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Trade: The Brexit Debate

May 9, 2016 10:59 AM
By Dr Alan Bullion

Alan Bullion

Dr Alan Bullion on Trade After Brexit

The argument on trade of those in favour of Britain leaving the European Union appears to be that the United Kingdom is such an important trade partner of the remainder of the EU that it can obtain a trade deal which gives it access to the internal market of the EU but which would not constrain the British government to accept internal market regulation and even allow it to abolish parts of the existing internal market regulation.

This is an entirely improbable scenario for both political and economic reasons. Let's start first with the political arguments.

If the remainder of the EU were to accept such a deal it would allow British producers to trade on equal terms as producers in the remaining EU countries, while not having to meet the same regulatory costs (environmental, health and safety at work, workers' rights and so on). No democratically elected politician in the 27 EU member states will be prepared to accept such a deal because it would mean setting domestic producers at a competitive disadvantage to those in the United Kingdom - effectively committing political suicide.

The EU will almost certainly not be willing to be generous to the United Kingdom if it votes to leave. That is not only because the UK takes only a modest but significant percentage of EU exports, but more importantly because Britain's exit would be seen as a challenge to the long-term future of the Union. The tensions in the EU over migration policy and the Eurozone are very considerable and some countries may be tempted to consider leaving the EU as well. Britain will be seen to have delivered a blow to the whole process of European integration and through its exit to have strengthened those right-wing nationalist movements which exist now in several member states. The breakup of the EU would be quite devastating and lead the continent back towards the 1930s. Under these circumstances the EU is not going to be kind to the British.

The economic case put forward by Brexit supporters that membership of the EU is preventing us from trading with new dynamic parts of the world like China and India is also quite bogus. Whereas in 2014 the United Kingdom exported €19 billion of goods and services to China Germany exported €75 billion. Apparently membership of the EU does not prevent German producers from exporting to China whereas according to Brexit supporters it prevents British exporters doing the same thing. Membership of the EU is here being blamed for something it is clearly not responsible for.

But Brexit supporters clearly don't understand how complex modern international trade works. They appear to argue as if Britain produces finished goods which it then exports abroad. In actual fact a large part of international trade is determined by complex value chains; that is to say that international companies will produce goods and services by buying parts of those goods and services in several countries. The final product is produced in a country where all the parts are brought together. So any product will have value added from several different countries. British business supplies inputs to final products throughout the world but notably in other EU countries. A very large number of thousands of British jobs (the EU estimates 200,000 but as with all these big figures this should just be taken as a rough indicator of volume) depend therefore on German exports to China because they are producing inputs to German industry. If Britain leaves the EU there are several reasons why German businesses will probably want to source their inputs from other EU countries. Modern industrial assembly methods require total reliability of supplies from subcontractors. With Britain outside the EU subject to customs controls and possibly even anti-dumping and anti-subsidy measures, producers on the continent may well prefer the security of supplies from within the EU.

But of course many Brexit supporters are toying with the idea of remaining in the internal market while being outside the EU. Apart from the possibility of being able to negotiate access to the internal market as if a member of the EU but while having left the EU (see the political arguments above), the existing examples where the EU has agreed to such a deal are not promising.

Joining the European Economic Area Agreement (EEA), often referred to as the Norway option, would give British producers access to the internal market in those sectors covered by the agreement but even a summary look at the EEA agreement shows that it is based on the four freedoms of goods, services, labour and capital. The free movement of workers is an essential part of the agreement (article 28). The financial mechanism by which the EEA countries pay a sort of annual entry fee to the EU is also an integral part of the treaty (article 116). But the non-EU EEA countries do not have a say in the decisions taken by the EU and relating to the internal market, although they are consulted in what the Norwegians call 'fax democracy'. It is difficult to see why such a deal which would lead to Britain having no real say in decisions which directly affect it is preferable to the deal that it has as a full member of the EU.

Then there is the Swiss system of having bilateral deals in particular areas with the EU. But Switzerland also has to accept free movement of workers and is subject to decisions taken unilaterally by the EU. It also pays a substantial annual contribution to the EU. It should also be said that the deal with Switzerland is extremely unpopular amongst the existing members of the EU which see it as a sort of cherry picking by Switzerland of those areas in which it is particularly interested. While this might be tolerable for a relatively small country it is unlikely to be acceptable in the case of a large country like Britain.

All the other examples of European countries outside the EU but with close trade ties to it would almost certainly be unacceptable to the British and to the EU itself. States in Eastern Europe (Ukraine Georgia Moldova) have deep and comprehensive free trade area agreement is with the EU, while the countries of the Western Balkans have stabilisation and Association agreements. These are agreements which provide a degree of free trade subject to certain conditions (as with the EEA, agreement on rules of origin), but they do not provide access to the internal market of the EU and are subject to anti-subsidy and anti-dumping procedures. Association agreements are usually struck with countries which are far weaker economically than the EU itself, which certainly will not apply to the case of the United Kingdom.

So it seems that the dreams of Brexit supporters of a powerful Britain negotiating an agreement which gives it in some way privileged access to the EU market and ideally full access to the EU internal market is just a dream.