Developing Trade

David Vines, Paul Gretton and Anne Williamson

National Institute Economic Review, 2019, vol. 250, R22-R29

Abstract: The UK faces no easy options in determining how to develop its approach to international trade post-Brexit. If it finally decides to leave the European Customs Union and Single Market, it faces the possibility either of simply crashing out of the EU without a deal; trying to form market-access agreements and Free Trade Areas (FTAs) with the EU and other countries; or unilaterally reducing tariffs and liberalising trade with all countries. Each course raises significant practical difficulties, and entails major disadvantages compared with staying in the Customs Union and Single Market. The economic costs of a ‘no-deal’ approach stand to be very large, including inevitable tariffs, obstruction of UK access to EU markets, physical disruption at borders, a damping of investment and the much-discussed problem of the Irish border. Assuming ‘no-deal’ does not happen, negotiating FTAs with other countries would be possible only after a lengthy transition period, as in the Withdrawal Agreement voted down in Parliament, and would depend on the shape of the ultimate post-Brexit trading relationship between the EU and the UK. The process would be difficult, costly, and protracted; would likely be concluded on disadvantageous terms; would be even harder to apply to trade in services; and would yield extremely small gains given the volume of UK non-EU trade that is already covered by FTAs. Finally, unilateral liberalisation, while ameliorating some of the drawbacks of the first two options, faces the same problems of loss of access to European markets and disruption to trade; and would entail severe economic pain with only very gradual gains. The UK needs to conduct a much more profound and considered debate on these issues before deciding to set aside the large benefits of membership of the Customs Union and Single Market for the significant difficulties and tenuous gains offered by the alternatives. Public debate on the economic effects of trade policy has so far lacked the detailed but necessary analysis of these questions. It seems essential to establish a national policy review institution, modelled on the Australian Productivity Commission, in order to stimulate such a debate.

Date: 2019
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