Eyes on the prize in the Brexit endgame

Once we’ve left, 85pc of the world economy will be outside the EU, including the fastest-growing economies

As negotiations with the European Union enter their endgame, Britain’s anti-Brexit brigade is out in force. Anything Brussels wants is reasonable and justified. The UK’s conditions, of course, are driven by ignorance, nationalism and spite.

Whatever the unreconciled say, Britain is leaving the EU’s single market and customs union, by law, at the end of this year. But whether we will strike a free trade deal with Brussels, or default to trading on World Trade Organization rules, remains entirely unclear.

Last week, Michel Barnier said one of his negotiating team had tested positive for Covid. A similar thing happened in March, when the EU’s chief negotiator himself contracted the virus.

We were at a critical juncture, making real progress, perhaps just days from a deal.

But with the suspension of face-to-face talks, and given time needed for the ratification process to play out across EU parliaments, with the deadline fast approaching it really could go either way.

As such, I’ll stick to observations rather than predictions – the first of which is that a trade deal is clearly the best outcome.

UK exports to the EU amount to 8pc of GDP – and if they continue largely tariff-free, under a reciprocal agreement, there will obviously be fewer disruptions for both sides.

As lockdown lifts, and world trade reboots, a UK/ EU trade deal would help foster growth across all parts of Europe.

Yet WTO terms is no disaster. Britain already trades under such rules with the US – our biggest single-country trading partner, accounting for a fifth of UK exports.

The US and China sell hundreds of billions of dollars of exports to the EU each year using WTO rules – the framework, in fact, for the majority of all trade across the globe.

For many years, UK trade with the EU has been in deficit, and falling as a share of our total overseas commerce – despite the much-vaunted benefits of the single market and customs union. Britain’s non-EU trade, in contrast, generates a surplus.

Having grown much faster than UK-EU trade for some time, it now accounts for a clear majority of the goods and services we sell abroad. Such non-EU trade is conducted largely under WTO rules.

If we do leave with no trade deal, UK exporters to the EU will pay WTO tariffs – but they are generally very low. And the Government has indicated it will use part of the £10bn or so annual EU membership fee, plus incoming tariff revenues, to compensate UK exporters in sectors where tariffs are higher.

My third observation is that, with full Brexit almost upon us, deal or no deal, the Government should be talking much more about the opportunities Britain gains outside the EU.

We are “getting Brexit done” not just because the majority voted to live in a sovereign country that controls its own borders – as do other liberal democracies like Canada and Australia. There are also major economic advantages, which reinforce key parts of the Government’s broader agenda, particularly now.

Stark regional imbalances in the impact of lockdown, and Covid itself, make “levelling up” more urgent than ever. Brexit should be at the heart of such initiatives.

Outside the EU, Britain will regain control over billions of pounds of “cohesion fund” spending, which can tackle regional inequalities.

Free of Brussels’ stringent state aid rules, the Government can selectively take stakes in industries of the future, not least artificial intelligence and biotech.

Freeports and enterprise zones, low-tax jurisdictions bringing investment and prosperity to coastal towns and other deprived areas, should be at the forefront of addressing regional imbalances – and, again, are only possible outside the EU.

And what about research and development tax credits, and other post-Brexit regulatory tweaks, again with a regional focus?

While levelling up will cost money, such efforts should extend way beyond spending, emphasising infrastructure projects that harness long-term private capital, tax breaks and, above all, vigorous supply-side reforms – all of which are far easier after Brexit.

The latest government modelling suggests that, under no deal, the UK economy would be 3 percentage points smaller in 15 years’ time than it otherwise would have been.

That’s compared to the outcome under the kind of “skinny” free trade deal being negotiated – no tariffs on goods, but some new border checks and restrictions on services trade. As such, the no-deal negative growth impact in any one year is set to be tiny.

And, according to the Office for Budget Responsibility, any possible implications are anyway “dwarfed by the uncertainty surrounding the underlying path of future productivity growth”.

So let’s use the freedoms of Brexit to implement the supply-side measures – on tax, regulation and infrastructure – that would so clearly boost productivity, more than offsetting the miniscule growth downsides if we do end up with no deal.

My fourth observation is that, once we’ve left, 85pc of the world economy will be outside the EU – including the world’s fastest-growing and most populous economies.

While EU trade agreements with other nations cover 11pc of UK trade, we’ve already “rolled over” deals accounting for almost three quarters of that, including sizeable economies like South Korea, South Africa and Japan. The rest are close – and will come.

Plus, we have a good chance of striking agreements with the world’s very largest players, not least the US, trade deals that have always eluded Brussels, given intra-EU conflicts.

Finally, imagine if we were in the EU now. Earlier this year, even before Covid, Italy was again in deep financial trouble, stifled by the high currency eurozone straitjacket.

Another bond market crisis loomed – resulting in a €750bn (£670bn) rescue fund, paid for by all EU members.

So had we remained, Britain would now be contributing mightily to a vast bailout preventing the implosion of the eurozone – which we are not even part of. And with Brussels now sanctioned to borrow on the EU’s behalf, the UK would have taken a huge step towards EU fiscal integration – which repeated polls show almost no British voters want to take.

Whatever the one-off complexities of leaving the EU, the long-term, enduring complexities of staying would be far more acute.

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