February 2019

Rebecca Harding, independent economist, explains why clarity now is more important than ever in the run-up to the UK leaving the European Union

How many events have there been over the last three years which have started off with, “We are not going to mention the B word”? Translated, this means concern that the impending departure of the United Kingdom from the European Union (Brexit) might dominate. Instead of the conference agenda, delegates could end up endlessly discussing what might or might not happen in the breaks while panellists will attempt to express no view so as not to upset anyone who might be a client with differing views.

And all along, banks and businesses have delicately shadow-boxed around the subject just waiting for some certainty which would allow them to have opinions on fact rather than opinions on politics

Rock and hard place

Anyone observing the UK Parliamentary process at present from outside the UK would be forgiven for feeling utterly confused about what is going on. Indeed, most observers from inside the UK would not claim to have the first idea about what may happen in the next week, still less what might or might not happen on 29 March when the UK is currently set to leave the European Union.

Put simply, the current impasse in UK in EU future relations is a clash of centuries of adversarial politics with no written constitution to govern them versus a rules-based economic and political order. For the UK, the whole relationship can be redefined and restructured by starting from the premise that the UK is no longer part of the EU – there is everything to play for; for the EU the rules are the base case and anything beyond that means that you are not playing the game anymore.

This of course wreaks havoc with the UK political process as well. In the absence of a written constitution, any putative “deal” with a third party is fair game for negotiation and renegotiation. There is an inherent conflict within the UK’s own Parliamentary democracy: Members of Parliament (MPs) the one hand must abide by the wish of the people who voted for Brexit and, whatever their own views may be, they have to deliver on this as a matter of moral obligation. On the other hand, and as Parliamentarians, MPs are elected to make complex decisions on behalf of the people they represent in the national interest, an equally compelling moral obligation. Hence the conflict at the moment is an existential one for British democracy: should politicians deliver the will of the people or should they act to prevent something happening that could threaten the livelihoods of their constituents?

No middle ground

It would of course be possible to argue that Theresa May’s deal squares this constitutional circle: for the Brexiteers it is nominally an exit from the EU while for the Remainers it is closer to the EU than a no deal Brexit would be. So why is everyone united in opposition to it?

Opposition to the deal is because there is no such thing as a “soft” Brexit: either the UK exits the EU with no deal or it stays in. There is no “middle path” because there is no compromise or cost-free position which is partly in and partly out of the Customs Union or Single Market.

The economics of trade are being forgotten in all this. For most economists, the issues are straightforward: membership of a Customs Union and a Single Market creates trade conditions that are “frictionless”. This reduces costs and creates economies of scale which cannot be replicated in the short term outside of this framework. The welfare benefits for the consumer are higher in that choice is maximised and prices are pushed lower by being part of a bigger economic union. The economic benefits of having access to more competitive markets across a bigger geography should allow more companies, big and small, to gain from the availability of labour, capital and consumers. The political benefits of being part of a large trading bloc will be abundantly clear to UK negotiators when they start to discuss terms of trade from outside of the EU.

Yet even simpler than this there are some real concerns about trade itself between the UK and the EU. 60% of goods trade between the two is accounted for by five sectors: automotives, electronics, machinery and components, pharmaceuticals and aerospace. These are sectors which are defined by integrated supply chains across the region and the potential disruption from customs and excise checks as components cross borders will render the UK uncompetitive over time.

Financial services

The position in services is more ambiguous. The UK government estimates that the UK has a £28billion surplus in services with the EU. However, if we look at international data sources, it is also the case that Germany, France, Ireland and the Netherlands all say they export more in services to the UK than the UK imports from these countries; in the case of Germany, France and Ireland, the difference turns a surplus to a deficit. Such “trade asymmetries” are well-known and the Office of National Statistics is investigating them; meanwhile, we all assume that the UK national accounts are correct.

But what we do know is that London has for centuries been a global centre for trade finance. In 2017 alone, some US$730bn in trade finance will have been intermediated by global banks through London (according to Coriolis Technologies data). With anecdotal evidence to suggest that this is shifting to Amsterdam and Frankfurt, this should be raising concerns in the corridors of power.

Health warning

Take this back to one thing: the precautionary principle: if there is likely to be any kind of damage from a particular action, usually in health or environmental terms, then it should be avoided. Movements in the UK’s trade and GDP are 94% correlated; the UK’s goods and services trade account for 62% of GDP. Very few of the economic models that are out there suggest a positive impact on either trade or GDP of the UK leaving the EU. On that alone - that there is no proof beyond reasonable doubt that there will be no impact – the precautionary principle should dictate the next steps that Parliament takes.

Dr. Rebecca Harding is an independent trade economist and CEO of Coriolis Technologies

Rebecca Harding

Independent trade economist and CEO of Coriolis Technologies

Rebecca Harding

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