Advertisement

No EU trade deal is better than a bad deal? Don’t bet on it, Theresa May | Jonathan Portes

Workers assembling a car at Nissan’s Sunderland plant
There could be tariffs imposed on many areas of the car industry – parts used in Nissan’s Sunderland plant come from all over the EU. Photograph: Owen Humphreys/PA

It’s not the beginning of the end (of Brexit) – but it’s definitely the end of the beginning. Despite the fixation in the UK on the precise date and legal niceties of the article 50 process, the most important event of the weeks to come will not be the notification itself but the EU response to it, and the political and economic dynamics that sets into motion.

If things go according to plan, we’re headed for the usual EU negotiating scenario: long interludes of tedium and small print interspersed with episodes of late-night brinkmanship ending eventually in a compromise no one likes, but which everyone will describe as a victory.

But if politics – either here or on the continent – derails the process, we could soon find that far from “taking back control”, we have done precisely the opposite.

Ministers have put a brave face on that possibility. When Theresa May set out her negotiating position in January, she said clearly that, if necessary, the UK would just walk away (“no deal is better than a bad deal”) while Boris Johnson claims that the UK would be “perfectly OK”.

Would we? At a minimum, this would mean uncertainty for business, for EU citizens resident here and UK citizens living elsewhere in the EU, not to mention the possibility of extended litigation about money and other issues. Other possibilities would be disruption at borders, for both travellers and businesses, as we and the rest of the EU reintroduce long-abandoned controls.

Possibilities would be disruption at borders, for both travellers and businesses, as we and the rest of the EU reintroduce long-abandoned controls

But assuming we got over the immediate disruption, the most important direct consequence of leaving without a deal would be that trade with the EU would revert to “WTO rules” – that is, the standard World Trade Organisation arrangements that countries without preferential trading arrangements use.

For some ministers, this doesn’t seem to be a problem. After all, we already trade under WTO rules with the US – and our exports to the US are worth about £88bn per year. So maybe doing the same with the EU “wouldn’t be the end of the world”.

And it’s true that the WTO does provide a safety net. WTO rules mean the EU couldn’t impose punitive tariffs on us out of spite – it would have to treat our exporters in broadly the same manner as those from the US. That, in turn, means average tariffs on our exports to the EU would be fairly low, perhaps only 4-5%.

Even that conceals the fact that some sectors would be hit much harder – EU tariffs for agricultural products average 30-40%. Well over half of our trade in food is with the rest of the EU, so we’d face a choice. We could stick with EU tariff levels to prop up our own farmers, in which case UK consumers would face higher prices and less choice. Or we could unilaterally lower or abolish tariffs – which would be good for consumers but would mean a wrenching and painful restructuring for UK farmers.

But headline tariff rates are not the most important issue by any means. Take the car industry. Tariffs of 10% on cars would be bad enough. But much worse than that would be the disruption to integrated pan-European supply chains. Parts used in Nissan’s Sunderland plant, for example, come from all over the EU. And, equally, UK suppliers export components to Renault and Fiat.

It is difficult to see how all this could survive the imposition of tariffs, not just on finished cars but on parts every time they cross a border – not to mention the extra costs and, more importantly, time spent if we introduce new customs controls.

But perhaps the most fundamental issue is regulatory arrangements after Brexit. Take, for example, pharmaceuticals, one of our most important export sectors. To sell a drug in the EU, companies need to get it approved by the European regulator, the European Medicines Agency, which is in London. After Brexit, it will move to another member state (not surprisingly, a number of cities are already vying for it).

So what happens next? Our drug companies will still need EMA approval if they want to market their products in the rest of Europe. Will we set up our own regulator – which will take time and money, and even then manufacturers will not necessarily see getting UK approval as a priority, given that the UK market is much smaller than that of the EU or US? Or will we simply find a way of rubber-stamping approvals by an agency in which we no longer have any role? In other sectors, such as aviation or chemicals, the issues are even more complicated – legally, technically and, perhaps, politically.

Fundamentally, the point is this. Yes, we trade successfully with the US and many other countries under WTO rules. But, when it comes to those countries, we haven’t spent the last 40 years slowly and painfully integrating not just our trade but the fundamental infrastructure of our economic, legal, regulatory and bureaucratic processes. In economic terms, we are friends with the US, but we’re not married to it. Divorces are always painful – but just walking away isn’t going to lead to a happy outcome.