Sherlock Holmes said that, when you’ve exhausted all other possibilities, whatever remains, however improbable, must be the truth.
In last week’s column I explained why the assumed roads forward for Brexit (the Norwegian, Swiss, Turkish and conventional World Trade Organisation tariff models) all had major stumbling blocks and should be seen as non-starters. This week I’ll look at “whatever remains”. The “whatever remains” is unilateral free trade – i.e. unconventional WTO membership with zero tariffs on imports.
So what would attract the government to the zero option? Here are six possible attractions:
Control – Outside the EU’s Common External Tariff, the UK would be free to pursue a zero tariff model. The EU would have no say and the UK would be in complete control. There would be no strategic game.
Speed – The issue of prolonged uncertainty hangs over the post-Brexit economy. The zero option could be implemented rapidly. The UK would agree a zero tariff schedule with the WTO and that would be it. The damage from years of uncertainty, from long drawn-out trade negotiations, would disappear. The UK could still pursue free trade agreements (with the negotiations centering on services and non-tariff barriers from a negotiating standpoint), but there wouldn’t be the pressure to do so.
Consumers – There is a substantial potential gain to consumers over producers from trading at world prices with zero tariffs on imports – on one estimate, from Economists for Brexit, the consumer gain is eight times the producer loss. There could be a significant political dividend from lower import prices.
Kudos – Hong Kong is a unilateral free trader. Some of the “sparkle” from such dynamic economies could be sprinkled on the UK. Britain could become the global leader for genuine free trade, challenging protectionist tendencies around the world, by both its example and its potential success.
Soft power – The UK’s success in the Rio Olympics, coming second to the US in the medals table, could have an impact on government policy, making it easier to sell the argument of the UK “going alone”. You get gold medals from competition not protectionism. It should also be remembered that in measures of soft power (culture, history, English language) the UK ranks number one in the world (out of 30 countries), ahead of even the US.
According to the Portland Index of Soft Power, soft power seeks to achieve influence by building networks, communicating compelling narratives, establishing international rules, and drawing on the resources that make a country naturally attractive to the world, as opposed to carrot and stick diplomacy. It is about pull not push. Unilateral free trade would play to our strength in soft power.
Supply-side – It would also provide a clear strategic narrative. External liberalisation would be complemented by internal liberalisation, as every effort is made to accelerate productivity growth and boost competitiveness. I envisage three effects: first, increased infrastructure spending and faster decisions, for example over a new runway at Heathrow; second, lower Corporation Tax, possibly a reduction from the announced 17 per cent in 2020 to 15 per cent, with a commitment to operate an even lower rate, say 10 per cent, by 2025. The main rate of Corporation Tax has already come down from 28 per cent to 20 per cent; third, reductions in the absolute level of product and labour market regulation, despite Britain’s relative competitiveness shown in OECD measures.
Theoretically, the government might be attracted by what I call the zero-zero option, namely the zero option plus membership of the European Economic Area – zero tariffs on imports from the rest of the world, and access to the Single Market (albeit with customs checks). In other words tariff free trade through the front and back door.
The problem with the zero-zero option is political. It wouldn’t end free movement of people, it wouldn’t stop budget contributions to the EU, and it wouldn’t bring back control over EU legislation. There’s a political and economic problem for the zero-zero option on the continent as well. By trading at world prices and facing tariff-free access to the EU, the UK would build up a substantial competitive advantage. The EU is likely to block this from the outset. What is acceptable for a small, oil dependent economy such as Norway would be unacceptable for a large economy such as the UK, competing with EU economies across a whole range of goods and services.
So I think we’ll go zero, not zero-zero.