The EconomistJuly 22nd 2017 Britain 452 would preserve tariff-free access for most
goods and could even coversome services
(though notusually financial services). It
would mean no free movement, no auto-
matic adoption ofEU regulations and
probably no ECJ, though some dispute-res-
olution mechanism would be needed. The
disadvantage is thatfree trade is not the
same as frictionless trade. There would be
customs controls and rules-of-origin
checks, many services would not be cov-
ered and there would be non-tariff barriers
thanks to differential regulation.
The final menu, which would also be
likely in the end to follow from no deal, is
to revert to trading with the EUunder
World Trade Organisation rules. This is not
totally straightforward, because although
Britain is a WTOmember its tariff and im-
port schedule is set via the EU, and having
a schedule of its own would require divid-
ing up the EU’s import quotas for things
like New Zealand butter. Trading on WTO
terms implies small tariffs on goods such
as cars and pharmaceuticals and larger
ones on farm products. It does notcover
services. Non-tariff barriers would remain.
And there is the WTO’s most-favoured-na-
tion principle, which allows discrimina-
tory trade practices only in an approved
free-trade area. This means that, if Britain
and the EUagreed to avoid mutual 10% ta-
riffs on cars, they would have to offer the
same deal to other countries.
It will cost you
The Brexit menus share two characteris-
tics. One isthat, except for the EEAoption,
they would take time, perhaps several
years, to negotiate.
The second is that all would impose
losses on the economy. Brexiteers rejected
the Treasury’s projections for the cost of
Brexit last year as “project fear”. But the
Centre for Economic Performance at the
London School of Economics has remod-
elled the trade consequences. It concludes
that the hardest form of Brexit, a reversion
to WTOterms, would cut trade by 40%
over ten years and reduce annual income
per person by 2.6%. A softer version like the
Norwegian model would cut trade by
20-25% and reduce annual incomes by1.3%.
And these are just static effects. There
would also be dynamic negative effects
from lower investment and slower produc-
tivity growth.
Britons are unprepared for such a hit to
their incomes. And the more distant Brit-
ain’s relationship with the EU, the bigger
the income loss. This is a crucial trade-off
that Mrs May’s government has been re-
luctant to acknowledge. Britons face a
choice: to minimise losses from Brexit, they
must cede some sovereignty to the EU,
while to maximise freedom from Brussels,
they must accept a larger drop in incomes.
What makes this choice harder is the
state of the economy. Immediately afterthe referendum Brexiteers crowed that the
doomsters were wrong: the economy had
not suffered and confidence remained
high. Yet in the first quarter of 2017 Britain
fell from being one ofthe fastest-growing
economies in the EUto the slowest-grow-
ing, partly because of uncertainties over
Brexit. Higher inflation, caused in part by a
fall in the pound, is eating into real in-
comes. It is no wonder that Philip Ham-
mond, the chancellor, is demanding that
the economy should be given higher prior-
ity in the Brexit negotiations. Labour is also
arguing for a “jobs first” Brexit.
Nor is trade with the EUthe only pro-
blem. Before even getting into new trade
deals, Dr Fox must find a way to replicate
the 35 free-trade agreements that Britain
currently has via the EUwith 53 countries.
The raw arithmetic is that some 44% of Brit-
ish exports go to the EU, 16% to countries
with which the EUalready has a free-trade
deal and about 20% to America. Donald
Trump may have promised an early deal
with Britain, but experience shows it will
be neither easy nor quick—and Mr Trump
may then be long gone.
Third countries need to know the terms
of Britain’s trade with the EUbefore mak-
ing bilateral deals. Monique Ebell of the
National Institute of Economic and Social
Research, a think-tank, calculates that
downgrading from single-market member-
ship to a free-trade deal with the EUwould
reduce British trade by about a fifth, where-
as free-trade deals with the fourBRICcoun-
triesplusAmerica, Canada, Australia, New
Zealand, Indonesia and South Africa com-
bined would boost it byjust 5%.
Next is the question ofEUregulators, of
which Euratom is but one. Some 35 EUreg-
ulatory bodies govern such things as medi-
cines, aviation safety, environmental rules,
financial servicesand phytosanitary stan-dards. All come under the ECJ, so if that re-
mains a red line for Mrs May Britain must
set up a new set of regulators of its own.
These would largely have to replicate the
EU’s rules to maintain regulatory equiva-
lence. Most companies prefer to stick with
the system they know, and many fear that
setting up British regulators would not
only take time and money but also force
them to obey two lots of rules, not one.
There is much else to do. Sorting out
what powers repatriated from Brussels
should go to the devolved administrations
will be testing; the Scots say they might
hold up the EUwithdrawal bill, and La-
bour supports them. Hundreds of treaties
on matters ranging from air transport to
data sharing must be renegotiated with
third countries. Ways must be found to co-
operate in scientific research, foreign poli-
cy, defence, security, counter-terrorism and
intelligence. All of these raise yet again the
issue of the ECJ, which has jurisdiction
over data-sharing and various justice and
home-affairs measures, including the Euro-
pean arrest warrant.Sic transit gloria
One conclusion is that all this cannot pos-
sibly be dealt with by March 2019. To give
the European Parliament time to ratify the
Article 50 divorce, its termsmust be agreed
by around October 2018. Businesses that
have to plan ahead, such as airlines, need
certainty long before that. Without a deal
allowing them to fly after Brexit, airlines
might have to stop selling advance tickets.
Banks and others want to know the rules
they will face by next spring. And that
points to something else, which has long
been assumed in Brussels and is slowly be-
ing accepted in London: thatthere must be
a transition period after March 30th 2019.
Yet it will not be simple to arrange one,
because negotiatorswill want to know the
ultimate destination, at least in principle,
before agreeing the terms for a transition.
Business lobbies and, quietly, the Treasury,
are pushing to stay in both the single mar-
ket and the customsunion during transi-
tion, to minimise disruption. The simplest
idea would be to prolong the status quo for
three or four years, but that would not sat-
isfy those who are keen to get on with leav-
ing. An alternative might be temporary
EEAmembership, but Brexiteers might fear
that the temporary arrangement would
become permanent.
Transition will be key to making Brexit
less disruptive. But on its own it will not re-
solve the dilemmas facing the govern-
ment. For that, more honesty, less inclina-
tion to tar any critics as seeking to subvert
democracy and greater readiness to ac-
knowledge Brexit’s trade-offs are required.
One other thing is certain: those who said
the only way to take the EUoff Britain’s po-
litical agenda was to have a referendum
have been proved utterly wrong. 7