Liam Fox, the secretary of state for international trade, is right about one thing: a UK-EU customs union would leave the UK “in a worse position that it is now”.
Economically speaking, compared to being a full EU member, a EU-UK customs union would leave us worse off. However, there is little evidence to back his assertion that it would leave us worse off than if we were to follow his plan, and free ourselves to trade with the world.
Being in a customs union doesn’t, in and of itself, prevent the UK from running its own trade policy – it would constrain our ability to make concessions on goods tariffs, but we would still be free to negotiate in the areas of services, data, investment, procurement and intellectual property. Fox, who delivered a “road to Brexit” speech on Tuesday, worries it would tie our hands. Perhaps. Perhaps not. Regardless, the idea that future free trade agreements will compensate for the losses of Brexit is for the birds.
It is an open secret – albeit one that’s under-acknowledged by trade policy professionals – that signing a free trade agreement does next to nothing for a country’s headline GDP. For reference, the flagship EU-Canada free trade agreement is only predicted to increase European GDP by 0.03% – a rounding error. Without harmonisation of rules, supranational regulatory architecture, and effective accountability mechanisms – such as those that exist within the EU – it is difficult for governments to do much more than lower some (often already low) tariffs.
This is especially true of services trade, which is difficult to measure at a border, and can fell governments if something goes wrong (see the financial crisis, for example). How much access does any one country or bloc want to grant to a systemically risky sector it has no control over, no say in how it is governed, and no means of holding to account if something goes wrong? Answer: not much. What about qualifications? Is the public really happy for a doctor from another country to set up shop and operate on them with little guarantee that their qualifications are of an equivalent standard to those trained domestically? (Those criticising the EU on its approach to services also need to ask themselves why the EU is the only modern example of multi-country, comprehensive cross-border liberalisation in services trade.)
Compounding matters, countries tend to trade more with partners that are near than ones that are far away. Distance matters, and the EU is right on our doorstep.
The government’s own numbers undermine Fox’s bravado. In an economic analysis leaked to Buzzfeed, it’s estimated that post-Brexit trade deals with the US, China, India, Australia, the Gulf and the Asean bloc would add between 0.3 and 0.6% to GDP in the long run. Even if you assume all these deals are completed (an incredibly optimistic assumption) Brexit is still estimated to leave the UK 2-8% poorer than we would have been had we remained.
As Sir Martin Donnelly – formerly the top civil servant in Fox’s department – told BBC Radio 4’s Today programme: we risk giving up “a three-course meal … for the promise of a packet of crisps in the future”.
The irony is that, rather putting Fox out of a job (as the joke goes), a UK-EU customs union would actually assist him when it comes to his most pressing concern: replacing the 50-plus trade agreements the UK is already party to by virtue of its EU membership. These include agreements with countries such as Turkey, Korea and Switzerland that UK companies already rely on. And as it stands, we can’t guarantee they will continue to apply throughout a transition period, never mind once we leave.
While new shiny trophy free-trade agreements might spruce up his ministerial desk, they are good for little else. And a government acting in the rational, economic interests of the country would adjust its policy accordingly.
• Sam Lowe is a trade expert at the Centre for European Reform
