'No Deal' With EU No Disaster for Post-Brexit U.K., Says Report

  • Britain should pursue trade regardless of EU ‘threats’: IEA
  • EU’s other 27 members make up U.K.’s biggest trade partner

U.K. Prime Minister Theresa May

Photographer: Simon Dawson/Bloomberg

A U.K. trade deal with the European Union after Brexit is desirable but not essential, the Institute of Economic Affairs said, in support of Prime Minister Theresa May’s repeated assertion that no deal is better than a bad deal.

Britain should walk away from talks on a post-Brexit trade deal if the EU offers bad terms that lead to a protectionist and costly agreement, the IEA, a free-market think tank, said in a report on Friday. Instead, it said the country should trade with the EU under World Trade Organization rules, seeking a policy of zero tariffs while brokering free-trade agreements with major trading partners including the U.S.

“Many people believe that disaster will befall us if we do not forge a deal with the EU,” said Jamie Whyte, research director at the IEA. “In fact, we could unilaterally eliminate all import tariffs, which would give us most of the benefits of trade, and export to the EU under the umbrella of the WTO rules.”

Looming trade discussions are shaping up to be one of the trickiest tasks on the agenda of Brexit negotiators. Britain and its business lobby groups are seeking as “frictionless” as possible commerce with the EU post-Brexit, while EU politicians signal that Britain won’t be able to benefit from the same access once it’s no longer a member. 

‘Fantasy’ Plans

For now, the talks are in abeyance, with the EU saying it will not discuss a future deal until the issues of citizens’ rights and Britain’s exit bill are resolved. The slow pace of talks so far has stoked fears Britain will leave the EU before trade talks conclude.

The IEA paper comes days after the U.K. released a document on customs which Guy Verhofstadt, the European Parliament’s point person on Brexit, derided as a “fantasy.” In a tacit acknowledgment that time is ticking down, Britain is seeking a transition period between Brexit day in March 2019 and the day when new trade arrangements can set in. During that period, the U.K. would leave the EU’s customs Union, allowing it to broker new trade deals with third countries, but customs arrangements with the bloc would be largely unchanged.

Trade will not stop after Brexit even if the two sides fail to agree to a deal, the IEA said. Instead, the exchange of goods would continue under WTO rules, which would prevent the EU from charging punitive taxes on goods, while tariffs would hurt EU consumers, according to the policy analyst. It recommended that Britain unilaterally get rid of such duties with trade partners including Europe, while encouraging them to do the same.

Bargaining Chip

“Compared to an outcome in which the U.K. and the EU traded under WTO terms, there would be benefits for the U.K. to unilaterally liberalizing as it would reduce the cost of imports,” said Thomas Sampson, an economist at the London School of Economics, who hadn’t seen the IEA report. “The cost is you’re giving away the bargaining chip that you would normally use to get concessions out of the EU.”

The U.K. should pursue its own trade policy regardless of “threats” from the EU, the IEA said. The country could seek free-trade agreements with countries such as Canada, Australia and New Zealand and use a tariff-free approach to become a “super-Singapore or super-Dubai.”

However, Sampson cautioned against dismissing the importance of the EU when negotiating future deals. The bloc is the U.K.’s largest trading partner accounting for almost half of all imports and exports in 2016.

“The U.K.’s priority should be to do everything it can to secure an agreement with the EU,” he said. “The potential gains from securing an ambitious new agreement with the EU are much larger than those of negotiating with the U.S. or any other country.”

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