Tuesday, May 30, 2017

The Trading Background To Brexit Negotiations

Once the election is over I anticipate that the public debate will move quickly to the EU Brexit trade negotiations. 

Above is an overview of current UK trade. Theresa May has made it clear that to her mind no deal is better than a bad deal. Logically that makes sense as at some point a bad deal could be worse. Also if she is not prepared to walk away she really has little to no negotiating leverage.  So what would no deal look like?

Economists such as Roger Bootle argue that in the event of no deal the UK should adopt a policy of Unilateral Free Trade (UFT). This would involve the UK imposing no tariffs on imports from the EU (as now), even if the EU imposes tariffs on the UK, and dropping the EU’s Common External Tariff (CET) on imports from the rest of the world (ROW).

This approach raises some key questions for example:
  • would the pound fall on declaration of a UFT? 
  • would imports increase as prices are reduced by lack of tariffs?
  • would this hit domestic producers? Or would this be compensated by more exports?
  • would consumers spend more if prices are reduced?
  • how would the Government deal with the loss of £3bn tariffs, or the net £700m after the current payment of £2.3bn tariffs to the EU
  • will new EU tariffs and customs checks lead to increased financial and bureaucratic costs for British firms?
I suspect we will see a lot more discussion of these issues and the impact of no deal in the coming weeks.