British Influence: Future UK Trade Patterns - Fantasy & Reality

24 March 2016

This paper considers what it would be like for the UK to trade with the EU on the same terms as other non-member countries, including whether increased trade with emerging markets would be an adequate substitute for trade with the EU.

UK Trade with the EU

[...] It is sometimes suggested that if the UK left the EU it would be able to preserve its easy access to the Single Market because it would be in the interests of the EU Member States to keep access both ways because they export so much to the UK.  In fact, while the UK buys about 10 per cent of the rest of the EU’s exports we sell nearly half of ours to the EU.  Furthermore, not all EU Member States have a trade surplus with the UK; half of the EU’s trade surplus with the UK is accounted for by two countries, Germany and the Netherlands.  It is also often claimed that outside the EU the UK would continue to get privileged access to the Single Market on the same terms as a Member; this is something no other country has been granted.

Services

[...] Outside the EU, the UK would have to rely on the far more limited World Trade Organisation rules on trade in services which would allow EU countries to impose non-tariff barriers on many UK services exports and financial services businesses would lose the benefit of passporting.  A survey of financial services businesses found that 37 per cent were very or fairly likely to relocate staff in the event of the UK leaving the EU. [...]

Future trends

Estimating future trends in the UK’s trading relationship with the EU means making difficult assumptions about future growth and other factors that might influence it.  There are, however, some factors that can be identified now:

·       the relatively poor performance of the eurozone economy of the last few years has steadied and growth of around 1.5 per cent is expected in 2016 with higher levels thereafter;

·       the shift in direction under the present Commission, which has led to substantially fewer items of legislation in the work programme, and a re-energised commitment to making the EU more competitive, is a significant re-focusing of effort around a pro-growth agenda;

·       the EU’s shift in trade policy in 2006, following the stalling of the Doha trade round, from negotiating multilateral trade agreements through the World Trade Organisation to seeking bilateral free trade agreements with major trading partners, is bearing fruit; there are now over 50 such agreements covering 60 countries; furthermore, the EU is negotiating free trade agreements with the USA, India, Japan and Mercosur which would take total UK trade with the EU and its trade partners to 80 per cent;

·       the services sector will continue to expand; removing existing barriers to trade in services within the EU could expand the UK economy by seven per cent.

Taken with the commitment of the European Council to complete the Single Market in energy and in digital services, these developments suggest that the EU is likely to remain the UK’s largest trading partner for the foreseeable future. [...]

World Trade Rules

[...] Relying on our WTO membership would prevent EU Member States from adopting discriminatory or protectionist policies directed against UK goods in certain ways.  But it would have to apply the EU’s Common External Tariff on UK exports.  This would mean, for example, tariffs on our food exports to the EU of anything between five and 36 per cent depending on the product, 10 per cent in the case of cars and five per cent on car components. In addition, if the UK wanted to apply higher tariffs than the present EU common external tariff, it would have to make equivalent trade concessions under WTO rules to all those countries (outside the EU) adversely affected.

The GATS has so far led to relatively little dismantling of barriers to trade in services.  Moreover, it includes a Financial Services Annex allowing new restrictions on financial services to be introduced for prudential regulatory reasons.  UK financial services trade with the EU, post-Brexit, could be dangerously exposed to unilateral EU action. [...]

Outside the Single Market [...] UK goods would be subject to the EU’s Common External Tariff, would go through customs checks (delaying their delivery), there would be no right to sell services across the Single Market, to deliver them or to send employees there.  We would be entirely outside the decision-making structures of the EU and we would not benefit from the EU’s FTAs, present and future.

The UK has a deep and complex trading relationship with the other EU countries.  It is becoming less and less usual for a relationship of this kind to be managed simply through WTO membership; it is the kind of close relationship for which trading partners would usually arise under a bilateral free trade agreement.

Nor could trading arrangements under the WTO rules replicate the magnet that the UK’s presence within the Single Market provides for foreign direct investment into the UK.  One expert has estimated the loss of FDI at £210 billion over four years if the UK voted to leave the EU.  This figure is made up of a loss of FDI from within the EU (a 20 per cent fall) and an even larger loss from Asia and the US.  These losses would be because investors in the UK would no longer have access to the Single Market.  Overseas merchant banks locate in London because around 40 per cent of the City’s trades are with other EU countries.

It is sometimes argued that if countries like the US, exporting under WTO rules, can export successfully to the EU while outside it and without benefit of access to the Single Market, then so could the UK.  However the US clearly thinks it would benefit from a trade and investment agreement with the EU and one is now under active negotiation.  Beyond that, even without an agreement beyond the WTO rules, US export success reflects its comparative advantage in areas where the UK does not compete at the same level; for example, commodities including oil, machine tools and other manufactures, large aircraft, defence equipment and some services.

An alternative suggestion is that the UK should negotiate an agreement similar to recently reached between the EU and Canada (CETA).  But, as a former Canadian Trade Minister has made clear, if Canada did as much trade with the EU as the UK does now with the rest of the EU, they would want something far better than CETA.  The Canadian agreement does not cover all financial services, does not remove all non-tariff barriers to trade and still requires goods from Canada to be subjected to cumbersome rules of origin checks.  Furthermore, it has taken seven years for Canada to negotiate this agreement and it has still not been ratified.  CETA is awaiting approval by the European Parliament and the agreement of all 28 Member States before it can be implemented. [...]

Future Trade Patterns

[...] Outside the EU and relying on WTO rules, we would lose our privileged access to the Single Market, would face tariffs on our exports to the EU and would be unlikely to achieve free trade agreements with other countries as good as those the EU has negotiated.  We could not rely on any likely expansion of our exports to the emerging markets to make up for the loss of trade with EU countries, given the uncertainties about the performance of those economies in the future.

Conclusion

The contention that the UK needs to withdraw from the EU in order to get access for our exports to emerging markets flies in the face of economic reality and negotiating experience.  It is in any case a false and unnecessary choice.  By remaining in the EU we can have the best of both worlds, retaining access and influence on our biggest markets in Europe and opening up better access to the markets of the emerging economies.

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