• The Invisible Hand

The different shades of Brexit

With B-day approaching, this post examines the different types of relationship Britain may have with the EU.

OUR CURRENT RELATIONSHIP

The UK is currently a full member of the EU, having adopted the Maastricht Treaty in 1993. Originally we were not part of the Eurozone and didn’t accept the social contract, but since 1997 the only major difference with other members is not having the euro. The main economic benefit of EU membership is the elimination of trade barriers. Economists since Adam Smith and David Ricardo have acknowledged the significant impact free trade can have on economic growth because it allows a country to specialise in what it is best at. However, membership of the EU extends beyond this because we are also part of the common market which means that there is free movement of capital and labour across borders. Although the lack of migration control is fiercely opposed by many on the right, undoubtedly this enhanced integration has made doing business easier in the UK and it has allowed the UK to access the labour force it needs to maintain its public services and increase economic growth. A common market also requires regulatory alignment so no border checks concerning regulation are required and goods are truly free to be transported.


However, there are a few significant problems with full EU membership. Most people are probably aware of the significant annual contributions we have to make to the EU in addition to our lack of sovereignty over EU legislation. However, probably the most significant limitation to economic growth is the customs union. A customs union has a common external tariff to prevent non-EU countries importing goods to one EU country where national tariffs are lower and then, once their goods are inside the EU, exporting them with no tariffs to their intended destination. For the UK, this makes it much harder to make trade deals with other countries. Perhaps with Brexit we will be able to trade more with non-EU countries. However, Brexit supporters forget that the EU is by far our biggest trade partner mainly because it is the closest and largest market. Although this is an impossible relationship with the EU to maintain if we fulfil the Brexit vote, it is important to outline our current position to understand how our relationship will change.


The major different types of deal we could adopt, starting from softest to hardest are: Norway, Switzerland, Canada, Turkey and adopting WTO rules. No country can be used to describe the final category because there is no country in the world that only trades on WTO rules.


NORWAY

A Norway deal would be effectively a painful admission that we have made the wrong decision and want to lessen the damage of Brexit. We would have technically fulfilled the Brexit vote by leaving the EU, but we would really still be part of the EU in everything but name. We would be members of the EEA and EFTA which still grants us access to the free market and common market. We would get no control over immigration or regulation. We would even have to keep making EU contributions. The main difference from our previous membership structure would be that we would sacrifice the significant influence we wielded in Europe. True, we may be able to escape the Common Agricultural Policy and Common Fisheries Policy, but this is not worth sacrificing our influence in Europe. We may as well stay in the EU if we adopt this deal.


SWITZERLAND

A Switzerland style deal would be a more radical step. We would benefit from smaller financial contributions, freedom from EU laws and have the ability to make trade deals with non-EU countries as we would no longer be part of the EU. Furthermore, we would still benefit from no tariff trade with the EU. The common market position is more complicated because it still exists but we would have reduced single market access. This means we still won’t be able to control migration and the financial sector in particular may suffer from a lack of full integration with the EU. This seems to be a better way of reflecting the Brexit vote because the main benefit is the ability to make trade deals with any countries in the world. However, our economy would take more of a blow over restricted access to the common market.


CANADA

As you might expect with Canada being a long way from Europe, this deal is quite different to what full EU members get. The big step up from the Switzerland deal is that we would be completely separate from the single market and our contributions would be substantially smaller. This is effectively a free trade deal because most tariffs are removed and there is no economic integration. For the first time we would have the ability to control migration and we would be completely independent of EU legislation. This is probably what most Brexit supporters are aiming for. But for the first time the Irish border suddenly becomes a problem because under this deal there would have to be a hard border in Northern Ireland. It also sacrifices the important benefits of the common market and it wouldn’t provide the same level of free trade as the UK currently has.


TURKEY

A Turkey deal is very similar to a Canada deal except instead of a free trade deal with the EU, we would be part of a customs union. Unlike a free trade deal all trade barriers would be eliminated so we would have completely free trade (unless some items were excluded). This would benefit the UK because we would have easier trade with the EU, but we would be excluded from the common market and we would be unable to make trade deals with other countries because a customs union involves a common external tariff.


WTO

This is the catastrophic no-deal situation in which the Bank of England predicts GDP could decline by 8%. With new regulations and tariffs placed on goods overnight some UK businesses simply won’t be able to trade with the EU so lost revenue may force them to close which will have a knock-on effect on unemployment. There is also an issue with our ability to import goods from the EU which has prompted fears of shortages and has led to the government stockpiling medical supplies. Over time we may recover and make deals with the EU and other countries, but this scenario should not be seriously considered by any economist and if we are to leave we must make a transitioned divorce.


Overall, it does appear the UK has some options. Some of the leave scenarios are not catastrophic. For example, a Switzerland deal could open up free trade opportunities with other countries. Yet we need to remember we cannot just decide what terms we will leave the EU on and the difficulty is getting Europe and parliament to agree on a deal as Theresa May is discovering. If this does not happen then unfortunately, we may be left with the ‘Doomsday’ situation of a no deal Brexit. Politicians should be doing everything to avoid this even if it means accepting a softer or harder Brexit than they would have ideally wanted. Too many people are full of dreams of an unrealistic Brexit and we must accept our current situation as an emergency and take the best available lifeboat.




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