This is what would actually happen if we implemented the Brexit economic plans suggested by politicians

The Independent’s Economics Editor takes us through the implications of leaving the single market, exiting the customs union, abandoning negotiations and introducing unilateral free trade – warning: it’s not pretty 

Ben Chu
Sunday 11 September 2016 11:45
Comments
Wetherspoons pub chain founder Tim Martin has been calling for the UK to lift all tariff barriers
Wetherspoons pub chain founder Tim Martin has been calling for the UK to lift all tariff barriers

Are the economic trade-offs involved in Brexit finally being acknowledged? In one limited sense, the answer is yes.

Politicians and commentators seem to be facing up to the reality that the UK will not be able to both impose curbs on the free movement of European citizens into Britain, and also enjoy continued membership of the single market.

The rest of Europe (for reasons of self-preservation) simply will not allow it. There will have to be a choice made by the UK.

Yet other trade-offs and the serious economic consequences arising from certain policy choices are still not being recognised.

Ministers and senior pro-Brexit figures have mooted and recommended various positions and courses of action in recent weeks. Yet they are not being required to defend the economic implications that would almost certainly flow from them. In short –- they’re getting away with it.

Here are some examples.

Leave the single market

David Davis, the Brexit secretary, told the House of Commons last week that it was “very improbable” the UK will remain a member of the single market.

Let’s spell out the consequences: Leaving the single market would very likely end the rights of all UK-based services firms to sell into European markets without discrimination or having to face local regulatory barriers.

Donald Tusk asks Theresa May to start Brexit process 'as soon as possible'

In particular it would mean financial firms based in London would lose their “passport” to sell services across the bloc. Many have made it clear they will move their European headquarters out of the UK capital if this happens, taking jobs with them. Leaving the single market will also almost certainly mean that the euro-denominated derivatives clearing trade will be forced to move from London into a location in the EU, again costing jobs in the City.

This matters for our balance of payments too. Financial services accounted for around a third of the UK’s £90bn of services exports to the EU in 2015. And our surplus on EU financial services trade accounted for a quarter of our entire services export surplus last year. If Britain’s traditional services surplus gets eroded our already ominously large current account deficit threatens to yawn even wider.

If Davis thinks single market membership is “improbable” it means these negative economic outcomes for the UK are all probable.

Quit the EU’s Customs Union

This was recommended by the International Trade Secretary Liam Fox in July, when he realised that remaining in the single market customs union would prevent him from striking new bilateral trade deals with other states such as Australia and Canada.

But, again, let’s be very clear about the consequences.

Even if the UK negotiated a comprehensive free trade deal with the rest of the EU that dismantled all goods tariffs, leaving the customs union would still necessitate costly customs checks on all British goods entering the single market.

Moreover, Dublin would need to impose customs checks on goods entering its territory from Northern Ireland – something that would seriously risk unpicking the peace process.

The UK and Ireland might both be willing to forgo customs checks and they might even be able to agree a free travel agreement, but this isn’t just about our two governments. The rest of Europe could not allow Ireland to compromise the integrity of the single market by allowing goods imports into Ireland from Britain unchecked.

Depart the EU with no negotiations

This is something that Tory backbenchers such as John Redwood have been pressing for, arguing that the Government should simply ignore the Article 50 exit procedure. Rather than getting bogged down talking to other European governments, they say, Britain should unilaterally withdraw and only after that offer to begin discussions with the EU about a trade deal.

But let’s think through the consequences.

Unilateral withdrawal would take British exporters over a cliff. They would have no idea of the potential future costs of doing trade with the EU, our biggest single trading partner. On top of this, the UK would also instantly fall out of the coverage of the 60 or so free trade agreements between the EU and the rest of the world.

Such a leap into the dark would result in a major hit to domestic investment and pre-emptive action by foreign firms to shift operations out of the UK.

Unilaterally lift all UK tariff barriers

The former Chancellor Nigel Lawson, the “Economists for Brexit” group and even the JD Wetherspoons pub chain founder Tim Martin have been pushing for this, arguing that the Government should not even bother trying to strike a special trade deal with Europe.

They argue instead that the UK should simply scrap all tariffs on goods and services imports from anywhere else in the world and export to others under the basic World Trade Organisation rules.

The economic implications of this would be enormous.

British car exporters to Europe would instantly face the EU’s 10 per cent import tariff on motor vehicles. And UK manufacturing firms would be engulfed in a tidal wave of ultra-cheap competing imports from the developing world, not least Chinese state-subsidised steel.

The consequences for UK manufacturing would be devastating.

So, as a simple rule of thumb, when you hear “leave the single market” think about the hollowing out of the UK’s financial services industry and our services balance of payments surplus. When you hear “leave the customs union” think Northern Irish customs checks. When you hear “no negotiations” think of business panic. And when you hear “unilateral free trade” think of the total collapse of what is left of the steel industry and a 10 per cent tariff on car exports.

If such consequences are a price that Brexit ministers and leading figures in the movement believe are worth paying for the benefits they see let them argue that – or let them tell us how the pain would be mitigated. But at the moment they are getting a free pass.

We are force fed the tautology “Brexit means Brexit” by Theresa May whenever the Prime Minister is asked what Britain’s future relations with the rest of Europe will look like. It is difficult to blame her. This isn’t a hand she wanted to play and she wants to keep her options as open as possible and for as long as possible.

Yet we shouldn’t be tolerant with the dyed-in-the-wool Brexiteers. They (or at least some of them) have real power and influence now. It’s time for them to face some real accountability too.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in