Brexit Deconstructed - A dummies guide to trade

Brexit Secretary David Davis, who will return to Brussels for talks in March. Picture: PA PA Wire/PA Images

James Ball gives a quick dummies guide to trade within Brexit, as it appears that there are plenty of dummies who need it.

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In two months time, the UK and the EU will begin negotiating their future trading relationship, and the excitement seems to be initiating a whole new wave of Brexit falsehoods, from the left and from the right.

The Sunday Express recently ran a headline claiming a ‘no deal’ Brexit would cost the EU to the sum of £500 billion while providing an even larger boost to the UK economy. And in a recent political interview, Labour leader Jeremy Corbyn said that leaving the EU would necessarily mean leaving the single market – the system which lets EU countries trade goods and services with each other with no barriers.

Both comments totally misunderstand how trading works, what the UK would need from a trade deal, and are just two isolated examples in a sea of misunderstandings and falsehoods. But while the minutiae of trade deals get incredibly technical (not to mention boring), the basics are so simple that even senior politicians should have grasped them by now.

Major economies get broken into two main groups: goods, and services. Goods are simple enough: that’s everything physical that you might sell – from electronics, to food, to raw materials. Services covers banking, consultancy, accountancy, education, legal advice, and other intangible services. The trick to understanding what is important to the UK is that this country imports far more goods than it exports, but exports far more services than it imports.

Generally, it is seen as good thing to export roughly as much as you import: if you import far more than you export, you’re ‘sending money overseas’ each year, which in the long run is seen as fairly unsustainable. The UK, even as a member of the EU, currently imports more than it exports.

The topic that dominates conversations in the media about trade talks is tariffs. These are charges levied on goods as they enter a country, and can range from just a few percent of the sale price to two or three times its usual cost.

Tariffs work to keep cheap imports out of a country (or trading area) to avoid flooding the market and damaging local producers – for example keeping cheap Chinese steel out of the EU to try to protect steelworking industry in member states, or trying to add charges, to stop cheap imported food from competing with farmers in the EU.

EU nations pay no tariffs on goods bought and sold within any member state, meaning they can competitively sell each other goods, without the barrier of tariffs making them uncompetitively expensive. However, tariffs only affect the trade of goods. That means a post-Brexit trade deal which allowed for tariff-free trade – such as that which hard Brexiteers claim would be the result of a ‘no deal’ or very hard Brexit – would make the UK’s trade gap even bigger than it already is.

More important than tariffs are ‘non-tariff barriers’: these are things which stop the buying and selling of goods, but which aren’t direct charges. In practice, that means things like product safety standards, whether on pesticide use, animal welfare, or hundreds of other regulatory standards. This is where the Brexiteer idea of ‘sovereignty’ with no restrictions is revealed as a fantasy – even in a feted no tariff deal, EU nations would be free to reject any goods which didn’t meet current or future EU regulations, over which the UK will no longer have a say.

Finally, for a future trade deal to be beneficial – or at least not too harmful – to the UK, it will have to enable the UK to continue to be a major services hub. In practice, that means enabling the City (even if it isn’t the UK’s most popular institution) to carry on trading in a frictionless way with the EU.

This is a level of cooperation far beyond even aligning non-tariff barriers on goods, as the banking sector is extensively regulated. The UK is unlikely to close this sector overnight, but as rules start to diverge – or requirements on EU headquartering get tighter – jobs and money could shift year-by-year.

The trade deal between EU and Canada, despite taking seven years to negotiate, is a complex and extensive one which covers only goods – which would leave the UK in a worse trading position than it is now. When it comes to a more extensive agreement, the EU has a setup for this: the single market.

The problem becomes that while it is possible to be a non-EU member and to participate in the single market – as Norway does – the EU is uncompromising about changing the terms for this. To be in the single market for goods and for services means also being in it for people: you must allow free movement. The UK failed to persuade the EU to make too many allowances to change these terms when it was still a full EU member: it’s now trying to secure even bigger concessions as a non-member. These prospects seem remote.

That five-minute read covers the basics of international trade and what would constitute a ‘good’ deal for the UK. Also, even this quick and minimal briefing shows the difficulty of securing a deal as good as the one the UK has now, let alone one that’s better – and shows how little of the public debate tackles any of these actual issues.

In March, the consequences of the exaggerated rhetoric, and inflated expectations, on all sides will be landed firmly on the desk of Theresa May and her negotiators. She cannot hope to meet them.