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Does Britain need the EU more than the EU needs Britain?

Writing in The Daily Telegraph, former Conservative Chancellor Norman Lamont argued that “I have often said that we could succeed economically outside the EU… What is often forgotten is that the EU needs a [free trade] agreement just as much as we do.” This came in response to a research document produced by the Cabinet Office which emphasised the risks of Brexit and the difficulty of negotiating a trade deal with the remaining EU members while simultaneously disentangling from it, suggesting the whole process could take over a decade with little gain.

According to the government’s civil servants, 44 per cent of British exports go to the EU, so Britain ‘is more reliant on exports to the EU than the rest of the EU is reliant on exports to the UK’. This, they say, is because ‘as a share of the economy, only 3.1 per cent of GDP among the other 27 Member States is linked to exports to the UK,’ which contrasts with 12.6 per cent of UK GDP linked to our EU exports. The UK does, though, have a ‘surplus of £17 billion on trade in services with the EU’.

However according to statistician Jonathan Portes, about 16% of the EU27’s external goods trade goes to Britain, more than the next highest, the USA (15%) and China (8%). The remaining EU would therefore have a serious incentive to conclude a free trade deal with Britain during exit negotiations. David Davis, former shadow Home Secretary, argues that ‘We currently import £59 billion more from Europe than we export’, so the remaining EU has a real incentive to negotiate seriously and include services in the exit deal.

The EU’s defenders sometimes argue that 3-4 million British jobs are associated with exports to Europe, so argue trade links should not be altered in case those jobs are threatened. Davis points out that the EU-27 economy has 5 million jobs associated with Britain in the opposite direction, including 1 million from the German automobile industry and nearly 500,000 from French wine and cheese production. Under WTO terms, tariffs on car sales in each direction would be 10% and on beverages, over 20%.  A free trade agreement (FTA) between the parites is needed to avoid these WTO tariffs.

Davis continues:

’The first few months [after an exit vote] may be hysterical, but the leaders of France, Germany, Spain, Italy Poland and the rest know that the way to lose elections is to destroy your own industries.   That is a powerful advantage for us.‘

In addition there are roughly 3 million EU citizens living in Britain, while far fewer Britons live in the rest of the EU, many of them in Spain.  This means there is an additional reason for EU countries to negotiate a sensible deal: it is in the interests of Ireland, Portugal, Italy and Poland among others not only to keep free trade flowing, but to protect the rights of their citizens to work in Britain.

Furthermore, the other EU states currently enjoy Britain’s budget contributions, which have been a net loss for the UK every year except 1973, even taking the rebate and CAP payments into account. The budget contribution was £8.5 billion (net) last year, as explained in our factsheet – this means a significant portion of the cohesion funds, structural funds and farming subsidies enjoyed by other members is supported by British payments.

The Centre for European Reform points out that ‘half of the EU’s trade surplus with the UK is accounted for by just two member states: Germany and the Netherlands’. Indeed, several EU members are in deficit to the UK.  Since all 27 EU members will be able to veto or delay the exit negotiations at various points, as the Cabinet Office repeatedly emphasised, this is an important fact for British negotiators to bear in mind.

The Cabinet Office report notes that in Brexit negotiations, the other EU members will be ‘driven by their own national, political and economic interests, and would fight for them as hard as we would for the UK’s position’. Reaching agreement would ‘involve potentially unpalatable trade-offs’ since unlike everyday EU business, most of which is conducted by qualified majority voting, the exit negotiations need unanimity among the EU-27, so any country can veto proceedings.

Of course, in reality, pressure from Germany and the other big traders, plus Ireland which is especially exposed to a poor exit settlement, is likely to dissuade members like Croatia or Hungary from vetoing an exit deal. Nevertheless, those that rely on Britain mainly for its budget inputs and free movement rights – many of the central and eastern European nations – will push for their privileges to continue.

Overall, the EU relies on Britain as much as Britain does the EU, perhaps more in terms of associated jobs and trade flows. The UK’s delegation can aim for a good free trade deal with the Dutch and Germans straightforwardly, but will need to use their guile to stop other nations blocking a comprehensive free trade deal covering goods and services. To do this, it is likely that some form of privileged migration rights for EU citizens will continue, as will some contribution to the EU budget, as is maintained by non-EU members Norway and Switzerland.