Is Brexit an opportunity for Britain? Unburdened by EU red tape, will the UK change its economic model by taking a more economically liberal, free market approach? Could it slash taxes and introduce greater labour market flexibility? Might Britain sign deep and comprehensive Free Trade Agreements with the United States, China, India, and other major economies? In short, far from heading for the cliff edge, could Britain’s economy thrive outside the EU?
We had a comment sent in by Kevin who runs a small business and says his order book has been full since the Brexit vote. He’s apparently even had to increase his workforce to meet demand. Kevin adds that friends of his who export outside the UK tell him that, due to the weak pound, their goods are “flying over the channel and the Atlantic”. So far, Kevin feels that the impact of Brexit has been positive for Britain’s economy.
To get a reaction, we put Kevin’s comment to Pieter Cleppe, Head of the Brussels office of Open Europe, a think-tank that promotes an economically liberal Europe and Britain. What would he say to Kevin?
Well, basically, the gentleman is talking about the effect the lower exchange rate has had on the British economy. Now, if devaluing your exchange rate was an effective way to create a sustainable and dynamic economy, then Zimbabwe must be the richest country in the world, which is plainly not the case. That said, of course, there can be cases where an exchange rate is overvalued, and you can make an argument that this was the case for Britain and that therefore this latest shift in the exchange rate triggered by the Brexit effect was sustainable and a good thing…
Now, will Brexit in the long-term be a good thing for the UK economy or not? At Open Europe we’ve said that three conditions need to be fulfilled for the UK to become a winner from Brexit. First of all, Britain needs to secure a good deal with the EU which keeps as much of the trade openness in place as possible. Secondly, it needs to conclude a lot of trade deals with the rest of the world. And, thirdly, it needs to become more competitive and implement free market reforms in order to compensate for some of the disruption that will inevitably happen as a result of Brexit. Now, those three conditions are hard to fulfil… If there is no good deal with the EU or there is a nasty divorce; if no big economy is interested in a trade deal with the EU; and if Britain for whatever reason refuses to implement free market reforms, then this growth will be lost. But it’s too early to tell where we are headed in this respect.
Does the UK really need a good deal with the EU to ensure growth? The British think-tank Civitas has published a series of reports (see here and here) by Michael Burrage, arguing that the supposed benefits of the Single Market are largely illusory. He points out that the growth of exports, of both goods and services, to the EU of numerous non-member countries over the 23 years of the Single Market has exceeded that of the UK, and argues that both the advantages of membership and the disadvantages of non-membership have been greatly exaggerated.
We had a comment from James, however, who argues that relying on the WTO without additional EU-UK agreements in place would be a mistake because “no developed economy in the world trades with the EU purely according to WTO rules. They all, without exception, conduct trade according to a framework of bilateral and multilateral agreements.”
We approached Michael Burrage and asked what he would say to James’ comment. Here’s his reply:
The Regional Trade Agreement Information System (RTAIS) of the WTO identifies all the negotiated and recognised trade agreements in the world, and there are 111 countries which have no WTO recognised and binding agreement with the EU, including Japan, China, and the US. These 111 countries are those that are conventionally described as trading under WTO rules. That does not mean that they have no diplomatic relations with the EU, and these diplomatic exchanges frequently refer, of course, to trade matters. The European Commission files and archives these exchanges, however trivial they may be, as ‘agreements’.
A good number of these ‘agreements’ are, for example, to officially inform other countries about the addition of new members of the EU. Many are memos of understanding. Now and then one refers to the resolution of a significant trade dispute, but these are not ‘agreements’ that have to be notified to the WTO, or that the WTO cares to recognise, because they are narrowly focused and ad hoc, and do not entail any binding obligations with implications for the trade of other WTO members.
A number of those committed to Remain, or to UK membership of the EEA, have recently decided that it would help to undermine the UK government’s position, if they conflated and confused RTAIS-WTO trade agreements with the diplomatic exchanges filed as ‘agreements’ by the European Commission, and then alarmed everybody in the UK, by claiming that the UK would be the only country in the world trading with the EU under WTO rules. It is a discreditable and ridiculous wheeze, but it has fooled a lot of people, though hopefully not James. It is post-script to Project Fear…
Sir Ivan Rogers, the former British Permanent Representative to the EU, argues that several of these agreements introduce mechanisms for reducing non-tariff barriers to trade (including divergent regulatory frameworks, customs regimes, and so on). Furthermore, Sir Ivan points out that the UK has a significant services deficit with the European Union, and one of the criticisms of the WTO is that not enough progress has been made in services (though, on the other hand, that exact same criticism is often made about the EU Single Market).
Nevertheless, we had a comment from Cathryn pointing out that the EU is not the world. She believes Britain will do much better outside the EU. Without having to worry about EU regulations, she believes that Britain will be free to trade with rapidly growing markets like India and China.
We put that comment to Pieter Cleppe for a reaction. What would he say?
Well, her argument is definitely, the ‘free market’ argument for Brexit. And, indeed, if Britain managed to close trade deals with other countries, especially big countries – New Zealand would be nice, but it’s a relatively small economy – then this would obviously be a good thing and one of the upsides of Brexit. Of course, the downside is clear; trade with the European Union – which still accounts for around half of Britain’s trade – would be in jeopardy. And that, of course, is quite concerning.
EU membership definitely had its upsides and downsides, and you could make a very good case that with the growing rest of the world it made less and less sense for the UK to take the damage that the EU inflicts in terms of regulation and the EU’s protectionism and failure to make trade deals…
Finally, we had a comment from Maia, who thinks the UK could enter into a transitional arrangement in order to soften the blow of Brexit. The idea is that after the two year Article 50 negotiation period is up, Britain will still need more time to negotiate a more comprehensive Free Trade Agreement with the EU.
Does Michael Burrage agree? If so, what does he think that a transitional arrangement would like?
Like Maia, I think there is a high probability of a transitional arrangement, simply because neither side wants sudden, overnight, disruptive, cliff-edge changes. Moreover, virtually every trade agreement I have read has phased reductions of tariffs, quotas and non-tariff barriers, often over many years. Of course, in the case of the EU and UK, it may well be the opposite, that is, a phased increase of tariffs, quotas and non-tariff barriers. But nonetheless the principle of phased rather than overnight changes is well-established in international trade negotiations, and I do not see any reason why either side would wish to depart from it…
No doubt, as exporters on both sides prepare to deal with each other in the same manner as they already deal with exports to the rest of the world there would be a modest amount of trade disruption. More importantly, however, the transition period would be marked by increasingly vociferous organized protests by exporters most affected on both sides, along with jitters in the financial markets. Intense pressure will then be put on negotiators of both sides to find a face-saving format that would enable something like the status quo ante to be restored, and it will probably prove irresistible. It will therefore be a transition period with a fair amount of political heat between and within both sides, with volatile and nervous financial markets, which will end after a relatively brief period of time, probably no more than a couple of years. We will then all look back and wonder what all the fuss was about.
Will the British economy thrive outside the European Union? Instead of trading with Europe, could it look to rapidly-developing economies like India and China? Could it become a low-tax, free market haven outside the EU? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!