Britain Looks Into the Trade Abyss

Many fear a go-it-alone future outside the EU portends economic eclipse.

Anti-Brexit protesters demonstrate outside the Houses of Parliament on March 13, ahead of a week of crucial votes on the future of Britain’s relationship with Europe. (Jack Taylor/Getty Images)
Anti-Brexit protesters demonstrate outside the Houses of Parliament on March 13, ahead of a week of crucial votes on the future of Britain’s relationship with Europe. (Jack Taylor/Getty Images)

One day after British Prime Minister Theresa May’s Brexit plan suffered a second historic parliamentary defeat, Britain’s go-it-alone trade future is starting to become a little bit clearer—and it is far from a pretty picture.

Instead, the emerging future landscape is one of permanent isolation, ever-rising prices, and long-term economic eclipse, some experts said.

“We’re in a complete and utter shambles,” said Roderick Abbott of the European Centre for International Political Economy. “The bottom line is that there is nothing you can do that would be better than what you had as a member” of Europe’s customs union and single market. “So why did you want to leave?”

The British government has sought to put the best gloss on its prospects. On Wednesday, the same day Parliament narrowly voted against even the thought of a “no deal” exit from the European Union, the government released its trade policies in the event of a no-deal Brexit. The one-year government plan calls for most British imports to be tariff-free, except for a handful of strategic sectors including agriculture and cars, where tariffs will be increased.

“This balanced approach will help to support British jobs and avoid potential price increases that would hit the poorest households the hardest,” said U.K. Trade Minister George Hollingbery.

Nearly three years after the historic vote to leave the European Union, Britain finds itself two weeks away from departure—and is still trying to figure out if it will leave, on what terms, and when. May’s two parliamentary defeats have doomed any hope of a negotiated withdrawal with a transition period. Wednesday’s nonbinding vote seemed to shoot down the idea—beloved by many hardcore supporters of Brexit—of a no-deal departure. And on Thursday, Parliament will have a chance to vote on whether it will seek an extension from the European Union to push back B-Day beyond March 29.

But the reality is that, whatever Parliament said about taking a no-deal Brexit off the table, that’s essentially all that’s left—unless lawmakers push for an extension or even a second referendum on the question.

“Even if parliament votes ‘no’ to the idea of a no-deal Brexit, that doesn’t mean that a no-deal cannot happen,” said Michael Gasiorek, a trade expert at the University of Sussex. “Unless something else is in place, this is the default.”

Trade may not have been the dominant issue during the 2016 campaign over Britain’s future in Europe, but it is looming ever larger as the day of reckoning approaches.

Unlike larger, more self-sufficient economies such as the United States, Britain is heavily reliant on trade, with imports and exports accounting for more than 60 percent of GDP. That means that a future without guaranteed, zero-tariff access to Europe, and the dozens of countries Europe has trade deals with, is quickly becoming scarier than it looked a couple of years ago, when British politicians promised quick and beneficial trade deals all over the world.

“I think they are beginning to sense, you actually lose negotiating and diplomatic power by leaving,” said Maria Demertzis, the deputy director of the Bruegel think tank. “The U.K. was still in that era of grandeur and thinking it would be able to dictate the terms.”

The first cold realization is that, no matter what kind of temporary tariff tweaks the U.K. government makes with its new plan, it will be extremely hard-pressed to come up with anything as good as what it already had.

As a stopgap measure, the one-year tariff schedule outlined by the government on Wednesday seeks to avoid price hikes as a result of bailing out of the free-trade zone, while still shielding politically sensitive sectors. The problem is that while the new plan would make most imports tariff-free, it would actually increase tariffs on trade with the European Union, the source of nearly half of Britain’s trade. And as Brussels made clear in its trade spat over steel and aluminum tariffs with the United States, it is ready to slap tariffs of its own on British exports.

“The EU has been very clear that it would retaliate proportionally” to any increased tariffs, Demertzis said. That would mean a tougher path for British goods seeking entree into Europe.

But it’s not just British exports to the continent that could suffer. The new U.K. tariff proposal only addresses imports—what other countries do to British goods is out of its control.

The U.K. plan “does nothing to improve access for British exports,” Gasiorek said. It also leaves unaddressed mundane but important trade issues such as regulatory standards that allow for seamless trade across borders. “It’s extremely messy,” he said.

But Britain faces the loss of more than just free access to the giant economic bloc. Crashing out of the European Union with no deal—which is where things stand now—would also cut off Britain from the nearly 70 other countries with which Europe has trade deals, which up to now Britain could benefit from.

Liam Fox, the U.K. secretary of state for international trade, promised to ink new deals with all those countries before Brexit took place. He hasn’t quite: So far, he has managed to reach preliminary agreements with just a handful of small countries, including the Faroe Islands, Mauritius, Madagascar, and Zimbabwe.

“It’s absolutely clear that in most cases, people are waiting to see what the trade relationship will be between the U.K. and the EU before they sign off,” Abbott of the European Centre for International Political Economy said. With only 65 million people, the U.K. economy simply isn’t as appealing as the 27- or 28-nation European Union. “They may feel that they don’t want to give the U.K. the same access as they gave the EU,” he said.

That’s not the end of Britain’s troubles. It’s on the verge of losing preferential access to scores of countries around the world, including its biggest trading partner, at a time when the U.K. is not as competitive or productive as other major economies. That means that firms from Germany, France, Italy, and other European economies will have a double-barreled advantage in those markets, Abbott said.

“The U.K. is not likely to be that competitive and will be working in third markets with preferences against them.”

And that’s without even mentioning the bigger trade game Britain is stalking: new deals with countries like the United States, India, or Australia. In each case, Britain is likely to face obstacles over perennially contentious issues, from U.S. insistence on free access for its agriculture products (including the now-infamous “chlorinated chicken”) to India’s longstanding reluctance to pry open its domestic market.

Even if the U.K. were somehow able to overcome bitter, deeply rooted disputes and reach new deals left and right, the potential benefits would likely pale in comparison to what Britain already enjoyed.

“It’s almost impossible to imagine that even if you signed free trade agreements with every country in the world, that that would compensate for losing the EU,” said Gasiorek of the University of Sussex.

At the end of the day, after promises that Brexit would restore Britain’s sovereignty and spark an economic revival, it seems destined instead to raise trade barriers with Europe, remove preferential access to much of the rest of the world, and still not make it any easier to reach a breakthrough with the United States or other major economies.

So is there any economic upside to the way that Brexit has played out?

“No,” Gasiorek said.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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