The House of Commons has rejected the idea of a “permanent” customs union with the EU three times, with many Conservative MPs appearing to share former trade minister Greg Hands' argument that it would restrict the UK’s independent trade policy.
But it won’t be straightforward to go it alone, and politicians should carefully, and candidly, set out the actual benefits of an independent trade policy.
Trade deals don’t generally lead to big increases in GDP. Yet the Government’s analysis of the potential of an independent trade policy is particularly damning. It is based on a scenario in which the UK would replicate all existing EU deals while also pulling off the feat of agreeing trade deals with the US, India, China and the Gulf States – and with the EU failing to conclude similar deals. Even with these heroic assumptions, the Government’s projections suggested that UK GDP would be boosted by just 0.2% after 15 years.
It is possible that that this figure is too low, with previous studies concluding the maximum benefit from just a US trade deal would be 0.35%. But it could also be too high, with the EU also in hot pursuit of trade deals with many of the UK’s prime targets.
The UK likes to present itself as a force for free trade, but it’s not clear that the public or Parliament would be willing to accept the controversial trade-offs that most deals would require.
The US might demand that beef and poultry be produced to US welfare standards or demand that UK public procurement is opened up to US companies. India will look for easier access to UK work visas – a demand which the UK has previously held out against. Deals with Gulf States and Saudi Arabia may raise human rights issues. With China there will be concerns over protection of intellectual property and potential national security risks.
Even deals with the Commonwealth countries of Australia and New Zealand offer little economic gain – their economies are very open already – while potentially exposing the UK’s farming sector to greater competition.
MPs may question how consumers will benefit if the lowering of trade barriers comes at the expense of producers, and there are already a raft of cross-party amendments tabled to the Agriculture Bill that would rule out changing UK standards in a trade agreement. The Government seems unwilling to face them down – but, if they passed, they would boot the prospect of an early trade deal with the US into the middle distance.
The EU’s advantage in trade negotiations is the offer of access to a market of 500 million consumers, while the UK can only offer access to 65 million consumers. Of course, if it acts alone then the UK could better focus on pursuing its own, rather than collective, interests. For example, a particular UK gripe has been that the EU has protected agriculture – which benefits the UK relatively little – but did little to liberalise services trade, where the UK has strong comparative advantage.
However, few trade agreements anywhere in the world go much beyond the provisions of the World Trade Organization’s General Agreement on Trade in Services (GATS), and the UK will find it very difficult to open up services markets more than the EU has managed. Removing regulatory barriers for services often means restricting a government’s right to regulate, and most countries simply don’t want to agree to that. In addition, increasing access for the UK’s highly competitive service providers would have a high cost for other countries’ local suppliers.
While Brexit could allow the UK to pursue its own trade interests, it would also be leaving the most liberal services trading block anywhere in the world: the EU single market. Restrictions on services for members of the single market are, on average, almost a quarter of those faced by non-members.
An independent trade policy could be an important symbol of the UK’s independence outside the EU. In addition, as Greg Hands argues, not having an independent trade policy could mean an “acute loss of foreign policy influence” given that trade is often linked to other issues such as migration and security.
However, the UK can still have its own trade policy of sorts if it stays in a customs union, albeit one with a focus on incremental gains – for example the recently agreed UK-Australia “fintech bridge” – rather than mega bilateral deals. This won’t, however, provide the headlines that supporters of a fully independent trade policy are after.
Politicians need to be clear. The economic benefits of an independent trade policy are likely to be limited, the trade-offs will be difficult to accept domestically and the UK will be trying to negotiate with reluctant and self-interested partners.