We're told that initial talks between the Prime Minister and European Commission president Jean-Claude Juncker went “very very badly”.
In response the shadow Brexit secretary, Sir Keir Starmer, has stated that the UK crashing out of any EU negotiations would be the worst possible outcome, and that it would be a disaster for British business.
Prior to entering politics, Starmer was a lawyer and director of public prosecutions. He advances a number of seemingly plausible arguments, which no doubt persuade many members of the jury (i.e. voters). The problem is that these arguments collapse under cross-examination.
His main argument is that, if we don’t conclude a deal with the EU, we will face disaster, with tariffs on exports to the EU of 30 to 40 per cent on meat and dairy products and 10 per cent on cars. He also asserts that the loss of passporting would have severe consequences for financial services.
Starmer’s first mistake is to believe that the jury is populated by producers. In fact it is overwhelmingly made up of consumers. If negotiations were to break down, and the UK introduced unilateral free trade – with zero tariff and non-tariff barriers on imports – consumers and intermediate producers would reap the benefits of trading at world prices. Economic modelling suggests that the benefit to consumers and intermediate producers would be seven times the cost to producers.
Such a choice is entirely within our control. The EU has no leverage whatsoever. So even if talks were to collapse, the UK could still be better off than it is now, by exiting the Customs Union (and its tariff wall) and introducing unilateral free trade – a clean break.
If the UK were to opt for a clean break, consumers would be better off in the short term and producers and consumers in the long term. Yes, there would be a cost to certain producers, but the full force of global competition would drive up overall UK productivity and make producers more competitive in the long term. Consumers would be better off too – due to productivity-induced higher incomes.
Of course, a free trade deal with the EU would be nice, but it’s not a necessity. Starmer is making a fundamental mistake in focusing on what might happen to UK exports, when the most important issue is what we do with regard to imports. The lesson of economic history is very clear. Free trade enhances prosperity. Period.
This is counter-intuitive. After all, surely if we face tariffs when exporting into markets that previously had no tariffs, that must be bad? The answer is no, due to the enormous benefit to consumers and intermediate producers from paying world prices, free from the EU common external tariff.
Further, if we placed tariffs on EU countries in retaliation, we would have to apply – under WTO rules – the same tariff rates on all other countries. And if we did that, UK consumers would not gain from lower prices.
Some commentators take issue with this argument, stating that non-tariff barriers are more important than tariff barriers, and that the price comparison data is outdated. The consumer benefit calculation cited in this article is a conservative estimate and marks down the differential between UK and world prices. Given that this figure still exceeds the average common external tariff, this tells us a lot about the continuation of non-tariff barriers as well. Unilateral free trade must cover tariff and non-tariff barriers.
What about issues such as passporting with regard to financial services? Space prohibits a detailed discussion here, but I would strongly recommend the Politeia paper, A Blueprint for Brexit – The future of global financial services and markets in the UK, by the regulatory lawyer Barnabas Reynolds. He suggests two models for the way forward outside the Single Market, which could offer tremendous opportunities for the City.
Bottom line – a complete breakdown in talks, which leads to a clean break, might be the best scenario.