Not so simple

THE grittiest part of the Brexit negotiations will be over trade. Brexiteers correctly argue that you do not need a trade deal to trade: America has not got one with the European Union, after all. But without a liberal and comprehensive free-trade deal with the EU, British exporters could face tariffs and, especially, non-tariff barriers, where it currently faces neither. The gravest estimates of Brexit’s economic damage are those that assume trade in future is done only under World Trade Organisation (WTO) rules.

The big argument within government is over how hard to try to stay in the EU’s single market and customs union. For Brexiteers, both are problematic. The EU insists that single-market membership like Norway’s means accepting free movement of people, paying into its budget and observing its rules with no say in them. Being in the customs union would prevent trade deals with third countries, putting Liam Fox, the international trade secretary who recently denounced British business as “too lazy and too fat” to export, out of a job.

It is more likely that a post-Brexit Britain will be out of the customs union and not a full member of the single market. Dr Fox would then have his work cut out. His first task would be to negotiate a free-trade agreement (FTA) with the EU. Admittedly, nobody wants tariffs on goods. But the bigger concern is non-tariff barriers such as regulations, especially for services, which make up 80% of the British economy. Outside the customs union Britain would also face customs checks for rules of origin, which could add between 4% and 15% to the costs of exports.

An FTA with the EU would take time, even if drawn up in parallel to the Article 50 negotiations for Brexit. Lobbies from farming to financial services would pile in. And ratification by every EU country and the European Parliament would extend the process beyond the two-year limit set by Article 50 (Canada began negotiating its free-trade deal with the EU in 2007; it is still not in force). So an interim deal may be needed. Alan Winters of the UK Trade Policy Observatory at Sussex University suggests agreeing informally to keep current trade arrangements until an FTA is in force. But that would in effect prolong EU membership, which Brexiteers would hate.

It may also be impossible for Britain to keep in place the EU’s 53-odd free-trade deals with third countries. Roderick Abbott, a former deputy director-general of the WTO, says these cannot simply be inherited after Brexit. Third countries will want to know first about Britain’s future trade relations with the EU. South Korea conceded fuller access for the EU to its market in hopes of using Britain as a gateway to the single market. It will be reluctant to give Britain alone similar terms.

For all Dr Fox’s enthusiasm over deals with the likes of Australia, India and America, they too will first want to see the terms of a putative EU-Britain FTA. Many are negotiating trade deals with the EU, which a post-Brexit Britain would be left out of. Yet there is a glimmer of hope for Brexiteers. If accords like the planned EU-US Transatlantic Trade and Investment Partnership fizzle because of opposition in Europe, Britain might be better placed to do bilateral deals, albeit with less bargaining power.

The final puzzle for Dr Fox will be the fallback should free-trade deals prove impossible or take too long: trading on WTO terms. Brexiteers say this is simple, as Britain is already a member of the WTO. Yet its tariff, quota and subsidy rules are fixed by its EU membership. Post-Brexit it needs terms of its own, and they have to be negotiated and approved by all 163 other WTO members, a process that the WTO’s director-general has called “tortuous”. The alternative of scrapping all tariffs and quotas might appeal to some economists, but it would not be welcomed by British farmers or manufacturers, and it would deprive Britain of bargaining chips for future bilateral trade deals. Trading with the EU under WTO rules would mean tariffs on cars, pharmaceuticals and most agricultural products, and it would not cover services.

British exporters may have gained from a lower exchange rate since the Brexit referendum. But they face huge future uncertainties over their terms of trade—no matter how fat and lazy they may be.

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