Is Britain committing commercial suicide?

A 19th Century trade agenda will decimate the most productive parts of the 21st Century economy

This is the sixth part of SPERI’s new series on Brexit, the Conservative Majority and the UK Political Economy.

The former ‘party of business’ is deliberately shooting the country in the feet. It is unique in actively negotiating less favourable market access with its major trading partner: a gigantic economy and genuine regulatory superpower. This historic strategic error will erect huge barriers between British firms and their European markets, decisively undermining the country’s prosperity.

Ian Dunt describes this revolutionary experiment as ‘the most perilous system-level recalibration of an advanced economy in trading history’, which is ‘detonating our trading networks’ and has ‘rubbished our international reputation’. Britain has chosen a course of action that misconstrues its place in the world; is predicated on a fallacious ideological prospectus reflecting a 19th Century grasp of trade policy; and has already impoverished its people to the tune of £200bn.

Boris Johnson’s EU envoy, David Frost, recently crystallised the government’s position: for Britain, ‘sovereignty’ and ‘independence’ are now zero-sum absolutes to be reified, whatever the cost, not shared in the pursuit of relative positive-sum gains. Consequently, at best only a circumscribed free trade agreement (FTA) is possible: even worse than the EU’s limited deal with Canada and little better than ‘no deal’. This will destroy much advanced manufacturing and prevent firms in the cutting-edge services sectors that account for 80% of British GDP from easily trading with – and, crucially, in and across – Europe.

Much of this ‘trade’ is actually typified by multiple firms in a disaggregated production network undertaking myriad complex intermediary processes. These collectively comprise the provision of a given product, which may have physical and virtual properties, such that it may simultaneously constitute a good and a service. Advanced 21st Century FTAs are therefore not about facilitating simple ‘imports’ and ‘exports’ but rather constructing the regulatory architecture under which firms can undertake those complex processes across the transnational space, often by moving skilled people, capital and data around within it, not necessarily sending things to it.

Despite this, preposterous 19th Century Brexiteer narratives remain obsessed with largely-superfluous tariffs, equate exports primarily with finished goods, and believe ‘free trade’ arises spontaneously out of liberation from regulation. This mindset expresses incredulity when Brexit means Brexit and the demanded rupture actually does rupture frictionless trade which is assumed to be a natural fact of life, rather than the outcome of decades of carefully crafted institutional and regulatory compromises.

In the 21st Century, regulation makes trade happen. Considerably more is at stake than (low-value) finished goods exports: capturing inflows of globally mobile investment and human capital, and securing the ability to provide intra- and extra-continental (high value-added) services are critical. This is underpinned by the most advanced regulatory structures: the EU Single Market (ESM) and its network of formal FTAs, plus hundreds of other cooperation agreements (at least 38 with the US alone) which collectively facilitate ‘trade’.

Once Britain is no longer party to this regulation, many exporters will face staggering compliance costs. Others will become unviable and relocate or shut down. Barely 10% of haulage firms will operate within the ESM post-transition: the rest will only deliver goods to Europe, returning empty at intolerable expense. Their incipient collapse represents the canary in the coalmine of this looming catastrophe.

After Frost’s speech, the government attacked the EU – with a Tweet of Michel Barnier’s 2017 ‘staircase’ explaining trade options vis-à-vis UK ‘red lines’ – for supposedly diluting its Canada-style FTA offer. Yet this is a logical consequence of Britain disingenuously appearing to change those red lines: reneging on various commitments made in the Withdrawal Agreement (WA), including level-playing field provisions and the Northern Ireland Protocol. Britain’s formal negotiating mandate is expected to confirm this direction of travel, representing a ‘flagrant breach’ of the WA – an international treaty with legal force – and undermining already-waning trust in Brussels (and Dublin, and many other capitals too).

Barnier’s diagram actually demonstrates how far, and how cynically, we have been dragged hard-Brexitwards since 2017. Pre-referendum, the ‘softest’ Brexit (Norway/Iceland, Step 2) was advocated by both Nigel Farage and Michael Gove. Now, Frost’s implied FTA is so hard that no space exists for it between the hardest conceivable Brexit (South Korea/Canada, Step 6) and the dotted ‘no deal’ line!

Britain is swapping substantive interdependence for a mirage of nominal independence. Modern FTAs are about regulatory harmonisation and inherently reflect the preferences of the most powerful international standard setters. As Silke Trommer notes, Britain is a ‘middle power’ with neither the market size nor negotiating capacity to ‘influence global trade rules on its own terms’, especially in a divergent fashion when the dominant tendency is towards EU-led convergence, a process called the ‘Brussels Effect’. As a Third Country, Britain is a supplicant requesting privileged access to the giant market of a nearby regulatory hegemon, and the EU will ultimately determine the price of that access. If London refuses to pay – or continues to pretend that it can enjoy absolute sovereignty free of constraint – even a disastrous ‘bare bones’ FTA might be impossible.

More tragic is that the blissfully unaware public have little appreciation of the coming dislocation, whatever the deal. When Boris Johnson spouts nonsense about Brexit being ‘done’ or Britain being the ‘supercharged champion’ of ‘global free trade’, people wrongly assume trade will actually become freer, just as they wrongly assume ‘no deal’ means retaining the status quo rather than being plunged into an abyss. A ‘Canada-style deal’ certainly sounds superior to existing arrangements. Yet the very opposite is the case: any EU-UK FTA will be inherently sub-optimal and drastically inferior, as the country leaves the most advanced trading bloc on the planet, and loses unparalleled access to other markets globally. As David Henig suggests: ‘If you claim to be in favour of free trade but refuse to recognise that the UK leaving the EU means more trade barriers then you are not in favour of free trade’.

So, red tape will increase dramatically as Britain is again faced with barriers that extend far beyond just tariffs and have, until now, been rendered invisible by ESM membership. It will be dramatically worse off in terms of intra-EU trade, especially when it comes to services exports. But extra-European trade will suffer too, since it is inconceivable that hundreds of global agreements can be easily or rapidly reconstructed. Britain has rolled over about half of its formal FTAs and a handful of limited Mutual Recognition Agreements (MRAs), but these only cover a fraction of its trade and are nowhere near as comprehensive as the 977 bilateral treaties to which it will soon no longer be party. Plus, Brussels is already negotiating more extensive agreements with many putative partners anyway: they will be unprepared to concede as much to Britain as they would an inordinately more powerful EU, and may well seek to extract further concessions of their own from what is a relatively small market in global terms.

The British position is now clearer than at any time since 2016 (albeit with lies and Orwellian newspeak proliferating). But relative clarity comes easily when taking an absolutist position on the final approach to the teleological terminus of the revolutionary road. It is very different to what was promised in 2016 and does nothing to either resolve the century-old strategic dilemmas facing Britain internationally or address its failing internal development model.

If this fantasy is realised, an unprecedented economic shock is likely to result. Accumulated investment outflows, business closures, costly trade frictions and depressed growth could eventually lead to a sterling crisis. The lesson of September 1992 – ‘you can’t buck the market’ – might take on new relevance for this Black Wednesday on steroids. The revolution may finally devour its children.

Read all of our posts in our blog series on Brexit, the Conservative Majority and the UK Political Economy.