A quickie divorce, step two: trade in goods

In the last blog I argued that HMG first needs to flush out the attitude of the EU before committing time and political capital to negotiations. I suggested the EU’s sponsorship of the UK’s independent representation at the TiSA talks in Geneva as a touchstone of the EU’s intentions. If negotiations do take place, the UK’s position on services should be the status quo ante, governed by binding arbitration, failing which reciprocity.

I now turn to trade in goods, where a zero-tariff regime makes increasing sense. It has never been easy to get other countries to reciprocate a zero-tariff policy. But as events are turning out, zero tariffs are emerging as the most elegant solution all round. They should be combined with an invitation to the EU to reciprocate, addressing the concerns of integrated supply chains and manufacturing exporters in general. If this invitation drives a wedge between Brussels and its constituent exporting nations, that will work to the UK’s advantage.

Zero tariffs reduce costs for manufacturers and consumers. Politically, they also:

relieve both sides of the unrealistic burden of line-item negotiations;

take the high ground in the international community; and

show support for (eg) financial services or car manufacturers, who would probably lobby the EU to reciprocate.

Should the EU decline to reciprocate, a zero-tariff regime represents its own fall-back position. International manufacturers in the UK will be able to source from anywhere in the world, free of duties. They will then have to balance the undoubted gravity effects of the proximate European market with the UK’s other attractions, including any newly emerging relief in the tax regime.

Critics of this policy may fairly point out that it has only been taken up by the two city-state entrepôts of Hong Kong and Singapore, suggesting that it has little application to major economies. But this conclusion does not follow. The overall level of EU tariffs is 5.3%, some 180 basis points above world levels of 3.5%. Both are well below any reasonable test of materiality. It is also not at all clear which UK sectors need the protection of tariffs.

We sometimes hear that a zero-tariff regime would deprive the UK of bargaining cards in free trade negotiations. The facts are against this. Singapore has a network of free trade agreements (encompassing almost twice the GDP of those achieved by the EU), including agreements with the ASEAN group, EFTA, China, India, Japan, Korea and the US. Hong Kong has free trade agreements with ASEAN, China and EFTA.

We are also told that zero tariffs would deprive the UK of penalties for dumping. This is hard to understand as nothing in such a regime would cause the UK to relinquish its rights in such matters.

In the final blog, we will turn to the financial settlement.