Hard Brexit: Should the UK Consider it?
- Wednesday, 22nd February 2017
This article was written for and published by Der Tagesspiegel.
Britain would prefer to negotiate a free trade agreement with the EU27 – to continue trade without tariffs or new non-tariff barriers. That would be in our mutual interest. The EU is our biggest market. The UK is also the biggest market for the EU – bigger even than the US with whom the EU has been struggling to negotiate a trade deal. And the EU has a huge trade surplus with the UK. It would be simple to negotiate since to go from zero tariffs to zero tariffs is infinitely easier than negotiating removal of tariffs.
However, we recognize that for the EU politics may outweigh economics. It may be more important to deter other countries from following our example. In which case there will be no free trade agreement and we will trade with each other on Most Favoured Nation terms with no discrimination under World Trade Organisation rules.
It is important to recognize that if there is no deal and we trade with the EU on Most Favoured Nation terms the UK will be better off than if we had voted to remain.
- The MFN tariffs on our goods would average just 4%. Yet our current net budgetary contribution to the EU is equivalent to a tariff of 7%. To go on paying a premium of 7% to avoid a cost of 4% would be irrational!
- The change in Sterling against the Euro means our exporters are 15% more competitive than a year ago, so an average 4% tariff is relatively minor.
- Under WTO rules we can remit tariffs on imported components incorporated into exports - reducing the impact of tariffs on complex supply chains.
- The British Treasury will receive £12.3 billion in tariffs on imports from the EU; but our exports will bear only £6.5 billion in EU tariffs – since we export far less and import high tariff goods. So we can compensate (via increased research grants, marketing support and lower taxes) companies facing high tariffs (like our car manufacturers) for whom the 15% exchange rate advantage is insufficient.
- We can negotiate Free Trade Agreements with the rest of the world with whom we do the majority of our trade. The share of our exports going to the EU is falling fast – it was 54% in 2000, is now 43% and likely to fall to 30% by 2030 even without new trade deals.
- We will be able to reduce the burden of EU regulation particularly on companies who do not export to the EU.
- We can abolish high tariffs we will inherit from the EU on food, clothing and other items which we do not produce – helping low income households who currently paying high prices to support uncompetitive EU producers.
- We will save £250 million net per week when our net budgetary contribution ceases. So each week's delay costs the UK £250 million.
Financial and other services, are a major part of Britain's exports. They are not subject to tariffs. However, it has been suggested that the City of London would be seriously hit if they lost ‘passporting' rights - which give companies the right to trade in other EU countries directly or via a branch without setting up a subsidiary and subject to supervision only by their home-country regulator.
That is an advantage but not a necessity. Trade in financial services did, does and will take place without passporting rights. Remember that:
- The City traded extensively with European customers before passports were introduced.
- Since passports were introduced our financial services exports have grown less rapidly to the EU than to the rest of the world.
- The majority of our exports of financial services are outside Europe to countries where passports do not exist.
Most City firms now assume that passporting will cease. Some will set up a subsidiary on the continent or seek authorizations for existing subsidiaries to provide additional services. This will sometimes involve transferring staff from London to meet local regulatory requirements. This is not the end of the world. Some 10,000 Brits work in Hong Kong and many more in New York. No one claims that has weakened the City – on the contrary, subsidiaries in those countries generate enormous flows of business to London.
Passporting, equivalence, or third country regimes are all desirable – but not essential. In the words of one City grandee: "the City always massively overestimates the impact of prospective regulatory changes". Our financial services companies are immensely skilled at exploiting whatever opportunities regulations open up or fail to close!
8,000 EU companies have passports to trade in the UK versus 5,000 UK firms with passports to the EU. Trade in services, like all trade, is mutually beneficial. So European companies would lose from any steps the EU27 may take to hinder trade with the City. Indeed, it would be very difficult to restrict financial transactions between European companies and the City without undermining the convertibility of the Euro and cutting the EU off from other world capital markets as well as London.
Even with no deal the UK will be better off out.
Hard Brexit: Should the UK Consider it?
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