U.K. Prime Minister Theresa May is basing her trade strategy on a dangerous assumption.
Her plan to make a clean break with the EU single market and the customs’ union in 2019 poses a grave threat to core British industries, ranging from carmakers to sheep farmers, who will suddenly find themselves paying high tariffs to export to Europe.
May’s big gamble is that a deal can be done quickly to maintain privileged access for important goods. Her economic logic is compelling: EU companies say they are terrified about disruption to trade with the U.K. and want to avoid tit-for-tat tariff disputes that could ramp up prices for consumers on the Continent.
But this could be a potentially fatal political miscalculation. Europe’s most powerful policymakers — most critically in Germany — are willing to soak up mid-term economic pain in order to preserve a 440-million person single market. Ultimately, the single market is more important to Germany than the U.K. is.
Volker Treier, deputy chief of the influential German Chamber of Commerce (DIHK), said German businesses were right behind Chancellor Angela Merkel when she said the U.K. could not “cherry-pick” its economic relations with the EU.
“This would create a dangerous precedent,” he said, arguing that such special bargaining would boost populist movements across Europe and undermine the single market.
“When it comes to an ‘either-or’ situation, the integrity and further development of the single market is clearly more important for German companies than any possible damage to trade with the U.K.,” Treier added.
British politicians pin many of their hopes for a tailor-made deal on their supposed allies within Germany’s all-powerful car industry. Matthias Wissmann, the head of the German car lobby VDA, does indeed fear that May’s hard Brexit will be “arduous and expensive” for both sides. But he played down hopes of a quick trade accord to counterbalance it, arguing that it “will take years to wrap up new agreements.”
Prosecco vs. fish and chips
May’s problem is that her ministers have almost certainly overestimated their leverage. While about 45 percent of U.K. exports go to the EU, only about 8 percent of exports coming from EU countries head to the U.K.
The imbalance was laid bare by Italian Trade Minister Carlo Calenda at the end of last year, when he recounted to Bloomberg TV one of his arguments with British Foreign Secretary Boris Johnson. “[Johnson] said: ‘You’ll sell less prosecco.’ I said: ‘OK, you’ll sell less fish and chips, but I’ll sell less prosecco to one country and you’ll sell less to 27 countries.’”
France’s Foreign Minister Jean-Marc Ayrault has also repeatedly insisted that the U.K. cannot have an “à la carte” deal with the EU.
“The political dimension of this issue is more important on the side of the 27 remaining members to keep the cohesion. Of course, there are some trade interests … but the signal would be even more disastrous for countries with important elections like France, if Europe was seen to have an open door for trade negotiations,” said Elvire Fabry, a senior research fellow at Notre Europe, a think-tank based in Paris.
“My expectation of the EU side is the response will be a hard one,” she added.
This strong opposition in Paris, Rome and Berlin to bending EU rules means British companies will be facing far higher costs.
According to World Trade Organization rules, British-made cars will face 10 percent tariffs entering Europe once London leaves the EU, while sheep farmers will face 12.8 percent duties on their lamb.
Other companies such as machine makers and Scotch whisky distillers will find themselves facing far higher costs around the world when they crash out of the EU’s many trade agreements, ranging from Canada to South Korea.
Kathy Roussel, head of the Brussels office of AHDB Beef and Lamb, a large livestock lobby, said 95 percent of British lamb exports go to the EU.
“Any disruption there will have a significant impact,” she said. “A tariff of even 12 percent would mean that the U.K. would become less competitive.”
While attention tends to focus on complex EU-wide supply chains in the engineering sector — such as Airbus wings being made in the U.K. — it is also a major issue in the food business, said John Royle, chief livestock advisor at Britain’s National Farmers Union.
British beef is often exported for processing to the Netherlands and Ireland, then re-exported back to Britain as burgers, he said. This could leave May in the unenviable political position of driving up food prices.
“If you have tariffs, do you have it both ways? If so, then all of a sudden, you have to ask what the impact would be on consumers,” Royle said.
Britain’s strategy to exert leverage in negotiations is to threaten to deregulate, bring down taxes and set itself up as Europe’s free-wheeling Singapore.
The difficulty is that the EU, again, holds many of the cards. The EU not only decides whether to issue “passports” to British financial institutions, but effectively grants all countries a right of veto over trade deals.
That means that countries can block any potential trade arrangements over other grievances. Poland, for example, can use its trade veto to exercise leverage on migration issues.
Most significantly, the Netherlands, one of the U.K.’s closest allies among liberal northern European economies, has said that it will not accept Britain turning itself into an offshore tax haven.
In an interview with NRC Handelsblad, Dutch Finance Minister Jeroen Dijsselbloem argued that Britain was in danger of reverting to its economic malaise of the 1970s: “outdated, massive unemployment and totally impoverished.”
“They are threatening to become some sort of pariah on the edge — a fiscal paradise. That is exactly the direction we must not take.”
Additional reporting by Jakob Hanke.