The belief that the UK can go it alone defies economics, geography and the lawby Philippe Legrain / November 16, 2016 / Leave a comment
Published in December 2016 issue of Prospect Magazine
The pound in your pocket has lost 15 per cent of its foreign purchasing power since the Brexit vote on 23rd June. This is now pushing up the price of Marmite, Apple Macs and much else. While the economy slowed by less than expected in the three months to September, Britons are already decisively poorer, because currency markets believe the UK is headed for a very harmful hard Brexit in 2019.
While prime minister Theresa May glibly insists that “Brexit means Brexit,” Britain’s future relationship with the European Union could take different forms. Much depends on how brutally, or not, the UK severs itself from European Union trading arrangements, such as the customs union and the single market. “Hard Brexit” means something very specific—tearing ourselves apart from all of this.
While Conservative Brexiteers profess to be fervent free-traders, their zealotry is driving them towards a monumental act of trade vandalism. Within the EU’s single market and customs union, Britain enjoys the freest trade that exists among independent countries anywhere. Trade with the other 27 EU countries in goods and most services is unimpeded by customs controls, import duties or foreign regulatory standards. But in 2019 immigration controls and other trade barriers could suddenly sunder UK markets from EU ones, hitting nearly half of Britain’s trade.
The prime minister insists that her post-Brexit priority is controlling immigration. Yet cutting net migration by more than two-thirds to “tens of thousands a year” would damage public services and wreak havoc across migrant-dependent sectors as diverse as farming, food processing and finance. Controlling EU migration would also entail leaving the single market, since EU governments rightly insist that free movement is an essential element of it. Preventing Polish plumbers from selling their services in the UK will, inescapably, have consequences for British bankers selling theirs across the EU.
Losing the “passports” that enable UK-based services providers—such as accountants, architects and advertising agencies—to sell seamlessly across the continent would be a huge blow. Bigger companies might relocate their EU business; smaller ones might stop exporting. Some financial firms, it is true, may retain market access by being deemed to comply with EU-equivalent regulations. But that would depend precariously on a political judgement by the European Commission which can take years to obtain, and be rescinded by subsequent legislative changes.
Trade Secretary Liam Fox also wants to leave the EU customs union, so that a post-Brexit Britain could then set its own tariffs and eventually negotiate trade deals with non-EU countries. But this would entail reintroducing customs controls on trade with the EU too— including on the border between Northern Ireland and the Republic, the potentially explosive post-Brexit frontier which Ruth Dudley-Edwards explores on p26. The red tape and delays would be particularly disruptive to just-in-time international supply chains. UK-made cars, for instance, involve many EU parts that cross borders repeatedly during the manufacturing process.
“Quitting the customs union would automatically trigger 10 per cent EU tariffs on British-made cars”
Quitting the customs union would also automatically trigger duties on British exports. In the absence of a preferential trade agreement with the UK, World Trade Organisation (WTO) rules require the EU to impose WTO tariffs on imports from the UK—10 per cent in the case of cars, which are mostly exported to the EU. While Brexiteers argue that a cheap pound would offset this, the EU would also be free to impose anti-dumping duties on UK exports that it deems unfairly cheap. If, say, it turns out that the government’s secret “assurances” that led to Nissan’s welcome recent decision to expand car production in Sunderland include costly financial compensation, then the EU could slap on countervailing duties.
If Britain applied its own tariffs in turn, consumers would suffer as the cost of cars —and much else—made on the continent rose. The likes of Fox deny that this is what they want, but they fail to understand that if, as Fox has suggested, Britain’s independent trade policy starts out by adopting the schedule of tariff commitments that the EU applies to the rest of the world, then WTO rules will actually require us to impose equivalent duties on imports from the EU.
The threat to Britain’s trade, foreign investment and the good jobs tied to them is, then, severe: May admitted as much privately in a leaked speech to investment bankers at Goldman Sachs. While a post-Brexit trade deal with the EU could mitigate some of the harm, this won’t be in place for years.
The Article 50 exit process—which May plans to trigger by March—lasts up to two years. That is not long enough to seal a trade deal; indeed, the EU may refuse to start negotiating until the divorce is complete. The EU’s deal with Canada, which some Brexiteers see as a model, took seven years to thrash out and was nearly rejected by the parliament of Wallonia, a Belgian region. All this bodes ill for a UK deal which would likewise require unanimous approval by national—and some sub-national—governments and parliaments, each with their own axes to grind.
While a transitional agreement could mitigate the shock of a hard Brexit, the politics militate against it. It would require the UK to stick with free movement and EU budget contributions and postpone independent trade deals beyond the planned 2020 election. Nor is it clear why the EU should want to soften the blow. A hard Brexit would harm the British economy—where exports to the EU are 13 per cent of GDP—much more than the EU, where exports to the UK are only 3 per cent of GDP. That is why it’s the pound plunging, and not the euro. Softening the blow would weaken the EU’s leverage, when every EU financial centre is also keen to take business from London. Above all, EU governments have a political interest in making Brexit painful, to undermine Europhobic parties such as France’s Front National, which wants a Frexit referendum. The nationalist breast-beating at the Conservative Party conference has only hardened attitudes.
It is a terrible time for Britain to go it alone. It may be the world’s fifth-biggest economy, but it accounts for only 3.5 per cent of global GDP—and globalisation has stalled. World trade is no longer rising faster than output, so export opportunities are scarcer. In its 21 years, the WTO has failed to achieve a broad trade-liberalisation deal. China and India aren’t rushing to open up their services sectors, let alone give preferential access to Britain. Protectionism is rising, as the election of Donald Trump affirms.
Even in a global economy, geography still matters—the top trading partner of the US, for example, is Canada. So while deals with free-traders such as New Zealand and Singapore are desirable and doable, such small distant economies can scarcely make up for lost trade with our neighbours. A hard Brexit would be a disaster.
On the 17th of November, Prospect launched Brexit Britain: the trade challenge. A publication designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. To see the complete contents of the report please click here.
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