Brexit: the UK's international trade position

Brexit: the UK's international trade position

As the referendum of the June 23 is approaching, it seems only fair to examine the UK’s international trade position which is one of the main topics all the political actors have set their positions on. From this point of view, if Britain voted to leave the European Union, it would face a crucial trade-off: having to renegotiate the participation in the European Single Market to continue pursuing its benefits or opting out in exchange for more regulatory sovereignty.

Since British Prime Minister David Cameron promised a poll on EU membership, “remain” and “leave” campaigns and their advocates have been debating around the implications of Brexit on UK’s trade with diametrically opposite arguments. The first ones think that leaving would weaken Britain’s economy and, hence, provide evidence that the Single Market has boosted trade between the country and the rest of the EU; the second ones, on the other hand, believe that being part of the Single Market implies too many rules and regulations and that Britain’s trade with non-EU countries would improve if it left.

Even if the European Commission chief Jean-Claude Junker refused to entertain the idea of Brexit saying there is no “plan B”, alternative models to manage the trading relationship between the UK and the EU have been analyzed to consider whether they are attainable or not in case of a British exit from the 28-nations Union.  The European membership provides Britain with several tools to boost trade between the country and other Member States, benefits that clearly transform themselves in costs when considering a possible Brexit.

First, it establishes a Customs Union between Member States, which imposes a common external tariff (CET) on imports and the removal of all tariff barriers and quotas, allowing for free trade in goods and services. In case of withdrawal from European membership, if the UK continues to have a free trade agreement with the EU, it will still be able to maintain such favorable terms, otherwise, there will be larger increases in trade costs. Second, being part of the European Customs Union implies that trade policy and agreements with other areas or countries are competence of the EU: all members automatically benefit from trade deals between the Union and other countries but cannot set their own tariff levels. In the light of this, achieving a measured and progressive separation would involve both short-term and long-term renegotiations for all these agreements and networks. 

Third, the European membership guarantees Member States the removal of non-tariff barriers resulting from the objective of creating a Single Market enshrined in the treaties. Non-tariff barriers include rules and regulations, market-entry restrictions (like standards on products or services) and cost-increasing measures (such as, for example, border controls or rules of origin checks). The overall reductions in trade barriers have dramatically increased trade between Britain and the Union throughout the years till nowadays when EU exports are estimated to comprise 13% of UK national income.

Since Cameron announced the poll, Eurosceptic political forces, comprehending Farage’s UK Independence Party (UKIP), half of Conservative MPs (including Duncan Smith, Michael Gove and Boris Johnson), several Labour MPs and the Democratic Unionist Party (DUP) had given birth to cross-party groups like “Vote Leave”, “leave.EU” and “the Eurosceptic Grassroots Out Movement”.

As far as trade is concerned, their major argument pertains to an excess of rules and regulations on trade and business the EU membership implies without which the UK, they claim, would obtain better trade deals with non-EU countries. They contend that the rise of emerging economies has reduced the relative importance of Britain’s European trade and, for this reason, the Single Market’s added-value has declined. Instead, more regulatory sovereignty would free the UK to sign bilateral free trade agreements with, for example, the Asian emerging economies, the “Anglosphere” or Mercosur without having to reach a consensus with other 27 Member States. The rest of the world, as far as Eurosceptics are concerned, seems to offer more profitable opportunities that would replace any foregone trade with Europe, boosting the British economy in the long run. In addition, they argue that, in case of leaving, the UK would have anyway the opportunity to negotiate a free trade agreement (FTA) with the Union and, due to the large trade deficit the country runs, it could actually “dictate” its terms.

Indeed, the most appealing alternative to Eurosceptics is the so called “Canadian model”, a FTA which could guarantee free trade with the EU. As a matter of fact, Michael Gove, Secretary of Justice and fierce supporter of the Vote Leave campaign, said he wanted the UK to be “outside the Single Market but have still access to it”. Under such a deal, Britain would be able to control its own trade policy and potentially reduce the prices of imported goods from outside the Union. Furthermore, it would not be asked anymore to observe all European rules, to pay into the budget or accept migrants. However, British firms would have to continue complying with EU product standards, technical specifications, labour market and health and safety rules in order to sell their goods to other Member States which is crucial since half of Britain’ exports goes to the rest of the Union.

When considering this foreseeable scenario two compelling aspects come up in mind: the timing required to secure this kind of deal and the attainability of it. First, negotiating such an agreement would take considerable time: for example, negotiations on the EU’s trade agreement with Canada started in 2009 and were only concluded in February 2016. Second, the other Member States might not be open to concede Britain such an agreement: according to most of political analysts, it would be extremely hard or even impossible to negotiate such a deal in a post-Brexit atmosphere because it would create a dangerous precedent for other countries wanting to leave the Union.

Sadiq Khan, the capital's first Muslim mayor, has made Brexit campaigners furious by flying the European flag outside the City Hall, saying he wanted to symbolize his pro-remain position. The destabilizing uncertainty of the outcome of any negotiations for the access to the European Single Market seems exactly the reason why Cameron keeps on saying that exiting the Union would be a "leap into the dark", underlying the inevitable ambiguity a vote to leave would create, especially for British businesses. Big business, indeed, tends to be in favor of Britain staying in the Europe because it makes it easier for them to move capital, people and products around the world. Small and medium-sized firms, on the other hand, would welcome a cut in red tape and regulations.

In the light of this uncertain, it seems that the UK has a lot to lose from quitting the Union: the country’s participation in the Single Market has boosted its trade in goods and services with the rest of the Union and there is very little evidence that trade has been diverted away from its non-EU trading partners. 

Irene Vecchiato