September 6, 2017 / 6:32 AM / a year ago

Commentary: Britain’s deluded hopes for a painless free-trade deal

Watching the slow-motion crash of Britain’s exit negotiations with the European Union is a disconcerting experience. A state that once ran a global empire is looking second-rate as the government’s implausible expectations about what it may be able to achieve in the talks are dashed. The British lack of realism, especially about vital future trading arrangements with the EU, reflects divisions within a government weakened after Prime Minister Theresa May lost her Conservative majority at the general election in June. But it also shows the government’s dismaying lack of historical and strategic understanding about how Britain lost its clout outside the European club more than half a century ago.

A store in Blackpool, Britain, promotes sales of European food. UK and European officials are negotiating over post-Brexit tariffs on goods traded with the EU. REUTERS/Phil Noble

British attempts to wrest the agenda away from the EU in the late-August round of talks by including trade were predictably futile. Michel Barnier, Europe’s chief negotiator, said little progress had been made on the first three issues prioritized for resolution ahead of trade by European leaders: the rights of EU citizens in Britain and of British nationals in the EU, arrangements to avoid post-Brexit border posts restricting movement between Northern Ireland and the Irish Republic and, most contentious, the hefty exit bill the EU is demanding. This suggests a start to trade talks may be postponed beyond October. Britain’s weak hand is unsurprising since negotiations are being held under the European treaty’s Article 50, which May triggered at the end of March. This withdrawal procedure was designed to deter rather than to facilitate exit by imposing a two-year deadline after which a departing country is out in the cold with or without an agreement; any extension requires the unanimous consent of all the member states.

But the British lack of realism goes well beyond the staging of the talks. From the outset, following the referendum vote to leave in June 2016, May’s government has failed to recognise the underlying weakness of its negotiating position. This led to the defiant stance which the prime minister adopted when she argued for a hard Brexit in January, rejecting any compromise that would leave Britain “half-in, half-out” and insisting that no deal was better than a bad deal. That claim was bravado since it would entail a cliff-edge exit in which Britain would abruptly have to trade with the EU on the same and inferior terms as other countries under World Trade Organization rules. The resulting imposition of tariffs and loss of regulatory access would hugely damage an economy now intimately intertwined with the EU’s after almost 45 years of membership.

Since the June election, Britain has abandoned this blusteringly unrealistic approach. A flurry of papers from the government in August signalled a shift towards a more conciliatory stance. The government is now seeking to soften the exit by providing more time for businesses to adjust through a transition period lasting possibly as long as three years after March 2019. The ultimate objective is a close economic partnership, including “the freest and most frictionless trade possible in goods between the UK and the EU.”

These belated concessions to sanity are welcome, yet they replace one version of unrealism with another. Britain will supposedly slip effortlessly and painlessly out of the EU and into a free-trade agreement in which it will be able to forge new deals with countries outside the EU while retaining the same ease in shipping goods to and from the continent as now. Guy Verhofstadt, the European Parliament’s coordinator in the Brexit talks, was hardly exaggerating when he tweeted that this vision of being in and out of the customs union with ”invisible borders” was a fantasy. The harsh truth is that, once they are outside the customs union, British exporters to the EU will have to comply with rules of origin to ensure they are not subverting the union’s common external tariff by importing products from outside the EU on which Britain charges lower duties. Frontier checks of some kind, including special arrangements to deal with the Irish land border, will thus be essential.

Even if trade in goods between Britain and the EU remains free of any tariffs, this will in itself do little to make up for leaving the single market, which - in a bitter irony - Britain did so much to create in the 1980s under Margaret Thatcher. Outside the EU, British-based firms seeking to trade with Europe will once again face the increasingly crucial non-tariff barriers, which the single market has eliminated for services as well as goods. The most salient example is the loss of the “passporting” rights that allow financial services to be sold from any one member state across the EU without regulatory hindrance. As the exodus of firms from the City of London already indicates, Britain’s service-oriented economy is particularly vulnerable to this blow.

A solution to this problem would be to stay in the single market on the same terms as non-EU members Norway, Iceland and Liechtenstein. But this would involve accepting free movement of labor and making a continuing big contribution to the EU finances. That would frustrate two of the main points of Brexit for leavers who voted for Britain to regain control over EU migration and to stop paying into the EU. Far from restoring sovereignty Britain would lose it since the government would have to accept new regulations made by the EU over which it would no longer have any say.

All this was predictable – though apparently not to amnesiac British ministers. Since European integration got under way in the 1950s, Britain has been repeatedly taken aback by the political commitment of France and Germany to the venture and at its own lack of influence outside the club. When the six founder members agreed in the late 1950s to create the European Economic Community, Britain sought a similar free-trade agreement to the one it now envisages. The initiative got nowhere as the EEC saw such an arrangement as a potential threat to their planned customs union and the political cooperation underpinning it. (Another bitter irony given the mishandling of Brexit: that American officials in the 1950s believed that Britain’s civil service was so competent it would dominate any European community it chose to join.)

Another hard-learned - but apparently easily forgotten - lesson of the years before Britain finally joined in 1973 was that by staying outside the EEC, the British government gave up all of its potential power in the union. It put itself in the fatal position of a “demandeur,” in the words of Charles de Gaulle. The French president showed what he thought about this supplicant status by vetoing Britain’s first two attempts at membership in the 1960s. Now Britain is once again asking for favors of the EU - this time as it seeks to leave it. That’s hardly a strong negotiating position.

The mishandling of the Brexit negotiations is rooted above all in political cowardice. Ministers are unwilling to confront the British public with the harsh truth: that they voted for economic self-harm when they narrowly decided to leave the EU. Brexit means not just a hefty divorce settlement, but a damaged economy through worse trading arrangements with Britain’s closest and most important commercial neighbor.

About the Author

Paul Wallace is a London-based writer. A former European economics editor of The Economist, he is author of “The Euro Experiment,” published by Cambridge University Press.

The views expressed in this article are not those of Reuters News.

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