26 March 2016

The Economist: Unfavourable trade winds

The EU is clear that non-members like Norway can have full access to the single market only if they accept most of the rules, including the free movement of people, and contribute to the EU budget. Switzerland has less access (its banks, for instance, are restricted in the services they can offer within the EU), yet it still accepts most rules and pays into the budget.

Brexiteers argue that Britain, as Europe’s second-biggest economy, would use its clout to get a better deal. They say Britain’s big trade deficit with the rest of Europe means the EU needs the British market more than the other way round. And if no deal were done on single-market access, they reckon relying on World Trade Organisation (WTO) rules or having a free-trade deal like Canada’s would be good enough.

Yet the atmosphere post-Brexit would be frosty. The EU would have a big incentive to be unhelpful, for fear that other countries might copy Britain in leaving. Even at the best of times, the EU finds it easier to deal with small countries; protectionist interests within Europe resist deals with bigger ones. Any trade offer from the EU requires the approval of all 27 other member countries, plus the European Parliament.

As for the trade deficit, what matters is the share of exports: some 45% of British exports go to other EU countries, whereas only around 7% of their total exports come to Britain. It is true that German carmakers would want to sell to the British market. But several other countries run bilateral deficits with Britain or barely trade with it at all; a deal would not interest them.

The WTO option would not remove non-tariff barriers, nor even tariffs on many products, such as cars (which attract a levy of around 10%). The Canadian deal does not cover all goods. And both the WTO and Canadian options omit most services, including financial ones, which make up Britain’s biggest exports to the EU. Rival financial centres such as Paris, Frankfurt and Dublin would seize the chance to win back business following Brexit.

Hopes of easy trade deals with the rest of the world also look illusory. Lawyers say Britain would have to replace all the EU’s 53 free-trade pacts, which would be hard with tough negotiators like South Korea or Mexico. Several big countries, including America, China and India, are negotiating new deals with the EU, from which a post-Brexit Britain would be excluded.

A free-trading Britain, say Brexiteers, would no longer be held back by protectionist EU members. But other countries’ trade negotiators might find the British market of 65m consumers less alluring than the EU’s 500m. The top American trade envoy, Mike Froman, has said his country would not be interested in a bilateral deal with Britain. Agreements that China has signed with Iceland and Switzerland are lopsided towards the Chinese.

There are also practical problems. Because Britain has been in the EU for over 40 years, it has little experience of bilateral trade negotiations. The rules for exit say a trade deal with the EU should be done in two years, yet this is optimistic—the Canada deal took seven years and is still not ratified. Uncertainty over future trade pacts is a big reason why economists think Brexit would damage the British economy. [...]

Full article on The Economist

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