As we approach yet another supposed deadline for UK-EU trade talks, we know enough about the possible shape of a potential deal to once again – perhaps for the final time – state firmly that in our view the UK should not agree to such a deal. It simply isn’t worth it.
In trade deals, the negotiating parties can generally be said to have ‘offensive’ interests – where they want markets to be opened up or to remain open – and ‘defensive’ ones where they want markets to remain closed or protected. Looking at the proposed deal this way shows a heavy imbalance in favour of the EU.
The EU’s main offensive interests are:
- Maintaining privileged tariff and quota free access to the UK market – the fifth largest consumer market in the world. The EU’s goods trade surplus with the UK was almost £100 billion in 2019.
- Keeping the UK in the EU’s regulatory orbit to the maximum extent possible, to prevent the UK competing harder against EU industries both in bilateral trade and trade with the rest of the world.
- Maintaining the EU’s grossly disproportionate access to UK fishing waters
All these interests appear to be well served by the deal that is being discussed, which will involve free trade in goods, onerous ‘level playing field’ conditions that will keep the UK closely bound to EU regulations and a long transition for fishing rights which will maintain the EU’s high share of catches in UK waters – perhaps indefinitely.
By contrast, UK offensive interests seem poorly served. The deal will offer little or nothing for UK suppliers of services – where the UK has a strong competitive advantage and a sizeable trade surplus with the EU. The deal will severely limit the UK’s regulatory autonomy – which UK Chief Negotiator David Frost identified at the start of the year as the fundamental point of Brexit. And the deal will not repatriate fishing rights any time soon, if ever.
On this basis alone, the deal looks poor. But what about other arguments for a deal, such as the need to avoid short- or longer-term economic damage?
Looking first at the short-term issue, we are confident that claims of large-scale economic damage from a no-deal exit, relative to exit with the thin and unfavourable deal being discussed, are greatly overstated.
Most large firms – who carry out the great bulk of UK trade with the EU, have already planned for a WTO exit. The costs of doing so have been largely incurred. As long ago as Q3 2019, a Bank of England survey showed over 80% of firms said they were fully ready or as ready as they could be for a no deal Brexit. This share is likely to have risen further since.
Moreover, the same survey showed firms that were ‘fully ready’ expected output to keep growing and employment and investment to be flat in the year after a WTO exit. Only very small decline in output was expected by firms who were as ‘ready as can be’. Even with firms ‘not ready’ expecting a fall in output, the expected weighted total fall in output would be small. Such a fall could easily be offset by UK government stimulus policies.
Border preparations have also advanced much further than many observers think. A ‘smart border’ system has been designed and successfully tested at Calais. A similar new system is in place for Eurotunnel, and Rotterdam has long been prepared for new trading arrangements.
We might also recall at this juncture just how wildly inaccurate the UK Treasury’s claims in 2016 about how the UK economy would be hurt in the event of a vote for Brexit were – the financial crisis, soaring unemployment and collapsing output they foresaw never appeared, or anything like it.
What about the longer-term economic risks? The many estimates of large long-term economic losses are, as we have repeatedly argued, greatly overstated – based on flawed methodologies and extreme assumptions. In particular, there is simply no evidence to support claims of large declines in UK productivity from Brexit. In fact, it’s likely that productivity growth will be faster in a UK which has repatriated regulatory policy and is free to strike high quality trade and investment deals with fast-growing parts of the world.
Indeed, we would argue that, overall, repatriating regulatory policy is more valuable in the long term than free trade in goods with the EU. Trading on WTO terms with the EU means UK firms facing tariffs of 3-4% on average. The impact on GDP of tariffs on this modest scale is small. Adapting the approach taken by Nobel Prize winning economist Paul Krugman, the negative effect on UK GDP can be calculated at maybe 0.1%-0.2% of GDP.
If you add non-tariff barriers, as Remainers are keen to tell you that you should, you can perhaps double this. But the effect is still modest, and – crucially – these non-tariff barriers are largely going to be there whether we now leave with a deal or not; the deal being negotiated will have a minimal impact on non-tariff barriers.
Set against this small long-term trade effect, it’s quite plausible that smarter regulatory policy plus the freedom to open up trade with the rest of the world (e.g. via deep trade agreements that would be impossible if we remain in the EU’s regulatory orbit) could add 2-3% to UK GDP in the long term. The EU’s own analyses support these kinds of numbers. This prize is more valuable than avoiding modest trade barriers with the EU.
We are also told we need a trade deal more than the EU does because EU trade is a larger fraction of the UK economy than UK trade is for the EU. Mathematically this is true but misses the point. It is the EU that benefits most from the current arrangement because trade is so unbalanced in its favour. Slow trend growth in the EU also means the EU is more reliant on exports as a source of growth than the UK.
EU exporters are also more exposed to areas that will face relatively high tariffs than UK exporters are. Over half the EU’s £100bn trade surplus with the UK is cars and agri-food products that will attract tariffs of 10% or more in a WTO exit. For Belgium, exporters to the UK will face average tariffs of around 6%, for Spain 7% – much higher than average for UK exporters to the EU.
It’s also crucial to note that while the EU remains a significant market for the UK it is a stagnant and declining one. The volume of UK goods exports to the whole world has risen 40% in the twenty years but virtually all of the increase has come from non-EU markets. Even the car industry, so vocal a lobbyist for Remain, now sends over 60% of its exports by value to non-EU markets. Car sales to the EU account for just 0.5% of UK GDP.
We are also now being told that it is somehow normal for smaller partners in trade deals to accept grossly unbalanced deals. This argument is not only defeatist but wildly inaccurate, as any perusal of the many free trade deals between larger and smaller partners across the world would show. Balanced deals are normal where the political goodwill exists to strike them.
This brings us to our final point. It should now be abundantly clear that the EU is not interested in a balanced and mutually advantageous deal, only in political domination – a point we made long ago. Its rhetoric is belligerent and inconsistent, claiming that no deal will cripple the UK economy but also that without a deal the UK will thrive by ‘undercutting’ it. Both claims can’t be true, but the EU clearly fears a UK free to trade and compete globally. The UK government should be encouraged by this and embrace trading with the EU on WTO terms.