Three reasons why we may be underestimating the impact of Brexit on trade

Trade policy expert Dennis Novy, speaker at our CAGE event last week, describes why the risks of Brexit may be larger than estimates suggest.

Trade is an important part of the referendum debate but those advocating Brexit are hugely underestimating the challenges for the UK in the event that it leaves the EU. As an expert on international trade, I believe there are three issues that need more attention in the public debate.

1) The EU isn’t just a free trade area

First, the European Union isn’t simply a free trade area. It is a customs union. This means that every EU country has the same external trade policy with all non-EU countries such as Brazil, China or the U.S. If Britain left the EU, then it would have to renegotiate those external trade relationships. This process would take a very long time, given that there are dozens of such agreements in place or under negotiation. Ten years would seem an optimistic time frame.

But it would not stop there. Once a post-Brexit Britain introduced new agreements with third countries, complicated administrative barriers might kick in such as ‘rules of origin’ to prevent tariff arbitrage with the remainder of the European Union.

In addition, the EU Single Market is a deeper form of economic agreement than the typical free trade area. The Single Market provides further benefits such as common regulation and non-discrimination for public procurement. It took decades of political work to reach this level of economic integration.

2) UK capacity constraints

Second, the UK’s capacity to do new deals beyond the EU post-Brexit will be limited and stretched thin by simultaneously needing to agree a new deal with the EU itself. Britain has not negotiated a free trade agreement in over four decades. Britain simply does not have the administrative expertise to carry out some of the functions that the EU currently fulfils on its behalf.

Take the example of the current negotiations on the Transatlantic Trade and Investment Partnership (TTIP) with the United States. The team hammering out the agreement under the guidance of the EU Trade Commissioner in Brussels consists of some of the most experienced and seasoned operators in the business, drawn from all over Europe. These are the best and brightest in the game that can stand up to the venerable team working for the US Trade Representative. It would take Britain years – and serious government resources – to try and match that expertise. For many years, Britain would have to heavily rely on contracted consultants.

3) Obama was polite

Third, President Obama was being polite when he talked about the prospects for a post-Brexit US-UK trade deal during his visit in April 2016. The US would be in no hurry and Britain would find itself at “the back of the queue.” He explained there was a fixed cost to negotiating trade agreements. The U.S. would therefore give priority to larger negotiating partners such as the EU and Pacific partner countries.

Negotiating power largely depends on economic size. If Britain left the EU, its negotiating power would be decimated overnight. The U.S. would therefore likely revert to its default negotiating position, which is to make Britain a “take-it-or-leave-it” offer on terms less favourable than to the remainder of the EU. This is in essence how it negotiates trade agreements with smaller countries. Britain should not expect give-aways.

Dennis Novy is Associate Professor in the Department of Economics at the University of Warwick, a Research Fellow at the Centre for Economic Policy Research (CEPR) and an Associate at the Centre for Economic Performance at the London School of Economics. He worked as the Specialist Adviser to the House of Lords for their inquiry into the Transatlantic Trade and Investment Partnership (TTIP). He tweets at @DennisNovy


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