Brexit won’t kill EU-UK trade – unless Brussels really is malicious and inept

by Jonathan Adams

The debate over whether or not the UK will be able to negotiate a free trade deal with the EU following a vote for Brexit tends to proceed on the grounds that all the parties are out and out mercantilists. On the one hand, the EU needs a deal with the UK because of its net exports of goods. On the other hand, the UK needs a deal with the EU because of its net exports of financial and other business services.

Start instead from the perspective that both sides in any trade want it to take place. European businesses are not being forced to buy UK financial services. UK consumers are not being forced to buy French wine or German cars. Both parties make the trade because they’re better off trading. If the City lost access to markets in the rest of the EU, industrial firms there would equally lose access to the high quality financial services they need to compete with foreign rivals. Those foreign rivals have access to the City, New York and other major international financial centres.

Of course, the fact that both sides generally benefit from free trade, which is uncontroversial when you are talking about peers like the UK and Germany, does not mean free trade always prevails. One reason countries might not do a free trade deal is that existing industries would be threatened by new foreign competition. The country might do better overall but those working in existing, previously sheltered industries might lose out. In a competition between the concentrated benefits accruing to an established industry and the potential for new trade (often including new businesses not yet established), the more concentrated and better-established existing businesses tend to be better able to fight their corner. In a debate between the seen and the unseen, the seen tends to win.

In the case of a post-Brexit negotiation over a UK deal, that logic would be inverted because we start from patterns of trade and investment based on free trade within the Single Market. The businesses in the rest of the EU that would be blown away by UK competition are long gone already. The businesses that would lose out if they were less able to sell to the UK, or use services sold from the UK, would be keenly aware of the danger. The logic of collective action should serve to favour a deal, rather than get in the way of one.

The idea that the UK would not have a reasonable degree of market access (including for more difficult industries like financial services, where regulatory non-tariff barriers are enormously important) is therefore hard to sustain from a narrow consideration of the immediate interests in play. Any credible case that a decent deal will not be struck relies on one or both of two other factors:

First, setting an example. The EU might seek to attack the UK in order to discourage other countries from leaving in the future. This argument suffers in credibility a bit because there aren’t really any other countries with the UK’s combination of size and institutional awkwardness in the EU. Who else is there who they really need to discourage who wouldn’t be discouraged anyway? If the UK prospered outside the EU, there is still a long way to go before Poland, Sweden or Ireland think they can do the same. This is the big difference with Greece and the Eurozone, where the threat of other countries with lingering competitiveness problems also heading for the exit was real.

Second, institutional inertia. Even if most EU countries want a deal on reasonable terms, the threat here is a repeat of something like the Gallic “Non”, which delayed the UK’s entry in the first place. Any delay due to bickering over minor concerns could cause enormous commercial disruption.

I think the challenge for those advocating that the UK remain in the EU is that both of these arguments say something unpleasant about the EU. Either it is a protection racket, relying on the threat of a trade policy beating to keep people in line. Or it is so slow and unwieldy in concluding important trade negotiations that it would be reasonable to ask whether we should trust it with UK trade policy at all.

I’m not convinced that the biggest fans of the EU in Britain really believe that it would not strike a reasonable deal with the UK in the event of Brexit. They simply believe that EU policy will be better with the UK engaging from the inside, and that better governance across the EU is a valuable enough prize to be worth a fair bit of institutional awkwardness between Eurozone and non-Eurozone member states (like ourselves). Unfortunately that, more reasonable, position is being replaced with the idea that the EU is some kind of malicious ogre which is going to club us over the head and gnaw on our bones if we try to leave its cave. Does anyone think Britain would be stronger in that Europe?

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