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How to Prepare for Future Trade!

One of the enduring tropes in the Brexit debate is that you must be in the Single Market to trade with it. This seems to be largely behind the determination of so many MPs to see the UK remaining as close as possible to the EU. The fear is that if the UK is not inside the Single Market, UK exporters will find it much more difficult to sell there, exports to the continent will decline, jobs will be lost, and the UK economy will be badly hit. There is little evidence that these fears are likely to be realised, especially on the scale alleged, and even if some are, the EU27 is likely to suffer more than the UK.

Trade between the UK and the EU27 does not take place between governments; it occurs between companies, who perceive that buying from suppliers outside their country’s borders is more advantageous – i.e. better value – than relying on domestic suppliers. Will these calculations change because of Brexit? It is difficult to see why they should. Even if tariffs are re-imposed – which may not be very likely even with “no deal” – they will average only about 2.5%, although they could be significantly higher for motor vehicles and agricultural goods. If there is “no deal”, however,  sterling will very probably fall far enough to offset these mostly relatively minor hurdles.

Would the paperwork involved in the UK–EU27 exports be much more complicated than now, thus adding significantly to the costs of exporting to the EU?  The only material difference between the paperwork needed for the current “free movement” of shipments from the UK to the continent and future free trade (or trade on WTO terms) is that only one extra document is required. This is a certificate of origin, which in almost all circumstances presents no problem or significant costs to provide. The idea that huge additional costs and complications are entailed is simply not borne out by practical experience. The most compelling evidence for this is the success achieved by the many large economies in the world – the USA, India, Australia, Canada and Japan – all of whom sell vast quantities of goods to the EU on WTO terms.

Would the UK find that there were regulatory barriers making it much more difficult than now to sell goods from the UK to the EU? Very unlikely. At the moment, the UK and the EU27 are in full regulatory alignment and it would make overwhelming sense for this to remain substantially the position. If there were good reasons for UK regulations to divert from those in the EU, exporters would, of course, have to comply with EU requirements. This is what exporters must do all the time with all the markets into which they sell. Would the EU deliberately erect regulatory barriers to UK exports? Again, very unlikely, not least because doing so would put them in breach of WTO obligations by which they are legally bound and to which they are legally beholden.

Although it is often contended that there will be huge queues of lorries at Dover and elsewhere, both the relevant port operators and customs officials appear to be confident that traffic can be kept moving, although, there may be some teething problems to start.  Very sensibly, those in charge of checking paperwork – almost all of which is now done by pre-clearance – say that they will give priority to avoiding hold-ups rather than to detailed customs monitoring.

Of course, not all our exports to the EU27 are goods. About half are services – everything from finance to tourism, and from educational facilities to professional services. Most of these are not likely to be greatly affected by Brexit, although there have been concerns that financial services, in particular, would be adversely impacted. But provided proposals for services trade are based on mutual recognition with equivalence for the financial sector, as HMG proposes, financial services should flourish. This model already operates between the US and EU. Thus, there are sensible ways round potential problems as well as substantial offsets. There is still far from being a fully competitive market for services in the Single Market and the City may gain more from avoiding the wrong sort of regulation by being outside the EU than it loses on access to the continent.

There therefore seems to be little reason for thinking that UK sales to the EU will fall because of Brexit but EU sales to the UK may be more vulnerable, and this may help rather than hinder the UK economy. If “no deal” were to cause sterling to depreciate, this would make UK exports relatively more competitive, which could certainly help us. And there are also other factors which could work in our favour.

At the moment, every year we have a huge balance of payments deficit with the EU27. In 2017 we had a trade surplus of £23bn on services but this was dwarfed by a massive £95bn deficit on goods, leaving us with an overall trade deficit with the EU27 of £72bn. This sucks demand out of the UK economy and piles up debt. If overall trade – against expectations – were to be reduced, there would be a silver lining. The trade deficit would very probably go down. Of course it would also do so if our exports become relatively more competitive. Furthermore, if tariffs were to be re-imposed, because of our huge goods deficit, receipts to UK customs would be far higher than to those on the continent – by a factor of perhaps £13bn a year to £7bn.

For the UK, it is clearly true that a “no deal” outcome would involve considerably more short-term uncertainty than an agreement which would avoid a clean break on 29th March 2019 – and much will then turn on how helpful and co-operative those on the ground will be. Inevitably, there will be teething problems and some disruption. The big advantage of “no deal”, however, is that the UK will then be able to start negotiations with the EU – probably for a free trade deal along Canada +++ lines – unencumbered by the onerous legally binding commitments entailed in the Withdrawal Agreement, particularly round the Irish border and the £39bn up-front payment.

The Withdrawal Agreement, the Norway option, and holding a second referendum are all options fraught with problems. It is doubtful if there is a majority in the House of Commons for any of them. Although there is no majority in the House of Commons for “no deal” either, the UK may well get there by default. Of course, it would have been better if the UK had spent the last two and a half years negotiating a free trade agreement with the EU27, instead of trying to be half in and half out of the EU. Both Donald Tusk, the President of the EU Council, and Michel Barnier, the chief EU27 negotiator, have advocated this approach during the past few months. With the Parliament elected in 2017 determined to stay substantially within the Single Market and Customs Union, however, we have not taken advantage of this opportunity. We are therefore where we are, with very little time left. This is why the UK’s best option may well now be to hold its nerve and to do all possible to make a “no deal” Brexit work rather than HMG doing its utmost to avoid a clean break at the end of March 2019. This looks like the best way, in particular, to avoid huge problems stretching ahead as the UK starts negotiating the next stage of its relationship with the EU27, with all the cards in their hands.


John Mills

John Mills is an economist and chairman of JML, a UK household goods company which operates globally, as well as being Founder of Labour Leave. He recently found the Institute for Prosperity. He is the author of Exchange Rate Alignments (2012), Call to Action: Britain’s Economic Problems and How They Can Be Solved (with Bryan Gould, 2015) and The Real Sterling Crisis (with Roger Bootle, 2016).

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