Arch-Leavers Jacob Rees-Mogg and Bernard Jenkin. Photo: Stefan Rousseau/PA Wire/PA Images

Who’s afraid of the WTO?

A no deal Brexit outcome would provide more freedom than we have currently
September 18, 2018

The global economy has changed almost beyond recognition in recent decades and I have little doubt that the transformation will continue. According to the International Monetary Fund, the 28 countries currently part of the European Union accounted for 34 per cent of world output in 1980, but this had fallen to less than 22 per cent by 2017 and will almost certainly continue falling.

Europe’s dwindling share of global trade has come to be mirrored in the pattern of British commerce: our total exports of goods and services to the EU expanded by around 40 per cent between 2007 and 2017, but for non-EU countries the rate of expansion was twice that.

So it makes clear economic sense for the UK, as a major trading nation, to position itself to capitalise on these global changes.

The unilateral freedom to develop trade agreements with fast growing non-EU countries is a strong economic reason in itself for leaving the EU, as membership of the customs union stops us doing that. But there are other economic reasons for Brexit which are powerful in themselves. Firstly, outside the EU’s regulatory orbit the UK should be able to relieve businesses of the most irksome restrictions and give them a competitive boost. Secondly, in place of the EU’s “freedom of movement” the UK should be in a position—assuming it leaves the single market—to develop a bespoke non-discriminatory immigration policy. And, thirdly, there should be a Brexit financial dividend as the UK is currently a significant net contributor to the EU budget.

I have regarded this suite of economic benefits as a persuasive case for Brexit for many years. But I am fully aware that, despite the secular decline in its importance, the EU remains a major trading partner. The EU share of exports, which had been nearly 51 per cent in 2007, had fallen to just under 45 per cent by 2017. But 45 per cent is still significant. And so I strongly support a Canada-style Free Trade Agreement (FTA) with the EU. It would be beneficial to us and beneficial to our EU trading partners, given their huge trade surplus with us.

Unfortunately, the government rejected a Canada-style FTA in favour of July’s Chequers proposals. These would commit the UK to compliance across a wide range of EU regulations and undoubtedly restrict our ability to gain a competitive boost post-Brexit. They would severely restrict any future government’s freedom for regulatory reform, the UK would continue to be a “rule-taker,” though without influence. Further, adherence to the EU’s rulebook on goods would almost certainly restrict the scope for deals with third countries. Most trade agreements today are about far more than tariffs, and deal with the reduction of non-tariff barriers which arise from differing regulation. Compliance with the EU’s rulebook would inevitably restrict our negotiating freedom.
“A trade deal based on Chequers would be, to put it kindly, severely sub-optimal”
Where do we go from here? I would like to think there is still time to negotiate my preferred Canada-style FTA, but I fear that it is politically too late. Too many concessions have been made that cannot be unmade.

So there are two main options. The first is for the government to agree a trade deal based on Chequers, however loosely. This would be, to put it kindly, severely sub-optimal in economic terms. Indeed, a Chequers-style agreement could be worse than being a full member of the EU: many of the restrictions of EU membership without any say. The second option would be no-deal Brexit, trading under the WTO’s rule-based trading regime, which is comprehensive, tried and tested, and respected by the world’s trading nations. It is not some dreadful leap into the dark. Moreover, the UK already conducts over 55 per cent of its exports trade with non-EU members, primarily under WTO rules. This “no deal” WTO option would provide far more freedom than we have currently. It is the forward-looking, global option.

Read Andy Davis's investment column