Unilateral Free Trade Won’t Save the U.K.
(Bloomberg Opinion) -- Britain is preparing to return to the 19th century in the event of a hard Brexit — or at least to experiment with unilateral free trade on a scale unseen since the repeal of agricultural tariffs in 1846 changed the course of history.
But in the modern world, tariffs just aren’t as important as fans like President Donald Trump make them out to be. Other barriers, such as regulation, are likely to be the biggest obstacle to trade and cause of damage to the U.K. economy.
The government’s plan — temporary, of course, ministers assure us — is to allow 87 percent of the U.K.’s total imports in tariff-free, compared with about 80 percent today. Levies would only apply to meat, some dairy products, finished vehicles (although not car parts) and a small assortment of other goods. Since no customs controls will be applied at the, shall we say, porous border with Ireland, the U.K. seems willing to unilaterally allow all goods to be imported tariff-free, at least for a time.
This is in line with advice the government has been getting from pro-Brexit economists. They argue that unilateral free trade will lower prices for consumers and force firms to compete harder, boosting their productivity. Before the U.K. repealed its protectionist Corn Laws, a similar argument was made: Cheap grain imports would drive bread prices down, allow industrialists to lower wages, and help industry flourish.
It’s politically impossible to make that case today, but a similar argument can be masked by verbiage about a boost to the U.K.’s international competitiveness that would offset the tariffs facing British exports.
It all worked famously in the 19th century, helping to transform Britain from an agricultural into an industrial power. But the U.K.’s problem after Brexit won’t be the loss of the substantial tariff protections that come with being a European Union member; those, as free traders correctly argue, are as much of a curse as a blessing. The bigger danger is being kept out of European markets by all sorts of other means applied to outsiders and even to some of the bloc’s newer members.
In a recent paper, Erdal Yalcin from the University of Applied Sciences in Konstanz, Germany, and his collaborators calculated that non-tariff barriers such as import controls, subsidies, public procurement policies, and sanitary standards could reduce imports of affected products by up to 12 percent. That’s not on the scale of the 50 percent drop in U.S. imports of German cars economists expect if Trump imposes a levy — but it’s a substantial reduction nonetheless.
Lax U.K. import controls would lower one potentially costly non-trade barrier: border controls, with their delays and red tape. However, it looks like U.K. exports to the EU would still face that obstacle since the bloc hasn’t committed to abolish customs checks.
No economist, however, has a clear understanding of how regulatory obstacles on the EU side will affect U.K. companies trying to trade with Europe. That’s because such barriers are numerous and differ between countries.
The Polish Economic Institute, a government-backed think tank, recently released a report on protectionism inside the EU. It argues that “old” members of the bloc often erect administrative barriers to stymie foreign rivals. They also protect their own firms with subsidies, even at the price of violating the common market’s rules. According to the report, infringement procedures against the EU’s longstanding members tend to drag on rather longer than they do against more recent entrants. Similarly, the EU more regularly orders its newer and less influential members to refund illegal state aid than it does the bloc's older and bigger ones.
With all that going on inside the supposedly free and single EU market, it’s difficult to predict what barriers will be thrown up once the U.K. becomes an outsider. Most EU countries will be only too happy to push U.K. companies out of their markets after Brexit.
Likewise, it’s hard to estimate the impact of non-tariff barriers using those that already exist between the EU and U.S. as a benchmark. Britain will be in a far less powerful negotiating position than the U.S. when it tries to sign any trade agreement.
For Brexiters, much of the current exercise is about reliving the U.K.’s glorious history. The temptation to hark back to the days of the repeal of the Corn Laws is strong. The world, however, has changed too much for such time travel to address real-life problems. The reality of being outside the EU, dependent on it and yet having no say in its rules, hasn’t quite dawned on the British yet. But hey, there will be tariff-free French, German and Danish marmalade to sweeten it all until the really painful trade talks with the EU and U.S. begin.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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