01 June 2017

Financial Times: Trade realities expose the absurdity of a Brexit ‘no deal’

[...] Many seem to think that “no deal” would mean trading with the EU on “World Trade Organization terms”. The UK could in theory trade with the EU in the same way as the latter trades with the US. A series of posts on Conservative Home, a website for Tory activists, discusses what this might mean. But that analysis is done in terms of policy, not the likely effects on trade. The latter is far more relevant.

The UK would be leaving the world’s most integrated trading arrangement. We know that the deeper such arrangements are, the bigger their impact on trade. This is why trade within countries, the most integrated arrangements of all, is far greater than geography alone would suggest. A recent World Bank study argues that if the UK shifted from EU to WTO terms, trade in goods with the EU would halve and trade in services would fall 60 per cent.

Yet a shift to trading on WTO terms is not what “no deal” might mean. Trading after Brexit requires a great many deals on new administrative procedures governing certification of regulatory standards, customs processes and so forth. Trade requires not only such deals, but changes in procedures that would make them work, post-Brexit. So deals will not only have to be reached, but they must be done well before March 2019. In fact, it is hard to see how trade would continue to flow if these deals were not done by the summer of 2018.

Malcolm Barr of JPMorgan has outlined these issues. When the UK leaves the EU, its goods would cease to be “EU goods”. A new set of procedures would be needed to keep trade between the UK and EU running smoothly. Otherwise, the administrative burdens would become impossibly cumbersome. Such facilitation agreements exist between the EU and all its main trading partners.

One difficulty, notes Mr Barr, is that 25 per cent of UK exports to the EU by value go via Calais, which has limited capacity to process non-EU goods. Another is that, without a deal (or deals), UK drivers of heavy-goods vehicles would not be licensed to drive inside the EU. A well-known difficulty is the arrangements to handle the border inside Ireland. Particular difficulties will arise with trade in food and food products, chemicals and pharmaceuticals. Quite simply, continuing trade at anything like current levels will require a host of technical deals.

“No deal” is an absurd notion. To this, optimists will declare: yes, but it will be easy to reach agreement with the EU on such technical deals, because it is in the economic interests of the latter’s members to do so. To this glib optimism, I offer two answers.

First, the two sides will have little time to agree and then set up the new procedures. Above all, they cannot start until they know what to prepare for. The framework for post-Brexit trade will first need to be known. They need, for example, to decide soon that there will be no transitional arrangement if they are to shift early enough to WTO terms.

Second, it is ludicrous to presume that the rest of the EU will co-operate enthusiastically in creating the new trading procedures that are needed. Do Brexiters find it so hard to believe EU members would accept some costs in order to satisfy political objectives? Do they ever look in the mirror? [...]

Full article on Financial Times (subscription required)

© Financial Times