Hard Brexiteers seem to believe that it will be up to the EU to agree to tariff-free trade “because it is in their interests”, but they are making a colossal miscalculation, writes Michael Emerson.
Michael Emerson is Associate Senior research Fellow at the Centre for European Policy Studies (CEPS), Brussels. This op-ed is re-published with the permission of In Facts.
The standard argument of the hard Brexiteers such as Liam Fox and David Davis is that the EU will accept a tariff-free trade deal with the UK “because it is in their interests”, relying for this solely on the fact that the UK has a surplus in trade in goods with the rest of the EU.
One counter-argument is that UK exports to the EU are a much large percentage of the UK’s GDP than the EU’s exports to the UK are of its GDP. So it matters more to the British economy than that of the EU.
But this alone greatly understates the case. There are two other arguments that undermine the likelihood that the EU would easily agree to tariff-free trade.
The first concerns the zero-sum-game competition for market shares of trade and investment. The UK is sitting on two huge market share prizes: that for foreign direct investment by multinational corporations targeting the EU market (such as Japanese car manufacturers), and that for financial services where the UK has a surplus.
It is blindingly obvious that others in the EU are already eyeing the opportunity to win a good deal of the UK’s present market shares for both. The Japanese have strongly warned the UK about this as regards foreign investment, and Paris and other financial centres are rolling out the red carpet for banks and other financial institutions.
The second argument is the other EU member states’ existential interest in not making a deal with the UK that might be regarded as an attractive model for others. President François Hollande has already said as much. The spectre of a disintegration domino effect is no fantasy, with Marine Le Pen saying explicitly that she wants France to follow in the UK’s footsteps, not in her view to quit the EU but rather to destroy it from within.
To get tariff-free trade without free movement of people, the UK would have a very heavy price to pay, for example a substantial budgetary contribution that the Brexiteers will be loath to accept. Theresa May’s decision to trigger Article 50 by end March 2017 – before next year’s French and German elections – ratchets up the costs even before the UK sets out what it wants.
At the end of the two year negotiating period, if there is no agreement, the guillotine falls, and the UK is “out” with no deal, and will be reliant only on WTO conditions for trade (i.e. with tariff barriers). As the clock ticks and approaches the two-year limit, one can anticipate hard bargaining over the conditions for tariff-free market access. Who will blink first? The hard Brexiteers seem to believe that it will be the EU – that its bottom-line position will be to agree to tariff-free trade “because it is in their interests”.
If this is what they believe, they are making a colossal miscalculation. Rule number one for the negotiator is to read correctly the likely bottom-line position of the other side. If Britain’s negotiators continue to misread the situation, the EU will be willing to walk away after two years and let the guillotine fall.
The UK’s position so far is only talk, and so there is still a little time to craft a real negotiating strategy that would be less disastrous for the economy. This could mean aiming at a deep and comprehensive association agreement with maximum single market inclusion alongside a “safeguard” mechanism to give some control of immigration; or is that were too complicated, there could be the simpler option to remain in the customs union. But it is far from clear if either would be negotiable.
If a hard Brexit looms as the only feasible scenario, it is better for that to become clear as soon as possible, so that its true consequences can be better understood and fully factored into financial markets. And then that has to sink into the political debate. After all, the referendum was not a vote for a hard Brexit.