The British economy would thrive after a WTO “clean break” Brexit

Published by FREE MARKET CONSERVATIVES on

BY RUTH LEA

I have long believed that membership of the EU, tied to the EU’s Single Market, with its regulatory straightjacket, and tied to the Customs Union, with the inability to unilaterally negotiate free trade deals and modify tariffs, has been a drag on the UK economy, not an enabler. Crucially, Britain needs to be free of the Customs Union and the Single Market, a “clean break”, in order to have the necessary freedoms to deliver a potential post-Brexit competitiveness boost to the British economy. This is the true post-Brexit dividend.

My preference until recently has been for a straightforward trade deal broadly based on the continuation of tariff-free trade for goods and a special arrangement for financial services. In both these areas, these policies would be mutually beneficial. Indeed, arguably, tariff-free trade helps EU exporters to the UK more than UK exporters to the EU, given the EU’s enormous goods surplus with the UK – nearly £95bn in 2017 and 2018. Some claim there is a need for “regulatory alignment” and, of course, British exporters to the EU will have to conform to EU product standards after Brexit, as they have to conform to US product standards when they export to the US. But there is no need to conform to labour market regulations, for example. Post-Brexit we must be able to decide our own regulatory regime as befits the needs of the country.

But a straightforward trade deal, and a clean break from the Single Market and the Customs Union, is currently not on offer. Instead, we seem to have just two options. Firstly, we have the truly egregious Withdrawal Agreement and its unattractive sibling the Political Declaration on the future relationship. They represent anything but a clean break. And, secondly, we have the so-called “no deal” Brexit, a misnomer if ever there one, which would represent a clean break. The latter is clearly the preferable option for the economy and the country.

A “no deal” Brexit is a WTO Brexit

If we leave the EU under “no deal”, we would, of course, be trading under the WTO’s tried and tested trading rules. We would not just be crashing out and/or falling off cliffs. Trade with the EU would continue. Clearly, the British Government is making thorough preparations for such an eventuality and the recent scare stories pertaining the Operation Yellowhammer’s Worst Case Scenario are a lurid manifestation of Project Fear Mark 2 – the “horrors” of a “no deal” Brexit. Of course, we have been here before, prior to the 2016 referendum when Project Fear Mark 1 was in full swing. The “pièce de résistance” of that exercise has to be the Treasury’s warming of recession and 500,000 extra unemployment if the British electorate had the temerity to vote for Brexit. [1] It didn’t quite work out like that!

Moreover, the EU Commission has made its contingency plans for a wide range of issues, including financial services, transport and travel, customs and the export of goods, climate policy, agriculture and fisheries, international trade in services and foreign direct investment.[2] It is in the EU’s interests, as well as ours, that the planes still fly and trade still continues.

It cannot be emphasised sufficiently that trading under WTO rules is quite normal for much of UK and international trade – and not some dreadful aberration. The UK already conducts over 55% of its exports trade with non-EU members, primarily under WTO rules, and the proportion is rising. Even if allowance is made for those non-EU countries that have preferential trade deals with the EU (some of which may not immediately carry over on Brexit), about half of our exports go to the remaining non-EU countries.

There is no doubt that UK exports to non-EU countries have grown quicker than to EU countries in recent years. Total exports (goods and services) over in the period 2007-17 grew by over 60%, whilst exports to the EU and the non-EU expanded by around 40% and 80% respectively.[3] Given that the EU is a relatively sluggish and saturated market, this is wholly unsurprising. Commercial opportunities drive trade rather than the supposed allure of the EU’s Customs Union and Single Market. Moreover, we shall, of course, continue to have “access” to EU markets under WTO rules, as the US has “access” to EU markets now. Similarly, EU exporters would continue to have “access” to the UK market, which is good news for them given their trade surplus!

A WTO, “clean break” Brexit is potentially liberating

A WTO “clean break” Brexit is potentially hugely liberating. If we were out of the Single Market and the Customs Union there are two main reasons for believing there is scope for a major competitiveness boost to the economy. But I must emphasise the word “scope”. How well or badly the economy does after Brexit will crucially depend on how any future government use these freedoms.

The first freedom, already alluded to, is the ability to negotiate our own trade deals with fast growing and friendly parts of the world economy, including the US, Japan and the Commonwealth. For all the EU’s size and “clout”, the trade deals it has negotiated have been disappointingly few. EFTA’s deals, arguably, have been more successful. Our trade is already shifting towards non-EU markets. Freedom to develop closer ties with buoyant non-EU countries, not already covered by EU agreements, can only accelerate this re-balancing and boost trade.

The Commonwealth should be central to building links post-Brexit. Commonwealth countries are rarely considered together as an economic entity. Yet they are already economically significant and, given their relatively buoyant growth prospects, their share of world GDP will increase. They have, therefore, the potential to be significant growth markets for the UK’s exports. Reflecting our shared history and commonalities of language, law and business practice, it has been estimated that Commonwealth countries trading with one another experience business costs 10-15% lower than similar dealings with non-Commonwealth countries of comparable size and GDP. This has been called the “Commonwealth advantage”.

The second freedom, also already alluded to, would be the freedom to amend or even repeal business regulations, especially those businesses most the most irksome. A future British government should be able to be much more fleet-footed in modernising and updating the regulatory regime than the EU. But rather than just pick regulations at random, the Government should undertake a major consultation of business groups, and other interested parties, for their preferred deregulatory options and proceed from there. Governments should see regulatory reform, along with tax reform, as part of a package for improving the overall competitiveness of the British economy, post-Brexit.

There are other potential benefits as well. Firstly, there should be a Brexit financial dividend as the UK is currently a significant net contributor to the EU’s budget. In the 2018, our current contribution net of rebate and refunds was nearly £9bn.[4] Secondly, there will be freedom to further modify our tariff regime to cut the cost of living, which should be a progressive policy, benefiting the relatively low earning disproportionately. This is especially relevant in the case of foodstuffs, which currently have quite high tariffs in order to protect EU agriculture. And, finally as a footnote, we should not forget one of the other reasons for Brexit, the UK’s unilateral ability to develop a bespoke non-discriminatory immigration policy best suited to the economic and social needs of the country.

Ruth Lea CBE is Economic Adviser at Arbuthnot Banking Group. Follow her on twitter: @RuthLeaEcon

References

  1. HM Treasury, “The immediate economic impact of leaving the EU”, Cm9292, May 2016. It stated that “a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000”.
  2. House of Commons Library, “EU preparations for a no-deal Brexit”, 30 July 2019.
  3. ONS, UK Balance of Payments, the Pink Book, 2018 edition.
  4. House of Commons Library, “The UK’s contribution to the EU budget”, 24 July 2019.