Five Brexit challenges as Britain leaps into the unknown
In all, UK trade may shrink by up to a quarter in both services and goods
by: Martin Wolf
The UK government’s proposed legislation on its planned exit from the EU contains an extraordinary statement: “Whilst Parliament has remained sovereign throughout our membership of the EU, it has not always felt like that.” The government is correct, as I argued during the referendum campaign: the UK parliament has always been sovereign, as is being proved by its ability to trigger Brexit. What sane country would sever its ties to its most important trading partners and its strategic position in its continent’s councils over a feeling that its own government agrees is erroneous?
Yet this is what the government seeks. Rightly, it wants an amicable divorce: “We want to continue to trade with the EU as freely as possible, to co-operate to keep our countries safe, to promote the values the UK and EU share — respect for human rights and dignity, democracy and the rule of law both within Europe and across the wider world, to support a strong European voice on the world stage, and to continue to encourage travel between the UK and EU.” Yet, driven by its desire to control immigration and free itself from the European Court of Justice, both presumed to reflect the “will of the people”, the government plans to leave the single market and the customs union.
So is it likely to be able to reach a deal? Furthermore, what might be the result? In trying to reach any deal, the UK has to cope with five daunting challenges.
First, lack of time. Article 50 states: “The treaties shall cease to apply to the state in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification . . . , unless the European Council, in agreement with the member state concerned, unanimously decides to extend this period.” The chances of securing an extension are slim. Thus the limit is two years. In fact, it is less than this. Indeed, businesses will need clarity a good year before the end. As a result, the UK’s leverage will rapidly dwindle.
Second, divergent interests. As noted by the great Prussian general Helmuth von Moltke, no battle plan survives contact with the enemy. This will certainly apply to the UK’s plans. It is negotiating with the European Commission, 27 countries and the European Parliament, all of which will have different red lines. Their need to reach an agreement is less urgent than Britain’s. Many will want to show that exit is costly. Many will feel that the longer the talks drag on, the greater the chance of having UK-based business fall into their laps.
Third, divergent negotiating priorities. The commission, the lead negotiator, wants to start with the terms of the divorce before starting talks on a future framework and the transition towards it. The UK believes that nothing is agreed until everything is agreed. It will, perfectly sensibly, not agree to a divorce unless the outlines of a subsequent arrangement and the transition to it are also agreed.
Disagreement on how to negotiate might halt progress quickly.
Fourth, money. This has always been a sticking point for the UK. But the commission calculates that Britain owes €60bn. As a paper for the Centre for European Reform notes, this is “a far cry from the £350m-a-week bounty promised by Brexit campaigners during the referendum campaign”. This demand could prove to be the decisive stumbling block.
Fifth, complexity. In addition to the issue of money, the divorce will cover outstanding commitments (such as to scientific research), citizens’ rights and housekeeping issues (outstanding competition cases, for example). London has also decided on the most complex possible post-Brexit trading arrangement — a bespoke free-trade agreement (FTA), with the possible addition of sectoral customs unions and “enhanced equivalence” for finance, which are illegal under World Trade Organization rules. The ensuing complexity could prove overwhelming.
In all, the chances that a deal will not be reached in time must be high. Indeed Article 50 was presumably designed to be unworkable. Yet suppose a deal in line with the UK government’s desires could be reached. What would it mean for the UK, particularly on trade?
Two points are crucial. First, empirical work demonstrates what Angus Armstrong of the National Institute for Economic and Social Research calls the iron law of trade models: “Trade between two countries approximately halves as distance between them doubles.” Second, tariffs are much less significant barriers to trade than regulations. This is clearly true of services but it is also true of manufacturing.
That is why a careful empirical study indicates that a move from membership of the European Economic Area to a mere FTA could lead to a huge reduction in the affected trade. In all, UK trade may shrink by up to a quarter in both services and goods. Because of distance and regulatory barriers, agreements with the US, other “Anglosphere countries” and leading emerging countries would not offset this: according to the NIESR’s Monique Ebell, these might increase overall UK trade by only 5 per cent. This is because the countries are distant and regulatory barriers are likely to remain high. Also, if regulations were lowered, complex questions of harmonisation and compatibility of regimes would emerge. (See charts.)
The UK has committed itself to becoming “global Britain”. Getting there successfully will be a big challenge. True, the short term economic effect has been far less than many supposed. But exit has not yet begun. In her preface to the white paper, Theresa May claims that Britain is coming together.
The prime minister is right that the majority of Remainers hope her form of Brexit will work: this is our country, too. Yet most of us still believe that the path on which the UK is launched is deeply against its interests. We must hope we are wrong.