A few months ago, the press and news websites were full of articles saying that it would be easy for the UK to get a Free Trade Agreement with the EU.
Now that the reality is starting to set in of just how complicated Brexit is, the tune has seemingly changed.
Every day now it seems we are seeing more articles saying ‘we don’t need a deal’ ‘WTO rules would be fine for the UK’ etc.
We are getting a bit sick of explaining why WTO rules would be terrible for the UK – but to be brief; it would mean the imposition of tariffs harmful for importers and exporters, added red tape and greater difficulties for financial services providers. This is why no major economy trades with the EU on purely WTO terms.
In a recent tweet, Mr Graeme Leach promoted an article he had written “10 reasons why no deal could be a good deal for the UK economy” – we will address the substantive points in it below.
10 reasons why no deal could be a good deal for the UK economy https://t.co/rtzubBwCcx
— Graeme Leach (@GraemeLeachEcon) October 26, 2017
Mr Leach describes the “unique opportunities” of no deal, saying that “The protectionist wall surrounding the UK at present would be removed if we imposed zero tariff and non-tariff barriers on UK imports from across the globe. Regular readers of this column will be familiar with the benefits to consumers in the short term, and consumers and producers in the long term, from gaining the freedom to operate unilateral free trade.
The UK could become the world’s biggest advocate of genuinely free trade overnight.”
Lets unbundle this statement.
First off, if we grant the world preferential access to our markets, then the UK would have difficulty signing new preferential trade arrangements, since the other countries of the world would have very little incentive to grant us new access.
But let’s say the UK leaves and does implement zero tariffs. Under the WTO rules it would have to be applicable for essentially every country (barring those under internationally agreed trade sanctions).
So presumably he envisages ships from all over the world laden with goods to sell to the UK.
Except first off, it would suddenly become less attractive to sell to the UK because as Mr Leach correctly identifies elsewhere in his article “Sterling would undoubtedly plummet the morning after…financial markets would sell the UK and short sterling big time” this means that £100 before the day of no-deal brexit would buy you far less than the day before.
Lets say there is an American company that manufactures Microwave ovens and sells them wholesale to a British company, which sells them on via a chain of shops across the UK. The Microwave oven manufacturer will be suddenly getting less per unit as the £ will be worth less.
So at the first opportunity (as soon as contract allows) they (the American company) will increase their prices to restore their profits.
The UK company could simply increase the costs of the microwave to the end customer, but they would be worried about doing so. Consumer demand for microwaves could drop as a result of the higher prices (for example people could use their old microwaves longer before replacing them or buy them from second-hand outlets or use alternative cooking methods).
If the British microwave company refuses to pay the increased costs, then the American firm can simply sell their products elsewhere.
What about tariffs? Mr Leach says that “introducing zero tariffs on imports would counter the sterling effect on import prices”.
Since we would be outside the EU Customs union and common external tariff, the UK could drop all tariffs on imports on Microwave ovens – we believe that would mean a reduction of duty of 5.00%.
Since importers pay duties, the British microwave company would effectively receive a 5% cut in their import costs, but this still might not be enough to cover the lack of purchasing power due to the drop in the £.
Even if the Microwave-selling company could find a UK-based microwave factory to act as their new supplier, they themselves would be raising prices shortly, as they would need to cover the increased costs of raw materials and imported components.
What about Mr Leach’s point about dropping non-tariff barriers?
Common ‘Non-tariff barriers’ include many different issues including (but are not limited to) Licensing, classification packaging, and labeling requirements; sanitary and phytosanitary (SPS) rules; food, plant and animal inspections; import bans based on unethical fishing and farming methods; Import quotas.
So if we were to “zero” non-tariff barriers that means the British market would be flooded with goods that our current customs and health and safety rules would certainly keep out.
Cheap easily-broken toys, conflict diamonds in jewelers shops, shoddy and potentially dangerous appliances, chlorinated chickens, medicines that haven’t been sufficiently tested and alcohol laced with Methanol are just a few potential examples. Does that sound like a sensible course of action?
And what about Mr Leach’s other suggestion?
He suggests that the UK leaves the Single Market (EEA) and that this would mean “The UK would become a rule maker not taker, and could begin to take down the regulatory state.”
Firstly, even if we left the Single Market businesses would still need to comply with EU rules and regulations to sell into their market.
Countries such as the USA have difficulties doing this.
Below we reproduce some passages from the USA 2017 National Trade Estimate Report on foreign trade barriers:
“U.S. exporters and investors nonetheless face persistent barriers to entering, maintaining, or expanding their presence in certain sectors of the EU market. Some of the most significant barriers, which have endured despite repeated efforts at resolution through bilateral consultations or WTO dispute settlement, have been highlighted in this report for many years. Many are highlighted again in this year’s report.
The EU’s approach to standards-related measures, including its conformity assessment framework, and its efforts to encourage governments around the world to adopt its approach, including European regional standards, creates a challenging environment for U.S. exporters. In particular, the EU’s approach impedes market access for products that conform to international standards as opposed to European regional standards, even though international standards may meet or exceed the objectives set forth in EU legislation. U.S. producers and exporters thus face additional burdens in accessing the EU market not faced by EU exporters and producers in accessing the U.S. market.
The EU also promotes adoption of European regional standards in other markets and often requires the elimination of non-EU standards as a condition of providing assistance to, or affiliation with, other countries, which can give EU manufacturers commercial advantages in those markets.
The withdrawn standards can be international standards that U.S. producers use, which may be of equal or superior quality to the European regional standards that replaced them. U.S. producers thus must choose between the cost of redesigning or reconfiguring the product or exiting the market.”
As you can see, if we leave the Single Market, it won’t be easy trading into it.
In addition, even if the UK does leave the Single Market, it will still be hugely influenced by Single Market rules. In her report ‘The Brussels effect’ Professor Anu Bradford explains that the EU exerts massive influence over global standards – so the UK would truly become a rule taker, not a rule maker.
[Ironically, countries such as Norway (in the EEA/Single Market but not in the EU) have a right to be consulted on new EU rules relating to the Single Market and take part in a continuous information and consultation process.]
In conclusion, Mr Leach’s proposals would likely be highly damaging for the UK and should be ignored by policy makers.
Strangely, the only people pushing these extreme forms of Hard Brexit seem to be connected to the Legatum Institute and/or the Telegraph newspaper. No surprise then that Mr Leach is a senior fellow of the Legatum Institute and has written several Hard-brexit advocating articles for the Telegraph.
Draw your own conclusions.