The “Trade Embargo” strawman

The various Leave groups regularly portray the Remain concerns on exiting the EU Single Market as the EU and the UK engaging in some sort of Trade War or Trade Embargo. The argument goes that German companies such as BMW will keep trading with the UK as they sell a lot of cars here. Of course they do and will. This is a strawman argument. What Leave are doing is conflating three distinct ideas: Trade; Free Trade; and The Single Market. Moreover, if the current trade imbalance with the EU was not enough to get the concessions Eurosceptics wanted as a member of the EU, what makes them think it would get the EU “falling over themselves” to give a better deal to a nation that voluntarily left?

The debate is not whether (illegal under international law) embargoes of trade are imposed but on what terms that trade takes place. There are only a limited set of options.For those wishing to remain in the EU Single Market (which various Leave leaders such as Lawson, Boris Johnson, Farage have rejected) there are a couple of options: the “Norway” option and the “Swiss” option. Both involve maintaining EU freedom of movement, contribution to the EU budget, and having some large part of EU law imposed. Leave.EU and Grassroots Out have ruled out these options (indeed Nigel Farage did so very publicly on Channel4 News on 22nd February, Boris Johnson on various occasions and Nigel Lawson, on behalf of Vote Leave, on the Andrew Marr show on 10th April). Economists for Brexit advocate a WTO deal.

If we are not to be part of the EU Single Market then the default position is that UK-EU trade is regulated by the World Trade Organisation agreements. That requires that the EU and UK impose (indeed must impose) tariffs on each others imports. Whilst most believe this is undesirable they have no choice. Far from being an “embargo” this is how international trade rules operate. This will require import tariffs of 5%, 10% or even 30% on some commodities as well as a whole raft of non-tariff barriers. Unless some other agreement is negotiated, this is what must happen. The EU and UK cannot waive these rules for each other without opening themselves up to all other WTO members demanding the same treatment. Whilst that may well be a desirable outcome from free  traders, it won’t happen without multi-lateral agreement.

The other option is for the EU and UK to negotiate a Free Trade Agreement and one tailored to UK circumstances. This is the most likely option in the event of BrExit but it cannot be assumed. It requires unanimous agreement from each of the remaining 27 EU states (quite a few of whom have balance of payment deficit with the UK, most of whom won’t want to concede an agreement covering Services (which is especially dependent on Freedom of Movement), and a few who’ll be quite happy to let the UK be “punished” for leaving). In the best case outcome, an FTA will take a couple of years minimum to negotiate (Canada’s has taken 7 years and is still not ratified), will only cover manufactured products, will not remove many non-tariff barriers and will not exempt UK imports to the EU from customs and other formalities (eg Rule of Origin) that the Single Market exempts us from now. In the Single Market the presumption is that the products of each member conform to EU standards. With an FTA or WTO option the exporting state has to be able to demonstrate their products conform to EU rules. In the event of (say) a work to rule by French Customs one can expect each lorry has to be able to demonstrate that, adding costs and delays to that trade. Whilst Boris Johnson might think the rest of the EU will be “falling over themselves” to make a deal, most serious commentators think this very unlikely. What we can be certain of is that if you quit a club, stop paying your fees, and stop obeying the club rules, you don’t get handed a free platinum membership!

Contrary to the rather simplistic views of many “Leavers” an FTA is not a simple two clause legal agreement: “We agree to allow you to sell anything you produce in our country; You agree to allow us to sell anything we produce in your country”. Each clause introduces lots of special cases and exemptions largely designed to protect indigenous producers from competition whilst the other party aims to reduce barriers to its exports whilst keeping them on imports. That’s why they take years to agree and don’t provide the benefits anticipated. For an already pretty open economy like the UK, there isn’t that much leverage it has hence leveraging the power of a 500 million consumer market has lots of advantages.

So, whilst there won’t be a trade embargo there will be impediments to trade: some small, most costly. For businesses that are part of a pan-EU supply chain, the costs and delays of those impediments could be substantial unless offset by some other gain (eg a collapse of Sterling or big productivity improvements by UK employees). For high profit margin, high value manufacturers (Rolls Royce, JLR and Aston Martin cars; Rolls Royce Aero engines; JCB etc) the issues may not be great and will probably be containable. For low profit margin, high volume businesses they will be profound and directly impact their competitiveness. The result will be fewer manufacturing jobs in the UK, lower inward investment and higher prices and less choice for UK consumers. UK consumers may well be prepared to pay 10% more for a BMW or Mercedes, but will EU citizens be prepared to do that for a Honda, Toyota or Nissan?

To repeat: the trade embargo argument is a strawman. It is a convenient device for the various Leave Groups to deflect attention from what they mean by Leave.They need to come clean. Trade will continue; Free Trade will only be possible if we reach an agreement with the EU; Single Market access will only be possible if we conform to the conditions that most BrExiters don’t want to agree to.

There are circumstances in which a “trade war” with the EU could break out. Should British businesses radically reduce the working conditions of their staff (less H&S,  longer working hours, fewer holidays, fewer social regulations) to gain a competitive advantage then one can expect the EU and EU countries to respond by limiting imports. If the UK were  to decide to repeal key environmental legislation and as a result abrogate its obligations on climate change, pollution etc then one can reasonably expect the EU to respond against Britain. On these the various Leave groups are in disarray. The more Libertarian elements want less regulation. Others want protectionism and will retain such regulations.

The UK Treasury published a report on the economic costs of these various options on April 18th.

Here’s a summary of the main BrExit options:

See also:

Geo-Strategic Reasons for EU Membership

Geo-Political Considerations

What is meant by “Leave” the EU?

Analyses of Brexit Options

EU Laws: Are they really “pointless rules and regulation”?

Reciprocity: a glass half full or half empty?

Is the EU really undemocratic?

EU Cost of Membership

Implications for exPat Brits

Will we save money by leaving? The cost of EU Membership

Some tiresome arguments from BrExit advocates

It’s such an easy decision to leave, right?

Was Cameron shafted in the renegotiations?

Commentary on Gove’s BrExit statement

Does BrExit solve the migration crisis for the UK?

Boris at the Treasury Select Committee

Is it really Project Fear?

The Trade Embargo Strawman

The Government’s pro-Remain Leaflet

Summary of Brexit Alternatives