How bright are the prospects for UK trade and prosperity post-Brexit, following the UK's departure from the European Union? The short answer is that they will be inversely related to the size of the tariffs on international trade that the UK itself sets after Brexit. But both the question and answer can only be fully understood after considering two sets of costs: those of remaining in the European Union and those of leaving it. Once we have answered these questions, we can examine the different possible future trading relationships with both the EU and rest of the world. We end by examining the costs and benefits of trading on World Trade Organisation (WTO) terms or what has become known as the "no deal" option.
1. The Costs of Remaining in the EU
The EU has created the illusion that it is simultaneously both a worker's paradise--given the social protections it guarantees to workers--and a capitalist's heaven--given how effectively businesses can lobby Brussels to raise barriers against imports from outside the EU. (1) It even claims that it has brought lasting peace to Europe after centuries of conflict, whereas it is NATO that has a much greater entitlement to this claim. So successful has the EU been in perpetrating this myth that it won the Nobel Peace Prize in 2012. The reality is rather different. The costs of remaining in the EU are very high and they are not all purely economic. We discuss ten key costs.
1.1 The EU is a fundamentally protectionist trading bloc
First, the EU is a fundamentally protectionist trading bloc. Big business lobbies Brussels for more regulations to make it more difficult for small companies to enter the market and compete--whether these companies come from the EU or not. (2) There is also the Common Commercial Policy which prohibits member states from negotiating separate trading agreements with other countries.
The Customs Union, to which all EU member states belong, imposes the Common External Tariff, covering more than 13,000 imported goods, while allowing tariff-free trade between member states. While the trade-weighted average EU tariff for non-agricultural products is quite low at around 2.7% for non-agricultural products, it is higher for agricultural products at 8.1%. (3) For certain agricultural products, it is very high as Table 1 shows. It is also high for cars at 10%.
As a result of these tariffs, EU consumers are paying an average of 17% above world prices on food. (4) One example of this is tuna from the Maldives which attracts a 24% tariff, but is tariff free if it is destined for processing in the EU, thereby allowing European manufacturers to capture the bulk of the value added of this import from a developing country. (5) Another is cocoa: "While the import duties for unprocessed cocoa beans is rather small, the EU charges 30% for processed cocoa products like chocolate bars or cocoa powder, and 60% for some other refined products containing cocoa." (6,) (7)
There are also significant non-tariff barriers (NTBs), also known as technical barriers to trade (TBT). (8) These are often justified on environmental or health and safety grounds in line with the EU's "precautionary principle," (9) but are in reality mostly just forms of protectionism and market distortion. One example of this is the ban on Basmati rice from India due to concerns about pesticides and residues that can be barely measured scientifically. Another is the General Data Protection Regulation which prevented services involving data flow being included in the trade deal with Canada. Shanker Singham (10) argues that "more and more EU regulation is prescriptive and anti-competitive in nature. The EU will not grow vibrantly but will continue to destroy wealth for its own citizens and also for the rest of the world. The EU is therefore no longer a force for global liberalisation." (11, 12)
It is also very important to note that NTBs are illegal under World Trade Organisation rules which forbid any form of discrimination on standards between home and foreign products or between the foreign products of different countries. (13) The same applies to services. (14) Dyson--which manufactures its products in Asia--has won a case in the Court of Justice of the European Union (CJEU) (15) against the EU Commission by successfully arguing that EU energy labelling regulations were based on tests which favoured German manufacturers. (16)
Then there is the Single Market (17) which is claimed to be the jewel in the crown of the EU with its four freedoms of movement--of goods, services, capital and people. But the Single Market is not a free trade area, rather it is a single protectionist zone where regulations are harmonised and all goods and services produced must satisfy these regulations whether or not they are sold in other member states. Only 6% of UK companies export to the EU--accounting for 13.8% of GDP in 2018 (18)--yet 100% of UK regulations are determined in Brussels, including for the 94% of UK companies that do not trade with the EU. (19, 20)
The UK, in particular, has seen little economic benefit from the Single Market. (21) Table 2 shows the compound annual growth rate (CAGR) of UK goods exports to the 14 original members (EU14) of the Single Market from 1999 to 2018. Column 1 shows the real CAGR (inflation adjusted to 2016 GDP) of UK exports to the EU14 was 0.56%. (22) For eight of the EU14 states, UK goods exports to them have declined in real terms over these two decades rather than grown. The third column shows that the cumulative trade deficit was [pounds sterling]740.35bn.
By contrast, UK goods exports to the 14 leading countries (denoted WTO14) that the UK trades with on WTO terms--meaning in the absence of a preferential trade agreement--had a CAGR of 3.58%, (23) compared with 0.56% for the EU14: they grew more than six times faster between 1999 and 2018.
One explanation frequently offered for why UK trade with the rest of the world (ROW) has grown at a faster rate than UK trade with the EU is that the ROW's economies have grown at a faster rate over the last 20 years. The aggregate CAGR of the GDP of the WTO14 was 3.53% between 1999 and 2018. (24) This is indeed significantly higher than the 1.45% GDP CAGR of the EU14. (25)
Column 2 of Table 2 shows the CAGRs of the UK exports to the EU14 compared with the CAGR of their GDP. The growth of UK goods exports to the EU14 over these two decades was below the growth of the GDP of them all, except for the Netherlands. (26) This is reinforced by the trade figures for 2019. UK goods exports to non-EU countries increased by 13.6% over 2018 to [pounds sterling]201.5bn, while UK goods exports to the EU fell by 0.9% to [pounds sterling]170.6bn. (27) The UK trades on WTO terms with some key non-EU countries, including the US (the UK's biggest single trading partner), China (the UK's third biggest trading partner after Germany), Japan, Canada, Australia, India and Brazil. Despite this, UK trade with these countries has grown at a faster rate than with the EU where trade is supposed to be "frictionless." Further, Table 3 shows that the UK mostly has a trade surplus with non-EU countries--contrasting with the trade deficits shown in Table 2.
This helps to explain why UK exports to the EU have fallen from 60% of the total to 45% since the Single Market was introduced. Goods exports to the EU are 50% of total exports, amounting to 8.1% of GDP. Services account for 80% of the UK economy, but only 40% of the UK's service exports (28) go to the EU, (29) amounting to just 5.7% of GDP. The result was a [pounds sterling]28bn services surplus but a [pounds sterling]94bn goods deficit with the EU, leaving an overall [pounds sterling]66bn trade deficit in 2018. (30) In 2019, the EU27 had an even bigger trade surplus of [euro]125bn with the UK: this is 62% of the EU27's total global trade surplus in goods last year. (31) The UK will account for around 40% of EU exports to the rest of the world in 2020. (32)
Even strong supporters of the EU concede that the Single Market is "not visible in the macro statistics.... the data are telling us a different story--that the Single Market is a giant economic non-event, for both the EU and the UK." (33) Fredrik Erixon and Rosita Georgieva go further:
New initiatives to reform the Single Market are often presented as initiatives to 'complete the Single Market.' However, they have all fallen substantially short on that ambition, and Europe is far away from having a Single Market. In fact, it is further away from it now than ten years ago. The European economy has undergone profound structural changes, and as the economy has shifted profile, it has moved further into sectors and areas where there is very little of the Single Market. The more Europe's economy grows dependent on services and the digital sector, the less Single Market there will be in Europe. Arguably, the piecemeal approach has prevented Europe from reaping the gains of structural change, and the relative policy conditions between sectors have damaged Europe's desire to grow faster on the back of new sectors and services. The failings of Europe's Single Market are becoming ever more evident and, left unaddressed, will cause real economic disintegration in Europe and depress the rates of productivity and economic growth. Furthermore, given the vast complexity of regulations in Europe, and the increasing layers of bureaucracy they entail, it is difficult to see how improvements could be made without a vast overhaul of the structure of regulations and the design of the Single Market. And such a reform has to start from a completely different proposition: Europe's ambition should not be to continue building its Single Market, it should be to create a European market. As reforms are moving closer to areas like digital services, energy, and advanced business services, it is evident that the improvements that can be made in Europe's integration is less about...