Do Leavers Even Know How Trade Works?

I have better things to do with my time than argue with people on Twitter about Brexit.  Nonetheless, that is what I do with a chunk of my time. I have no idea why.   But since I can't stop myself I may as well go about it with a degree of efficiency - so I'll use this blog to document answers to common tropes that come up again and again.  This one popped up yesterday from Adrian. I've been chatting with him on and off since the referendum campaign. He's a decent guy.  At least his heart is in the right place.  However his head is very much in the wrong place.  This is demonstrated by his reference to the fact that we buy more from the EU than we sell to it.  From this he concludes that we would be better off if we left the Single Market.

Where to begin?

First of all - you can't assume that our trade position with the EU is necessarily affected by the Single Market.  Maybe it does, maybe it doesn't.   You can't just assert it.  Even if you decide to assume it is an important factor, how do you know if the effect is positive or negative?    We might have an even worse deficit if we left.

And if we want to export more, I'm very much on board with that.  But I'll need a bit more of a plan than leaving the Single Market.   If you want more trade you need something to trade with.  I'd like a bit more meat on where that is coming from please. Where are the goods and services to increase our trade going to come from?

But in any case, we are not necessarily worse off overall because we have a trade deficit with Europe.  Suppose we imported raw materials from the EU and turned them into manufactured goods for export elsewhere in the world?  In that case our trade with the EU would be profitable for us even if the books were in the red.  In fact that is exactly what some UK companies do.

But even that really understates just how bad a metric trade in goods with the EU is for how well off we are.  A lot of trade is to do with creating value.   I remember once reading an analysis that pointed out that for a Thomas the Tank Engine model selling for £10, less than £1 of the value went to the company that actually assembled the thing itself.  The license fee for the use of the name took the biggest chunk of the profit from the sale.

That isn't a special case - the intellectual property involved makes it obvious but it is generally the thinking bit where most of the value lies.  If somebody somewhere has an idea, and has some capital to back it up, getting the actual work done is generally the easiest bit.  A job I am working on at the moment is for a Korean company.  It was set up by an Austrian guy who got me involved because he studied in the UK so had some contacts here.   The ultimate goal is a product to be launched in the Middle East.  The only actual physical movement of goods so far has been from Korea to the UK. So according to the accountants this is a UK import.  Had the Austrian handled that bit of the project it would have been an EU import into the UK.  In either case the biggest bit of the value will end up in Belgium - where the Austrian currently lives - but my share in the UK is well worth having.  It will show up in the national accounts as a 'services' export from the UK to the EU.

Basically modern business is pretty much about ideas, contacts and interconnectivity.   The EU on the whole does a lot of stuff that enhances that kind of thing.  In particular the ability to basically do whatever you like, wherever you like, with whoever you like across the whole continent is really, really handy and really productive.

If you think that trade is about Prosecco and BMWs, and that we can get a 'good'  deal by pointing to the size of our cheque book you really haven't got a clue about how the world works.