There has been a lot of discussion recently about “getting Brexit done”, which the government at least seeks to use to give the impression that this also includes the trade deal with the EU, and the ability to move on to trade deals with the rest of the world. There are however several reasons why the reality is somewhat removed from this, writes Nigel Driffield (Warwick Business School).
Firstly, the political declaration has very little detail on trade, except for some understanding that there will have to be some frictions in trade between Northern Ireland and the rest of the UK (something that the prime minister seems happy to deny, even in the face of documentary evidence). The CBI this week urged caution that “sustainable economic growth will be risked if there is a needless rush for a bare bones Brexit deal that would slow down our domestic progress for a generation.” – recognising the reality that this deal is some way off providing any certainty to business, especially in terms of stimulating investment. The prime minister claimed before the election that there was “£150 billion” of inward investment waiting to flood into the UK once he “gets Brexit done”. Leaving aside the size of this number (roughly 50% more than last years total, which is admittedly 40% down on the year before), many of these issues, plus certainty over exchange rates, inflation will have to be addressed before the UK becomes as attractive for investors
In my opinion, the current situation affords an utter lack of clarity in at least three areas:
1. “WTO terms”. People assume that this provides some sort of multilateral agreement that in some sense replaces our existing trade deal. Instead, it simply offers a baseline of anticompetitive behaviour countries can not stoop below while retaining membership. As with all matters to do with trade, large countries and large trading blocks use the WTO as they see fit. America, for example, loses roughly half of the cases that it brings to the WTO, and then, when it has lost, largely carries on as before.
2. Rules of Origin. To my mind, it is shocking how little attention this has received. In order to have “free trade agreements” one has to abide by what are called “Rules of Origin”. That is to say that if a product (or service) is stamped as “made in the UK”, a certain percent of the total value must have been generated in the UK – or imported and been subject to tariffs paid (under WTO rules) at the point of importing them. At present, UK goods need to meet the requirements as “made in the EU”, but once we are independent much higher proportions of goods will have to have been produced here. Brexiters argue that this will lead to activities being brought back to the UK, but given then existence of trade costs, one would ask, if we could produce these inputs as efficiently as foreign producers, then why are we not doing it already. Those advocating “free trade” see the solution as cutting all our import tariffs to zero, but that is likely to risk many more jobs.
3. Quality assurance for exporting. This is likely to hit sectors such as food and drink. At the moment, participation in the single market requires the UK to carry out a certain level of quality assurance of goods exported to the EU. At the moment we just about meet this threshold (and get some leeway due to our market size and contribution). As a third country, we would need to do roughly three times as much checking, and at present, we do not have sufficient trained people. This can be addressed over time, but will cause significant difficulties in the medium term, especially if other countries – such as Canada or Australia demand the same. Again, one wonders if this is why certain brexiters have advocated us adopting the same standards as certain developing countries.
So, taking this together, one can see that we are still a long way off the certainty that business craves. There appears to be a clear division now between the political need to announce both a trade deal with the EU, and one with the US, and any desire to understand the benefits (and costs) associated with that deal. There is some suggestion this week that access to UK fishing waters is a concession the EU will demand in exchange for bank passporting. The government will then have to trade off the political fallout of this with the economic fallout should the city find EU access restricted. Such tradeoffs have hitherto been ones the government have sought to deny that they even exist, and it will be interesting to see if economic expediency trumps political posturing.
This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image: Pixabay License.