The Guardian’s pic of British and EU flags
As you’re no doubt aware, there’s going to be a referendum on the UK’s membership of the European Union (EU) sometime between now and the end of 2017. Europe has always been an important and emotive topic, now as much as ever. We will, of course, spend time thinking about the issues surrounding any UK exit, or “Brexit” as it’s commonly dubbed, in the Spring – it’s a huge macroeconomic issue.
Those who suggest we ought to leave argue that the economy – the macroeconomy – would function much more effectively outside the EU. Our firms would be freed from red tape, our energy would be cheaper, we could sign our own trade deals and just more generally, do what we like. Of course, that “we” is very much the subset of us that thinks we should leave, but even then there is disagreement on what being outside the EU would look like. Would it mean we look like Switzerland (with its similarly bank-heavy economy, as Vince Cable pointed out last night), or Norway? Or even Turkey?
One of the planks of this argument though is being able to direct our own trade policy – who we have free trade agreements (FTAs) with, mainly. At the moment, trade deals are negotiated and signed at EU level, since the EU is a customs union where within the union no tariffs are levied on traded goods, but outside it a common external tariff (CET) is applied.
What would directing our own trade policy look like? Practically, the first step would be to negotiate all the FTAs we need with countries we currently have FTAs with, unless we want to increase the costs of trading for our firms. This is a non-trivial undertaking of a lot of diplomatic resources; FTAs aren’t agreed and signed overnight. Clearly a great expense of government resource, which would have to take place in the period after any Brexit vote and when we actually leave.
This first step, however, is made all the more fraught when we think that actually, those potential trade partners also have to stump up a load of their own diplomatic resources to negotiate these extra trade deals which while the UK was in the EU, weren’t necessary. Why would they be willing to do this? What if they are a big country whose share of trade with the UK is small, while at the same time the share of our trade with them was large? Like, say, the USA?
The news today is that a senior US trade official (it’s hard to imagine such an official being permitted to speak to the media without the consent of his/her superiors) has said that the US probably wouldn’t be particularly willing, if push came to shove, and that in reality, the UK would have to join at the back of the queue.
Those favouring Brexit like to point out that it seems likely a number of EU countries would wish to sign FTAs with the UK since they export more to us than we export to them (Germany being the prime example). Again, though, this does rely on that proportion of their trade being sufficiently large that it warrants the expense of resources necessary. From here we find that the UK accounts for about 6% of all German trade, below France, the Netherlands, China and the US, and 7% of all German exports. Not trivial, by any stretch – but essential? The Germans may be first in the line to negotiate a trade deal, but they may also not be: there’s a huge, vast amount of uncertainty surrounding the various building blocks required for the UK to succeed outside the EU.