Negotiations between the UK and EU appear to be on the point of breaking down and it is reported that the British now expect to exit the Single Market at the end of 2020 with no FTA with the EU ready to apply thereafter. No surprise, really.
Ever since the EU referendum, the EU has loudly and repeatedly emphasised it has no interest in doing any form of sovereign FTA. We should not be offended. It’s up to the EU whom it does deals with. If it does not want to do a deal with the UK, that is its affair.
The UK’s position is very clear. We are only interested in doing any form of free trade agreement (FTA) with the EU if it is a sovereign FTA where the UK makes its own laws instead of being subject to EU laws or to EU court determinations.
There is nothing strange about the UK position. Developed countries enter into free trade agreements with each other all the time without subjecting themselves to the laws or courts of their trade partner. The UK seeks only the sort of FTA that is made by Australia, New Zealand, Canada, Singapore, Japan, Korea and many similar countries all the time.
Often, of course, free trade talks break down. For countries to maintain their sovereignty they have to be willing to say no and prove it by walking away. Often trade talks restart within a few years and eventually a deal is done. That will probably be what happens with the EU, also.
It’s possible that the EU will panic and buckle when it realises the UK is indeed prepared to walk away, as it did at the end of 2019. The EU has already given up on its most egregious sovereignty-impinging demands (which related to State Aid). Perhaps it will suddenly see the merit in a more widespread capitulation.
Of course, by then it might well be too late. The UK is already largely emotionally reconciled to there being no EU-UK FTA. With the Covid-19 crisis, life is already so disrupted that we may not really notice the additional blip of leaving the Single Market with no FTA. It will be be very challenging to assess robustly how much of any short-term GDP changes there are in early 2021 are Covid-19 recession-related as versus Single Market leaving-related.
Furthermore, the UK negotiators may well feel that international developments over the next few years will strengthen their hand, so they may get a better deal from the EU in, say, 2023 than they would in 2020, anyway. With the combination of the Covid-19 crisis, Hong Kong and its Indian border conflict making China increasingly internationally isolated, there is a good chance that China’s role in world trade could diminish over the next few years.
The EU-China relationship is a particularly important one, economically. A diminished role for China in the world economy would leave the EU trading more with the non-Chinese world. That might be other East Asian economies. But it might well, instead, transpire that it is the UK, US and the wider Anglosphere including Australia and Canada that in fact increase in trading importance.
That means the EU may find that within a few short years, it becomes more valuable to it to have a trade deal with the UK. A deal done later may well be a better deal for the UK than one done now – even if the EU were to capitulate on the current sticking-points.
In the meantime, how bad might it be to have no deal? Under current world trade rules, the main long-term gain from doing a bilateral FTA is the ability to set lower barriers to the FTA partner than to other countries – for example, if we wanted to keep US or Japanese products out of Britain but let in EU ones. The UK, however, has a tradition of having low import barriers overall.
We probably don’t particularly want to make it easier to let in EU products than products from Australia, Japan or Brazil (even absent bilateral FTAs with those countries). So for us the longer-term benefits of an EU-UK FTA are fairly low, probably mainly lying in reduced disruption to supply chains and to our exports as our exporters adjusted to selling elsewhere in the world instead of to the EU.
The EU, however, has a tradition of imposing higher barriers on imports from the non-European world. It probably wants to impose lower barriers on imports from the UK than on imports from the US (say). So its consumers may lose out more, in the short-term, through the absence of a UK-EU FTA.
The exporter/producer side of trade deals is less important (though tends to be discussed much more, through special pleading). Here there is one key fact: the EU exports a lot more to the UK than the UK does to the EU. So if there were to be significant two-way barriers to exports it is the EU that would suffer more and the EU that would therefore be more eager to return to the table in 2023 or 2024 to try again.
The EU-UK trade talks appear to be on the point of collapse. Perhaps the EU will buckle, but if it does not, no worries. And within a few years, there will be a new trade deal either way.
Andrew Lilico is a reporter for the Telegraph.
Source: The Telegraph