How strong is UK’s Brexit trade negotiating position?
We are told by the press that the EU needs the UK more than the UK needs the EU, so we are in a strong position when it comes to negotiating a Brexit deal. The details are often thin with regard to that statement so I thought it would be useful to look closer at our position.
The above assessment comes from the fact that the UK exports £220bn per year to the EU, and the EU exports £290bn per year to the UK. Hence, the EU is more reliant on us than we are on the EU. Ergo, we are in a stronger position.
However, what that omits is that there are more people in the EU than in the UK. The UK population is roughly 65 million, whereas the EU population, minus the UK population, is approximately 445 million. (Simple Googles will allow you to confirm this yourself.)
That means UK exports per capita to EU are approximately £3300 per person, and EU exports to UK per capita are approximately £650 per person. Thus, per person, the UK exports 5 times more to the EU than the EU exports to the UK.
But what if you consider that perhaps the whole of the EU doesn’t trade evenly with the UK? The combined population of France, Germany, Italy and Spain is approximately 254 million. Thus if only these countries were involved in exporting to the UK, their per capita exports would be £1100. Even on that basis, the UK needs France, Germany, Italy and Spain 3 times more than they need us.
That translates into a weaker negotiating position.
A similar situation exists with jobs. The Daily Mail estimates (something that’s likely to be far more inaccurate than actual measured quantities like export value) that 5.8 million EU jobs are dependent on the UK, whereas only 3.6 million UK jobs are dependent on the EU. That gives us the upper hand… until you take into account populations. Then 5.5% of UK jobs are dependent on the EU, compared to 1.3% of EU jobs being dependent on the UK. Per capita, 4 times as many jobs are at risk in the UK than in the EU. Saying again that only France, Italy, Germany and Spain (FIGS?) are significant then it’s 2.2% of their jobs at risk. A ratio of 2.5 to 1.
Our position then looks less strong on this measure too.
Naturally, we won’t lose all trade with the EU. UK will still have access to the EU market, and EU-UK trade will re-balance by moving to a different place on the economic Demand Curve (price vs. demand) depending on the deal negotiated between EU and UK.
So, to play out the scenarios, let’s assume the EU decides it doesn’t need us as much as we think it does and decides to play hardball, opting for tariffs on both imports and exports. Let’s also assume that the demand doesn’t go away and still remains. When the EU countries look around to decide where to buy their next widget, they have 26 other countries that they can import from tariff-free (possibly plus a whole bunch of paperwork-free etc too), whereas the UK has to look as far as USA, Australia, New Zealand etc to buy outside of the EU. Effectively, by moving to importing from another EU country, an EU country avoids paying an increased price, so they’re less likely to buy from the UK. The UK on the other hand will have to pay a higher price regardless of where it purchases from; at least in the short term. It would be easier to simply keep buying from the EU. So not only is the per capita exports in question smaller for the EU countries, the impact is likely to be smaller for them also.
Even more chillingly, Brexit offers EU countries the opportunity to increase their exports to other EU countries, improving their balance sheets. Brexit is an opportunity for them to scavenge what we would have exported for themselves. To some countries it will be a benefit if UK is not allowed free trade with the single market.
But we will do a deal, won’t we? The Leave campaign has said that the EU will do a deal because Germany will still want to export cars, France will still want to export cheese, and lately Italy will still want to export Prosecco. So it looks like there’s the basis for a deal. Some middle ground between Free-trade and Free-Movement or no-Free-Trade and no-Free Movement.
When analysing this it’s important to bear a few things in mind. Firstly, the top 3 EU priorities are, the EU must survive, the EU must survive and the EU must survive. The EU would collapse if the EU offered the UK free-trade access without free-movement. Everybody would want the better deal and the whole thing would crumble.
But we can still exchange something in return for allowing German cars access to our market tariff-free, can’t we? Well, no. All countries in the EU have a veto on the Brexit agreement offered to the UK. If special concessions are offered to UK in return for German cars, 26 other countries will be asking “why is Germany so special. What do we get?” In short, the EU can’t offer sector by sector deals, because the sectors quickly map to being country by country deals. No deal would get through if it traded off one EU country against another. So the EU can’t make such deals even if it wanted to. It really has to be free-trade for all or nothing. And, because of the requirement for the EU to survive, free-trade requires free-movement, which appears to be a red-line for many.
(It’s also worth bearing in mind that German cars and French wine are prestige products. They already have a price markup as a result of being premium products, and thus likely to be less price sensitive than other products that we might export to the EU. It may even be that the likes of BMW could absorb any tariffs within any markup they already have in place without having to raise the UK purchase price.)
The only deal I can see possible, given the government we have, and the history of our country, is that the EU is allowed free access to the UK market in return for the UK banks keeping their ability to operate in the EU. Any other UK exports to the EU would face a tariff, including all manufacturing and all agriculture. But maybe I’m just getting cynical in my old age!
So, now that Brexit means Brexit (and Remain is not an option), we are back to the two options of free-trade with free-movement, or no-free-movement and no-free-trade. Take your pick.
To get anything other than that David Davis not only needs to be intelligent, he needs to be a magician.