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Trading down

9 November 2015 By Hugo Dixon

Britain’s exit from the European Union is a real and present danger. Opinion polls show the “leave” and “remain” campaigns for a referendum that must be held by end-2017 are neck-and-neck. Meanwhile, the “Brexit” risk implied by betting odds is now 36 percent, according to Morgan Stanley, double what it was in the early summer.

The economic case for staying in the EU is compelling. If the UK quits, it will struggle to maintain full access to the single market, which is responsible for half its trade. It will also have less clout in securing trade opportunities with the rest of the world.

Norway, which is not an EU member, does have pretty much full access to the single market. But it has to abide by all the market’s regulations without a vote on them. It also has to pay into the EU budget and allow EU citizens to live and work within its borders.

Since such an arrangement would not be an improvement on the UK’s current membership, most British anti-EU campaigners have rejected it as a model. The snag is that their alternative – relying on Britain’s membership of the World Trade Organisation while cutting a series of bilateral deals – is even worse.

In its 20 years of existence, the WTO has not secured a significant multilateral trade deal. It has also done almost nothing to open up trade in services, which account for 80 percent of the British economy.

If the UK left the EU, it would be negotiating deals with blocs that were much larger than it. The GDP of the United States is six times as big, that of the EU (without the UK) five times as large and China’s is three-and-a-half times bigger.

The EU would be interested in doing a deal with the UK, but not as desperate as London. After all, while half Britain’s trade is with the EU, only 14 percent of the bloc’s trade is with the UK.

Britain would only have two years to negotiate an exit deal after telling the EU formally that it wanted to quit. If it failed to agree one, it would be thrown back on its WTO membership – which wouldn’t be much good. London would be under time pressure to cut a deal. As such, it would probably get only partial access for its goods and services – and still have to obey rules made in Brussels over which it didn’t have a vote.

Meanwhile, America, the UK’s second-largest trade partner after the EU, wouldn’t be keen to cut a trade deal with Britain at all if it quit the bloc, according to its trade representative. The United States is focusing on deals with other big blocs. It has just sealed a deal with 11 Pacific economies and wants to complete negotiating one with the EU as a whole next year.

In time, Washington might turn its attention to the UK. But there could be a long wait, during which British companies would be at a disadvantage to other European businesses that were able to penetrate the U.S. economy.

What’s more, America would drive a hard bargain, pressing for concessions that would be unpopular with the British public. It would demand better prices for its pharmaceutical companies, which complain that the UK’s National Health Service pays them too little because it acts as a monopsony – a single dominant buyer. It might also insist on Britain opening up its market to U.S. genetically-modified food.

Then there’s China. An imbalance of power would also determine the UK’s relationship with its third-largest trading partner. London has already given the impression of bending over backwards in order to secure business deals with Beijing during a recent visit by Chinese President Xi Jinping. If it were not part of the EU, the temptation for the UK to prostrate itself in front of the Chinese would be even greater.

Finally, the EU has about 50 trade deals with other countries. If Britain quit, it would have to negotiate such market-opening arrangements again. While it should be able to secure new deals, this would take many years – during which UK business would suffer. There’s also a risk that some countries would use London’s desperation to fix the terms of trade in their favour.

Cameron spent the first months after his re-election in May discouraging British businesses from speaking out on the benefits of EU membership – on the theory that if the UK looked too keen, that would undermine his ability to secure good terms when he renegotiates Britain’s relationship with the union. This was an error that allowed the “leave” campaign to gain a head start.

As the opinion polls have started to puncture Cameron’s complacency that he will win the referendum campaign easily, he has talked about the risks of quitting. But he is still being circumspect. Highlighting the trade benefits of EU membership should be high on the agenda.

(The latest version of this story corrects the percent of EU trade with the UK from 11 percent to 14 percent.)

Hugo Dixon is actively involved in campaigning to keep Britain in the European Union.



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