This article is inspired (understanding inspiration not as
the elicitation of higher artistic endeavours, but rather as a call to action)
by reports in The Express that Harvard economist and entrepreneur Michael
Burrage claims exactly the above. You can read the article here.
This is an interesting example of how you can get statistics
and numbers to say pretty much anything that you want, and to reflect any kind
of truth you are interested in peddling.
The so called ‘research’ (this is a word that unfortunately
is used more and more loosely in our modern World) states that WTO rules would
be the best solution for the UK. The arguments to justify this statement are,
as is often the case, sensible at first sight and fatuous and disingenuous as
soon as a bit of thought is put into it.
The ‘eminent’ Mr. Burrage points out that:
- · Trade between the UK and EU countries has grown by an average of 0.9% per year between 1993-2015.
- · Trade between UK and third countries which have trade deals with the EU has grown by 1.9% per year in the same period.
- · Trade between UK and third countries with no trade deal with the EU (trading under WTO) has grown by 2.9% per year in the same period.
This appears to indicate that most growth comes from
countries with which there is no trade deal.
There is nothing wrong with this
data, what is surprising, is Mr. Burrage’s conclusion: it is better to be under
WTO rules than under a trade deal, because trade grows quicker under WTO rules.
This seems counterintuitive. Can it really be true? Let’s look at it in a bit
more detail.
The first thing that is wrong with Mr. Burrage’s argument is
really an oxymoron (and the second part of this word may provide clues as to
who Mr. Burrage really is). Mr. Burrage tells us that trade growth with third countries
is growing at 2.9% per year while the UK is within the EU, and seems to
conclude that exiting the EU and trading with it under WTO rules is the best
way forward for UK trade. The data seem to show that ability to trade with third
countries is not impaired by being in the EU, in fact, trade seems to be
developing nicely. The argument seems to be that the growth is specifically
justified by the fact that these countries are traded with under WTO. This combines
two well known psychology biases, such as attribution bias, the attribution of
a cause to an effect, even though they may not have a causality relationship,
and illusory correlation bias, attributing correlations to non-correlated
events which happen to occur simultaneously. We will look at this a bit more
later.
Lying with numbers
But firstly, let’s look at Mr. Burrage’s disingenuous use of
numbers. I call it disingenuous as I have to believe it is intentional and not just
an error. I refuse to believe that one can graduate Harvard and teach at LSE
without developing a basic understanding of simple arithmetic. The problem is
in the use of percentages. Percentages are only informative when the base is
known. Let us use a simple example to explain this. Imagine I have a company
that sells, for example, software. My company does 100000 units of trade with
the EU, and 1000 units of trade outside the EU. I analyse the growth in my
trade, and I observe that, in the last year:
- · Trade with the EU grew by 900 units (0.9% growth rate)
- · Trade outside the EU grew by 29 units (2.9% growth rate)
If I look only at the growth rate in percentage terms, then I would conclude
that my future is outside the EU, despite the fact that the EU has contributed
900 units to my growth and third countries have contributed 29. The
percentages, without the base, tell the opposite story.
Therefore, Mr. Burrage, we need the whole story. Not only
the percentages, but the starting points.
Ignoring critical information relevant to explaining an observation
This is what in psychology is known as congruence bias,
testing specific hypothesis and ignoring others. Let me explain what I mean by
this:
The World’s faster growing economies in the last few years
have been, in absolute terms (this is what matters here, not percentages, but
which economies have grown most in absolute currency terms, as they are the
ones with which trade is expected to grow more in absolute terms – and, since
UK trade is relatively constant as a base, in percentage terms), China, US, India,
Indonesia, Japan and Brasil (they are responsible in absolute terms for a huge
amount of the World’s economic growth – see this for example).
This is important because, right now, most of these countries
are in the third category. Mr Burrage infers that growth is larger in the third
category because we trade with them under WTO rules rather than trade
agreements. I think that the fact that these countries are growing fast is a
more likely explanation for the speed of trade growth. This relationship is
obvious, the faster the country’s economy is growing, and the bigger it is, the
faster our trade with it would grow. Whether under WTO or trade agreement, the growth
will occur, and there is no information or argument to justify that the growth
is faster under WTO. The fact that some of the countries in the fast growth
category trade under WTO rules with us is a circumstance, not a cause. In fact,
if you were to move China and India to the second category (as they are about
to do, with trade agreements about to be signed) this would immediately change
the percentages to higher growth in category 2, and lower in category 3. The
reason why trade agreements are in advanced negotiation is, of course, that they
will make trade grow even faster.
I therefore make a case here for changing Mr. Burrage’s
arguments from:
Trade growth for the UK is greatest in percentage terms with
countries outside the EU with which there is no trade agreement, and therefore,
this proves that UK should exit the EU and not have any trade agreements.
To:
Trade growth for the EU and the UK is greatest in absolute
terms with the EU and the US, and behind them, with large global economies growing
fast. Therefore, we must trade as much as we can with the EU, the US and large,
fast growing economies. We already are part of the EU, which takes care of the
first, and as part of the EU trade agreements exist with the US, which takes care
of the second, and are in late stage negotiation with China and India, which
takes care of the third.
It would now seem, by using Mr. Burrage’s information
correctly, that the UK should stay in the EU and stop vetoing the Indian trade
deal.
BTW, the latter is an interesting point. The EU has no trade
deal with India yet. This is a trade deal Brexiteers are claiming will be
struck quickly by the UK once UK exits the EU, due to the special relationship
and common history between UK and India. If you study the EU-India trade deal,
you will find it is ready to go, but being vetoed by the UK for 2 reasons:
- India’s insistence in keeping tariffs on scotch whisky
- India’s demands for easier circulation of people to Europe
I am very interested to see how the UK is going to do a
quick deal with India without accepting those 2 demands, which are
non-negotiable for the Indians. It may well be that the demands are finally accepted
to get the trade deal under pressure but, if they are, why not accept them
within the EU, stop vetoing, and start trading?
As for Mr. Burrage, he exhibits such an interesting collection of cognitive and psychological biases in his reasoning that I would suggest he enrols as a study case with a Psychology Institute. This I think is where his true value would be, since his analysis is not really needed in economics or geopolitics, at least not until the biases are studied and removed.
