practice conservation tillage, which improves soil quality and water filtration and reduces erosion.

There are economic benefits too. In many cases, farmers who have adopted GE crops have either lower production costs or higher yields, or sometimes both, due to more cost-effective weed and insect control and fewer losses from insect damage.

It sounds great, but the report also issues a number of warnings.

Gains aren’t guaranteed. For instance, insect or weed resistance could render genetically engineered crops ineffective and force farmers to resume using more toxic chemicals. The NRC says that more needs to be done to slow the evolution of resistant weeds, such as spraying more than one kind of chemical.

Although farmers have gained economic benefits, more research is needed on the extent to which these advantages will change as pests adapt to GE crops, other countries adopt genetic engineering technology, and more GE traits are incorporated into existing and new crops.

Industry mergers and the dominance of a few players might stifle competition, an issue the Department of Justice is examining.

What do you think?

Useful links

OECD report on Biotechnologies in agriculture and natural resources to 2015

OECD Agriculture homepage

FAO on biotechnology in food and agriculture

20 questions about GM food answered by WHO

Greenpeace says no to genetic engineering

ISAAA says share the benefits of crop biotechnology

Avaaz would like more research, and a ban until it’s done