Matthew Lynn

Three reasons to walk away from a trade deal with the EU now

Three reasons to walk away from a trade deal with the EU now
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Just when you might have thought that our departure from the EU was finally dealt with it turns out another cliff edge is looming. We have only a year to agree a trade deal with the rest of Europe. Already there are scare stories about how we may crash out without one, and plenty of controversy about what kind of concessions we will have to make to Brussels. By the time the first tulips are flowering in the spring, Project Fear will be back up and running again. But hold on. Before we start negotiating we should ask ourselves a bigger question. Do we really want a trade deal with the EU? The answer might well be that we don’t.

Sure, of course we’d want a deal if it didn’t come with conditions attached. It would be crazy to say no. In a perfect world, we would be happy to offer the EU zero tariff access to our market in return for zero tariff access to theirs. And given that they run a £66 billion trade surplus with us they would be crazy to say no.

The trouble is, the EU is not an organisation that does straightforward economics. In truth, it has become very hard to work with. Partners in a trade deal have to sign up to EU regulatory and labour standards and possibly very soon tax harmonisation as well. That is true of any country that does a deal with Brussels, and it will be true in spades for the UK, for the simple reason that most other countries across the rest of the continent are already worried about a deregulated UK undercutting their high tax, expensive welfare, rigid labour market economic models. We are likely to be faced with a series of tough demands before our exporters are allowed unrestricted access to the EU market. There is a simple solution to that, however. Just walk away. Why? There are three reasons.

First, our trade with the EU is in steady, relentless decline. True, Europe is still our largest single trade partner, but its share of our exports has been declining by about one percentage point a year. With a permanently weak economy, that is only going to continue, and with most of the growth in our exports coming from services and digital products where distance is relatively unimportant, Europe matters less and less to the British economy every year.

Next, a trade deal with the EU may well be incompatible with one with US. The regulatory systems are too far apart, and the gulf is growing wider all the time (which is why Brussels hasn’t managed to agree a deal with Washington despite years of negotiations). Ultimately, the UK may have to choose between a deal with one or the other. That is a tough call. But ultimately, America is the better bet. It has a faster growing economy, and one that is more compatible with our services- and tech-based economy.

Finally, negotiations will be fraught and difficult. Businesses have already been through three years of cliff edges, precipices, and no-deal deadlines. There is no question that has damaged confidence, and tied up valuable resources. If we walk away from a deal now, and tell companies we will trade on WTO terms with the EU from 2021 then at least they know what is happening and can plan accordingly. The uncertainty ends.

The one thing we should surely learned from three painful years of trying to get out of the EU is that it is better to have a clean break. If the EU offered us a zero-tariff deal with few strings attached, based on the fact that are regulatory systems are already completely aligned, and to be agreed immediately and wrapped up in a few weeks, that would be fantastic. We should take it. But if it involves months of wrangling and huge concessions, followed by delays, and yet more extensions agreed at late night summits, then it would be better simply to walk away now. We should take whatever economic hit that involved and move on.

Written byMatthew Lynn

Matthew Lynn is a financial columnist and author of ‘Bust: Greece, The Euro and The Sovereign Debt Crisis’ and ‘The Long Depression: The Slump of 2008 to 2031’

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