By ROSS CLARK
PA/Reuters
It has been assumed by many, not least by Michel Barnier, the chief EU negotiator, that when it comes to the crunch the Government will not be brave enough to leave the EU without some kind of deal, that ultimately Theresa May and David Davis will meekly agree to pay whatever ransom the EU demands of it.
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Yesterday it became clear that this is not the case. While ministers seem prepared to pay some sort of leaving bill, it was revealed that Liam Fox and his department for international trade are making detailed preparations for the prospect of a departure without a free trade deal.
PA WireThe EU would not be allowed to impose more punitive tariffs on Britain than it applies on other countries
Such an outcome would be far from ideal. A modern economy requires goods to pass across borders as deftly and as cheaply as possible. Businesses require that services, too, be conducted across borders. Anything that interferes with that process increases costs and hits productivity. But neither would leaving the EU without a deal be a disaster.
Britain and the EU will remain members of the World Trade Organisation and are therefore bound by limits on tariffs – import taxes – which may be applied. The EU would not be allowed to impose more punitive tariffs on Britain than it applies on other countries. Currently, those applied by the EU average 5.3 per cent.
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If British businesses exporting goods to EU countries or importing goods from them had to start paying a 5 per cent tax it would hurt but there are plenty of other taxes which could be reduced in order to compensate: employers’ national insurance contributions, for example, business rates and so on.
The sectors where EU tariffs are highest are, interestingly, ones which would hurt EU businesses exporting to Britain especially hard. On cars tariffs are 10 per cent and on wine 32 per cent. German carmakers exporting to Britain will, as a result, face losing market share to American and Japanese producers, while French wine-makers may struggle to compete with Australian and Chilean producers.
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Overall, it is EU exporters who would have most to lose from the absence of a deal with Britain. In the second quarter of this year Britain ran a trade deficit with the rest of the EU of £8.9billion. Leaving the EU without a deal would not be without its advantages. It would free Britain instantly from having to obey any lingering EU regulations which might otherwise be attached to the terms of a free trade deal.
As the Chancellor Philip Hammond said, Britain could choose to adopt a radically different economic system – becoming a low-tax, low regulation business-friendly economy. We already have a reputation for being a good place to set up a business. But outside the EU we could go much further. We could, for example, emulate Singapore, which consistently tops polls for the most business-friendly economy in the world thanks to low taxes, streamlined employment law and access to capital.
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Remainers, of course, scorn the idea of Britain becoming a European Singapore. It can’t be taken for granted that a UK government would be brave enough to go down that route – which is perhaps why Philip Hammond has rowed back on the idea somewhat. There is little question, though, that many in the EU are terrified about Britain drawing investment away from the EU. A World Bank survey which puts Singapore as the most business-friendly country puts the UK at number six, Germany at number 15 and France outside the top 20.
Brexit talks: David Davis and Michel Barnier hold press conference
Thu, August 31, 2017Live pictures from the third round of Brexit negotiations in Brussels
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David Davis gives a press briefing at the end of third round of Negotiation on 'Brexit' talks at the EU Commission, in Brussels
It has been clear for some time that Michel Barnier and many others around him value a political victory over Britain over the economic wellbeing of EU member states. They are quite prepared to compromise free trade in order to be seen to mete out some kind of punishment for Britain. Theirs is not a position of strength. What drives them is the fear that other member states will follow Britain in coming to the conclusion that they, too, would be better off outside the EU. Their thinking is logical in one sense.
The prospect of another nation wanting to leave is higher than they dare think. A poll in the Netherlands this spring, for example, suggested that 56 per cent of the population favour leaving the EU. In Sweden public opinion is generally negative towards the EU. Even in Poland, where pro-EU views are strongest, the EU now seems to be doing its best to turn the public against it by challenging the rights of the Poles to make their own laws.
François Lenoir/Reuters
Britain is not unique in having a large Eurosceptic population, only in having held an in-out referendum in recent years. The EU would certainly not be able to withstand the loss of another of its net contributors. It cannot exist in its current form only with countries which take out of the budget.
Hopefully the EU will come to its senses and negotiate a proper free trade deal with the UK, allowing cross-border business to carry on pretty much as it does now. But if not, and we have to conduct business with the EU under WTO rules, it will not be a disaster.
Chances are that within a year or two the EU, minus Michel Barnier, will come back to do a deal after all.
