20 April 2016

OMFIF: Brexiteers peddling false hopes

[...] In truth no one has the full answer. But there are three certainties that all those pondering a post-Brexit world should bear in mind.

First, on the trade numbers. Eurosceptics are fond of pointing out that Britain has a big trade deficit with the EU. Other member countries’ exports to the UK were £291bn in 2014, against British exports to the EU of £229bn. So, the argument goes, the remaining EU states would lose more than the UK if Brexit led to tariff barriers or other forms of protectionism. This argument fails to consider that exports to the EU represent 12% of UK GDP, while the EU’s exports to the UK account for just 3% of EU GDP. Although neither side would win from a trade war, the UK would be hit proportionately much harder.

Second, on post-Brexit access to the single market. Those in favour of leaving say that, if the UK did not get a trade deal with the EU on the right terms, an adequate fall-back route would be available through the World Trade Organisation. But this is far from a satisfactory solution. The WTO concentrates on trade in goods (where the Germans are powerful) and works far less well for services (where the UK excels). With the EU focusing on breaking down the last barriers to intra-EU services trade, leaving the single market is odd. WTO and other possible trade arrangements after Brexit would not give equal access, would not complete the single market in services and would be equally flawed.

Third, Brexiteers – keen to enter the post-Brexit world of relying on trade (not politics) for UK global influence – believe Britain’s erstwhile partners would readily make concessions in negotiations, as Ruth Lea argued in her piece for OMFIF's EU referendum series, 'Britain's Brexit boon', on 19 April. However, this is highly unlikely. This argument ignores the reality that some EU countries would be eager to divert trade from the UK. They could seek to undermine the City of London, and lure financial market activities that at present take place in the UK towards EU financial centres like Frankfurt or Paris.

Moreover, other EU states would do their best to divert to their own territories foreign direct investment currently destined for the UK. These states’ governments would argue, with some justification, that such investments would lose their rationale once the UK no longer had full tariff-free access to the EU market. [...]

Full article on OMFIF

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