Anthony Hilton: The romance of Brexit just ignores the reality of how business works
Germany is in the European Union but its biggest trading partners are not. It exports more to the United States than to any of its EU partners. The Germans import more from China that from any other EU country. Indeed, of its top eight trading partners four are countries outside the EU. Britain is rather different. It trades more with the 4.5 million people of the Republic of Ireland than with the two billion of India and China combined.
The German experience punctures one of the central arguments of the Brexit camp — that we have to leave the European Union in order to trade with the rest of the world. The Germans have proved otherwise and point us to a quite different lesson — that if you want to trade successfully you have to be organised in a way which gives meaningful support to your exporters and you have to make products the rest of the world wants to buy.
We fail miserably on both these counts, as our trade figures show. Britain’s trade deficit as a percentage of total economic activity is worse today than at any time since 1948, when the country was on its knees after the war. Our support to exporters is lamentable but the more telling point is that even when the pound was devalued and our exports became 30 per cent cheaper overnight after the 2008 financial crisis, there was still no pick-up in volumes. Clearly price is not the problem — it is that we don’t have enough world- class products.
One should not let the facts get in the way of a good story, however, and there’s no denying there is something seductive and appealing in the idea that plucky Britain could and should go it alone, leave the EU and enjoy the freedom to make its own trade deals on its own terms with the rest of the world.Unfortunately romance is one thing, reality another.
A trade deal is a negotiation and in a negotiation size matters. If you are playing poker and you have £10 to bet while your opponent has £100, chances are you will lose, however good your hand and however much you bluff. A negotiation between Britain and, say, China, India, Brazil or Russia — assuming any of these countries would be interested — would turn on who needed a deal most, and what’s in it for them.
The Chinese think our glory days as a country are long gone and that we are now of little consequence in the world, but they still owe us a humiliation or two for the Opium Wars, which set us up to grab Hong Kong. India has a 60-year record of reluctance to open its economy to any foreign influence, let alone the erstwhile colonial power.
Brexiteers might think that gives us the advantage in trade talks — others have doubts.
There are practical problems too. The Brexit camp talks as if trade deals are only about money — allowing business to flow back and forth without penal customs duties. In truth they are much more about the elimination of non-tariff barriers — among other things setting standards for product quality which, for example, might insist that the Chinese do not put lead paint on childrens’ toys for the very good reason that it poisons the toddlers who suck on them.
These things matter, they cannot be wished away, but because there are thousands of products which might flow back and forth between countries there are tens of thousands of specifications to be argued over and agreed upon. It is that what takes the time.
Fishing for Leave flotilla
It applies to foodstuffs too. Do you want beef laced with growth-enhancing hormones or chlorine-bleached chicken from the US, without knowing what it is, or any of their other GM-modified foods? Currently, EU regulations keep them out of British shops. Outside the EU they will have to be re-negotiated, or the protection abandoned. We might, as the Brexiteers claim, be able to do a deal in a couple of years but only if our negotiating stance is one of abject surrender.
Note, too, what all these product standards mean to the British firms doing the exporting. They complain now about EU regulations but at least when these are met they cover Europe, and the EU has the clout to make them stick in many other countries too. This umbrella will disappear. After Brexit British exporters are going to have to be aware of and match the different requirements and regulations for every country they want to trade with — and to produce documentary evidence to prove at every border that they have done so.
Faced with these difficulties some such as economist Patrick Minford in the Brexit camp argue that we won’t bother with trade deals after all but simply open our borders (to goods but obviously not people!) and rely on the rules of the World Trade Organisation (WTO). This is unlikely to work for us either, for at least two reasons.
First, WTO rules state that if you strike a good deal with one country you have to offer the same terms to everyone else. That would seem to rule out getting a sweet deal with the EU, or indeed the EU giving a sweet deal to us — it would not stop there but would have to be offered to all comers.
Second, relying on WTO rules would have a devastating effect on the City, the earnings it makes and the taxes it pays because they do not cover trade in services. Financial firms in London would lose the right to trade freely across Europe. The entire regulatory system would be thrown into limbo because the EU rules which currently govern activity would cease to operate and until the UK legislated there would be nothing in its place. This would mean UK-based firms could be classed as “unregulated financial-sector entities”, making them uneconomic to deal with for any customer in Europe. Their business would dry up.
That is why banks and insurance companies based in London are so appalled by the idea of Brexit. They will have to leave or wither. And that is another reason why, outside the EU, the world will be a much chillier place.