12 Dec

'No deal need not be a disaster' Alexander Downer, The Spectator

Spare a thought for us foreigners. We’re desperately trying to understand the meaning of the Brexit arguments being thrown around in the House of Commons. We all have our own countries too, so we view those arguments through the lens of our homelands. So here are a few reflections on how we react. 

Theresa May’s deal has the UK leaving the voting structures of the EU but remaining in the Customs Union until the EU gives the UK permission to leave. Australia and New Zealand have a free trade agreement and co-ordinate their regulatory regimes through a joint council. But they certainly don’t have a customs union otherwise neither country would be able to make its own trade policy. And more than that, if they did have a Customs Union it would be unimaginable that either of those proud countries would allow the other unilaterally to make its trade policy for it.

Yet it seems to me that’s what will happen to the UK. Under the May agreement, the UK will leave all the voting structures of the EU but allow the EU to make the UK’s trade policy, until the EU says so. This might well be the day all the hydrogen in the sun burns up!

Secondly, this seems to have come about because of a desire to keep the Irish border a free and open border. Now here’s a question: Who was planning to shut the border and set up border posts? Not the British government and I understand the Irish government has always insisted it wouldn’t build border posts either. But if the Irish government did build border posts and the British government didn’t, then the Irish government would get a political bloody nose from Irish voters.

 

So it doesn’t in reality seem the Irish government and the EU on its behalf have much negotiating clout. The UK could crash out of the EU without an agreement and what would happen to the border then? In reality, probably not much.

And this takes me to my third point; crashing out. Surely it would be best to retain tariff and quota free trade between the UK and the EU – that’s what there is already. That can only be achieved if both sides agree to that. But if the UK and the EU can’t agree then the trade relationship reverts to WTO rules. Many say this would be “disastrous” or “catastrophic”. Really?

Most of the world trade in the main according to WTO rules. Australia has several trade agreements but more generally it operates according to the WTO. That means there are some tariffs and quotas which inhibit exports but Australia can decide on its own import rules. Indeed, Australia has unilaterally reduced tariffs over the last three decades bringing in imports more cheaply than was the case when there were tariffs and quotas. Australia isn’t in the EU and it gets by.

For the UK, goods and services exported by British companies is the equivalent of around 30 per cent of GDP. Since trade with the EU is around 40 per cent of the UK’s trade, then trade with the EU as a proportion of GDP is about 12 per cent. So when debates in the House of Commons rage about trade with the EU, remember, they’re only talking about 12 per cent of GDP. Around half of that is imports. The UK could control its tariffs on imports – the higher the tariff the more it would damage the UK economy. So to minimise damage to the economy, the UK could import tariff free if it wanted to.

So that leads to EU tariffs on British exports. The average EU tariff on non-agricultural imports is around 2.5 per cent. In aggregate, that won’t matter much but there are higher tariffs on specific sectors. For example, the EU tariff on cars is 10 per cent.

So looked at from the perspective of a foreigner, it’s hard to believe tariffs on some UK exports to the EU is going to wreck the economy. Sure, it would hit some sectors hard, particularly certain agricultural products, but the overall impact, whilst negative, would have very little effect on British exports to the EU.

I’ve noticed MPs claiming that British trade with the EU outside of a Customs Union would mean huge delays at Dover and other ports. Well, all of Australia’s trade is outside of a Customs Union; all of it. We don’t have huge queues at our ports. Nor does the UK at ports which trade with non-EU countries like America. To the outsider familiar with trade policy, the story about the M20 being turned into a parking lot sounds like a childish scare campaign.

Now that’s what we think about the economic debate. As for the official forecasts, they assume on leaving the EU no policies change. They assume the UK would impose tariffs on EU imports, which it would be mad to do. They assume domestic fiscal and regulatory settings would not change to accommodate different circumstances. Of course they would.

There are many reasons why some foreigners would rather the UK remained in the EU. But these are about geopolitics and Europe’s role in the world, not the British economy. Honestly, even if the UK crashes out of the EU without an agreement, it’s pretty obvious that after a short period of adjustment things will get back on track.

But crashing out will damage the political relationship between the UK and the EU and we wouldn’t want to see that. So an agreement would be better than no agreement. But with no agreement don’t worry; the economy won’t collapse.

Alexander Downer is former Australian minister for foreign affairs and advisor to Economists for Free Trade

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