Economics

Ignore the ultra-Brexiteers, an EU deal is essential

Negotiations won’t be easy, but it’s clear what Britain should be aiming for

April 03, 2017
©Ben Birchall/PA Wire/PA Images
©Ben Birchall/PA Wire/PA Images

This week, Theresa May submitted to Donald Tusk a letter formally triggering Article 50. The process for Britain leaving the EU has begun.

No-one really yet knows how—or even when—that process of withdrawal will end. But over the past few months the House of Lords European Union Sub Committees have produced a range of reports on the implications of Brexit. As Chair of the Lords EU internal market sub-committee, my particular focus has been on trade—arguably the central issue in the Brexit debate.

There is much ignorance in this area, and assertions are often made which are frankly untenable. Some politicians have claimed that Britain would be fine without an EU deal at all, of any form. Boris Johnson has said that we would be “perfectly OK” in such circumstances. Indeed, in an interview with this publication, Jacob Rees-Mogg said that Britain would “of course” cope if none was agreed.

Initially the plea from almost all businesses was that Britain remain within the single market—the “Norway option,” in short. That option was effectively closed off by the prime minister’s Lancaster House speech in January: she ruled out remaining in the single market or the customs union. Instead, the government intends to negotiate a bespoke Free Trade Agreement (FTA) bilaterally with the EU27—but May warned that if she cannot get a good deal then “no deal is better than a bad deal.”

She is mistaken. An FTA is essential. Around 44 per cent of UK exports go to the EU, while only 7 per cent of EU exports go to the UK. The government rightly wants to see an FTA with the EU which is unprecedented in its scope. But there is no template for such a deal. Even the most sophisticated trade deal, such as the recent EU/ Canada one (CETA), comes nowhere near providing what is required.

If there is no deal, then Britain faces external tariffs on its exports to the EU and will fall back onto World Trade Organisation rules. Under these, British manufacturers would face EU tariffs averaging 4.5 per cent with some, including those on motor vehicles, much higher. Farmers would face tariffs averaging 14.5 per cent but some as high as 40 per cent and potentially regulatory discrimination. When it comes to transport, road hauliers would face customs bureaucracy at borders—only some of which could be resolved by electronic means. We would leave the European Common Airspace and our airlines would not be able to fly routes between airports within the EU 27 unless they incorporated within the EU 27, as EU27 controlled companies.

In services, the issues will be over the non-tariff barriers and regulatory divergence for which the WTO has only weak rules. Our financial services will lose their present “passporting” arrangements and will have to relocate at least part of their euro and EU operations. Those working in professional services, for example in the legal sector, would lose EU provisions on mutual recognition of qualifications, which currently enable them to practice in EU countries—as would university and health professionals. Creative Industries such as music and fashion would lose EU rules on Intellectual Property and broadcasting on EU licencing. The Digital Sector would lose free flow of data under EU Regulations. Some of these issues were examined in my committee’s latest report.

Many of these sectors have also depended on their ability to recruit both high and low skilled workers from Europe. With Brexit will come the end of free movement, meaning that some form of reciprocal bilateral migration deal is also going to be needed.

The government is not going to get all that British businesses want. There will be trade-offs and compromises. It should not kid itself that negotiation is going to be easy—or quick.

Moreover, much of the deal will be about regulatory equivalence, the mutual recognition of each others’ standards, and any trade deal will have to come with some dispute resolving mechanism. Brexiteer purists may regard that as letting in the European Court of Justice by the back door, but all free trade deals involve some compromise and some loss of sovereignty.

Some claim we do not need an EU deal because we can easily replace EU trade with trade with the rest of the world. They forget that we cannot sign deals with other countries until we have unravelled our current relationship with the EU and agreed a new one. Those countries with an existing FTA with the EU will not necessarily offer the same terms to Britain—a market one tenth of the size. And the rest of the world—particularly nations with economies dependent on agriculture—will need to know what our position will be on tariff quotas once we leave the EU Common External Tariff before they think about reaching new trade agreements with us.

This all has a bearing on timing. The British government says that the two-year countdown started by Article 50—which in reality is less than eighteen months negotiating time because elections on the continent will distract our European partners—will include substantive progress on negotiations on an FTA. But the EU27 will start from the position that we cannot negotiate one until after we have completed the “divorce proceedings”—settling the amount we must pay to leave, withdrawal from EU institutions, rights of citizens. The most we can agree in two years will be the “framework” of a future free trade deal (which may also encompass wider matters like security and justice cooperation). This means we need a “transitional period,” during which we can hammer out the complex trade details.

All negotiators like to be able to threaten to walk away. But there is a vociferous lobby from those—some in key positions in the Conservative Party—who claim that “no deal” is actually the best option.

They are wrong. Our businesses, our workers, our consumers need a deal. Negotiations will be complex, difficult and time consuming. But no deal is the worst of all outcomes.