Hard-Brexiters are making colossal miscalculation

by Michael Emerson | 10.10.2016

The standard argument of the hard Brexiteers such as Liam Fox and David Davis is that the EU will accept a tariff-free trade deal with the UK “because it is in their interests”, relying for this solely on the fact that the UK has a deficit in trade in goods with the rest of the EU.

One counter-argument is that UK exports to the EU are a much large percentage of the UK’s GDP than the EU’s exports to the UK are of its GDP. So it matters more to the British economy than that of the EU.

But this alone greatly understates the case. There are two other arguments that undermine the likelihood that the EU would easily agree to tariff-free trade.

The first concerns the zero-sum-game competition for market shares of trade and investment. The UK is sitting on two huge market share prizes: that for foreign direct investment by multinational corporations targeting the EU market (such as Japanese car manufacturers), and that for financial services where the UK has a surplus.

It is blindingly obvious that others in the EU are already eyeing the opportunity to win a good deal of the UK’s present market shares for both. The Japanese have strongly warned the UK about this as regards foreign investment, and Paris and other financial centres are rolling out the red carpet for banks and other financial institutions.

The second argument is the other EU member states’ existential interest in not making a deal with the UK that might be regarded as an attractive model for others. President Francois Hollande has already said as much. The spectre of a disintegration domino effect is no fantasy, with Marine Le Pen saying explicitly that she wants France to follow in the UK’s footsteps, not in her view to quit the EU but rather to destroy it from within.

To get tariff-free trade without free movement of people, the UK would have a very heavy price to pay, for example a substantial budgetary contribution that the Brexiteers will be loath to accept. Theresa May’s decision to trigger Article 50 by end March 2017 – before next year’s French and German elections – ratchets up the costs even before the UK sets out what it wants.

At the end of the two year negotiating period, if there is no agreement, the guillotine falls, and the UK is “out” with no deal, and will be reliant only on WTO conditions for trade (i.e. with tariff barriers). As the clock ticks and approaches the two-year limit, one can anticipate hard bargaining over the conditions for tariff-free market access. Who will blink first? The hard Brexiters seem to believe that it will be the EU – that its bottom-line position will be to agree to tariff-free trade “because it is in their interests”.

If this is what they believe, they are making a colossal miscalculation. Rule number one for the negotiator is to read correctly the likely bottom-line position of the other side. If Britain’s negotiators continue to misread the situation, the EU will be willing to walk away after two years and let the guillotine fall.

The UK’s position so far is only talk, and so there is still a little time to craft a real negotiating strategy that would be less disastrous for the economy. This could mean aiming at a deep and comprehensive association agreement with maximum single market inclusion alongside a “safeguard” mechanism to give some control of immigration; or is that were too complicated, there could be the simpler option to remain in the customs union. But it is far from clear if either would be negotiable.

If a hard Brexit looms as the only feasible scenario, it is better for that to become clear as soon as possible, so that its true consequences can be better understood and fully factored into financial markets. And then that has to sink into the political debate. After all, the referendum was not a vote for a hard Brexit.

This piece was corrected on October 26 to make clear that the UK has a deficit in trade in goods with the EU not a surplus.

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    Edited by Hugo Dixon

    Tags: , Categories: Articles, Economy

    7 Responses to “Hard-Brexiters are making colossal miscalculation”

    • Fox is a very strange character. He should have been fully investigated for his relationship with the equally strange Adam Werritty for possible offences under the Official Secrets Act. I am sure the outcome of such an investigation would have put this weird and dangerous individual out of the political scene for good.

    • Michael – you really do need to remember also to point out – as the FT is doing with such cogency and regularity – that a simple switch to the WTO protocols is not guaranteed. It requires the approval of ALL WTO members.That could take years to finalise.

    • If we get a free trade deal. as we have now, can we import NZ lamb tariff free into UK and re-export it to Germany, either untouched or converted into something like a lamb bhuna, also tariff free?
      What about transport? British lorries carrying British goods to buyers in Germany can currently bring back a load of German goods, even dropping off some or all of them while passing through France. Will than still be possible after Brexit?
      Has anyone on the Leave side thought this through?

      • The NZ lamb will only get into Germany tariff free if it has been subject to around 40% ‘value added’ , or a change in customs category, in the UK. That is what the usual ‘rules of origin’ say.

        As regards the truckers there is a real issue here. EU member states apply quotas on the number of licenses for trucks of non-EU countries to operate across their borders. So unless the UK joins the EEA like Norway, something like this would happen to UK truckers.

      • It gets even worse if you look at the Airline sector and the cabotage rules that will apply if we leave the single market. It is highly probable that easyJet will lose out heavily to Ryanair if the EU rules on cabotage prohibit intra-EU carriage of passengers and freight by easyJet. There is also the relationship with the European Aviation Safety Authority which handles all matters of aeroplane certification, flight safety and crew licencing for ALL member states of the EU. If we leave the single market our relationship with EASA will have to be renegotiated, and for which we will have to pay, or we we will have to rebuild the UK’s Civil Aviation Authority both an expensive and very time consuming business. As you say the Brexiters have not thought this through.

    • Both Fox and Davis were in the wilderness following previous ‘failures’. May, who has changed sides to further her own political ambitions, has let them back in with carte-blanche in making up an ‘exit strategy’. Both of these guys , along with other ‘has beens’ such was Redwood and Duncan Smith, are drenched in arrogance and are acting as if Britain still had an ’empire’. The 48% are being left out and ridiculed and they are dividing the country even more deeply.

    • European politicians must raise taxes on their citizens if they want to stop free entry of British goods after Brexit; that is what “tariffs” are, just another tax. This is why the Euro politicians are complaining: they will have to increase taxes on their citizens to stop free-entry.