UK should not bank on doing a favourable trade deal with EU in event of Brexit

It is sometimes said that a trade deal with the EU will be easy to secure if the UK leaves the EU because ‘we sell more to them than they do to us.’

Now it’s certainly true that the rest of the EU sells more goods to the UK than the other way around, but the idea that this gives the UK leverage in trade deals is quite silly.

To see why consider this:

First, by leaving the EU, the UK will put itself outside the EU’s common tariff wall for goods (I discuss services below). That means that UK exporters will have to pay tariffs to sell into the EU.

But EU exporters will pay nothing to sell to the UK unless the UK imposed tariffs on EU imports. And if the UK does impose tariffs on EU imports, under the rules of the WTO, it will have to impose the same tariffs on similar imports from everywhere else in the world. Here is the relevant extract from the WTO website.

Imposing tariffs in this way will drive up living costs — perhaps substantially — especially for things which are imported in quantity, like food, clothes and energy. This will be even more the case if — as is likely — Brexit is accompanied by a depreciation in sterling. You can see why Leave campaigners have said that they won’t impose tariffs.

So the reality appears to be that unless a trade deal is done, UK exporters will pay tariffs to sell to the EU but EU exporters won’t pay to sell to the UK. And when you consider that almost half of the UK exports of goods go to the EU you can see that the hit to UK jobs is likely to be serious without a trade deal.

Then consider services. The UK is the principal exporter of services to the EU and these — especially financial services are sold throughout the EU under the so-called ‘passporting’ arrangements, in banking, trading and fund management. Taxes paid by City Businesses amounted to £63 billion last year (or half the NHS budget). If the UK leaves the EU, the services sector will lose access to the EU Single Market. There is no equivalent WTO rule that prevents the EU discriminating against UK service industries — with or without tariffs.

It’s very clear that EU governments want to encourage services businesses to be based in their own countries. These are highly paid jobs on which a lot of tax is paid. (And places like Ireland look very attractive as they are English speaking, use English law, have low taxes, flexible labour markets and low/no immigration controls.) Eurozone governments have tried in the recent past to insist that businesses providing services in the Eurozone should be based in the Eurozone but were blocked by the European Court of Justice from discriminating against the UK as a member of the Single Market. Outside the Single Market, the ECJ will offer the UK no protection at all.

So it seems clear that there are hardly any incentives on EU authorities to do a trade deal allowing the UK access to the Single Market without the obligations that apply to say Norway.

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