After Brexit - why not unilateral free trade? By Alberto Mingardi

Emily Skarbek has already offered very sound thoughts on Brexit – and David Henderson and Scott Sumner (as well as David Beckworth) are debating whether Brexit constitutes a monetary shock.

I would just like to build on the point Emily was making: that is, “Trade policy that is crafted in the next few years will be crucial to the economic impact of Brexit”.

Indeed, when push comes to shove, it will all be about the sort of trade policy the “Brexited” UK will pursue. It has been pointed out, for example here, that, for all the free trade rhetoric on the Leave side,

The pro-Brexit forces are correct that the EU has a strongly protectionist tilt towards the world outside the union. Although its 28 nations can exchange goods and services free of tariffs inside the trading bloc, the EU is a walled expanse that imposes duties on most of what enters from the U.S., China, and the rest of the non-EU world. The tariffs are especially high on manufactured products and food, averaging from 10%-to-20%. (…) Yet Johnson and other pro-Brexit leaders have never suggested eliminating or even reducing current EU duties. In fact, Johnson recently stated that leaving the EU would allow the UK to raise duties on steel imports to keep jobs in the beleaguered industry in Wales and Northern England. Toyota, GM, and other big automakers in the U.K. do a thriving export business with the rest of Europe. They’re adamantly opposed to a Brexit that would force them to pay 10% tariffs on the cars they sell in France or Germany. And if the U.K. exits, does anyone believe it wouldn’t impose duties at least that high on imports from Japan or Korea to shield an industry employing 800,000? If the U.K. exits, it would be forced to pay tariffs, often heavy ones, on the 45% of its exports sold in the EU. Yet it’s likely to impose the same duties, or even higher barriers, to support cars, agriculture and a host of big industries, and get no benefit at all from the lower prices prevailing outside the EU.

On the top of that, by leaving, the UK will be in no position to attempt to influence European legislation, though it will still be affected by it profoundly, when it comes for example to the setting of standards and various product regulations, precisely because EU countries are a very important trading partner.

The prevalent comments in the EU are now stressing the importance of expedited negotiations with the UK, and seem to be rooted in a retaliatory understanding of the future trade deal. As always, people tend to forget that free trade is beneficial for all parties. Tariffs won’t just hurt, say, Rolls Royce’s exports to France, but also those very French customers that may want to buy a Rolls Royce first and foremost.

The most dangerous effect of Brexit, as seen from Brussels, is that it might trigger a domino effect – or at least suggest to some countries that real benefits can be gained by entering in tougher negotiations with the EU leadership for whatever special conditions they may want to negotiate. Brexit is a precedent (*).

So, even if member states’ own interest would suggest negotiations should reach a free trade agreement as smoothly as possible (think about Italy, where roughly speaking 7% of exports is with the UK), EU negotiators may try, perceiving it as their own self-interest, to produce a different outcome. A single market should remain far superior, in terms of lower transaction costs, to whatever trade agreement may be reached. And yet perhaps negotiators may aim to “teach a lesson”, besides this point. Handersblatt reports that Germany’s Minister of Finance, Wolfgang Schäuble, is himself carefully weighing the alternatives.

So, what should Boris Johnson or Theresa May, or whoever is going to be the next prime minister, do? Perhaps it is time to be bold: unilateral free trade, at least with EU member countries. Sure, unilateral free trade is very unpopular. To the best of my knowledge, in recent years only Georgia moved in that direction, as “since 2006, it implemented basic free trade unilaterally for its imports from the whole of the world, such that its average industrial tariff is now 0.3%, compared with 4.6% for the EU. But its reforms have gone far deeper still, unilaterally opening all its markets to foreign direct investment and recognizing the technical standards for imports from all OECD countries, including the EU”.

But if the new British prime minister want to puzzle and indeed shock its European counterparts, this may well be the best option. Go ahead and zero tariffs on imports coming from the EU. It might well be one of those very few choices that could prove to be economically beneficially in the long run, not least because it will minimize the problem of capture by special interest groups when it comes to trade policy. But it may prove to be expedient from a political perspective too. As the government should run through the Houses its proposed “interpretation” of the vote (which was, after all, a consultative referendum), open support for free trade may help, in the short run, to restore peace and harmony among the Tories. On top of this, it might give the UK a strong card in negotiations with the EU, making retaliatory attempts hard to “sell” to the public.

(*) A more interesting precedent would be if Brexit were to be followed by another Scottish referendum, this time won by the independence front. The Scots may prefer to stay with the EU than keeping the United Kingdom united. The EU so far has been lukewarm with secessionist movements. But if they welcome the Scots in, what about the Catalans? Watch out for some interesting developments.