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Will the UK get a trade deal with the EU?

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If the UK votes to leave the EU, one of the biggest tasks following the referendum will be to negotiate a new trading relationship. The Remain campaign has continuously warned of the risk of the EU introducing tariffs and making it harder for the UK to export to EU countries. The Leave campaign has argued that there will be some level of free-trade deal, as the EU would not want the UK to put up tariffs against EU goods and damage their exports.

The government has claimed that a new deal with the EU is very unlikely to be done in the two year negotiating period set out in the EU treaties and Britain could face a decade of economic uncertainty because of the absence of trade deals. This, however, assumes that the EU countries would not use the provisions available to keep the UK in the EU until an agreement on trade is reached.

It is worth considering that the EU and eurozone are still not fully recovered from the financial crisis and would not want to do anything to risk damaging their economies.

Data from the ONS shows that over the ten years from 2004 to 2014, twenty-four of twenty-seven other EU member states had a trade surplus with the UK, selling more to the UK than they bought from it, in 2014, alone Germany sold the UK £27 billion more than the UK sold to them. In fact, for ten EU countries, representing 80 per cent of the post-Brexit EU population, that deficit is worth over £1bn a year to their economies. This means that any significant barriers to trade would have a likely negative impact on the exports of most EU countries, damaging their economies’.

The only three countries with which the UK has not had a trade deficit during that period are Ireland, Luxembourg and Malta. Given the level of Irish trade, and the recent support for the UK offered by the Irish Finance Minister, and the very unlikely prospect of Malta and Luxembourg blocking a trade deal with the UK under pressure from the rest of the EU, there is every chance the EU would want secure a free trade deal. Otherwise Brexit may have a damaging impact on the already fragile EU economy.

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Though it is likely, that in the immediate aftermath of a vote to leave, countries will seek to play down any chance of a good deal for the UK. The prevailing economic interests make it likely that the EU and UK will reach some type of free trading arrangement. This is even more likely given that both Germany and France are electing new governments in 2017. In the build up to the elections these two countries, which wield enormous influence in the EU, may wish to be seen to be protecting the interests of the EU and punishing the UK for leaving. However, governments, particularly whether they are facing elections or are newly elected, will not want to be seen to be damaging their own economies by holding out on an agreement. It is difficult to see a French or German government being elected on such a platform, with their domestic industries being so dependent on UK trade.

It therefore seems likely that a trade deal will be in place in time for the UK leaving the EU. Failure to do so would reflect equally badly on both sides.

Update 20th June 2016

The claim has been made that because the EU sells us less as a proportion of their exports than we sell them, they will be less inclined to secure a trade deal. However, if you break this down by country, looking at IMF data on EU member goods exports, for 26 of the 27 other EU countries the UK buys more from them, as a proportion of their total exports, than each member country buys from the UK, as a proportion of the UK’s total exports. This means that for 26 EU countries, the UK is a more important trading partner to them than they are to the UK. The only exception in Germany, where the UK buys 7 per cent on German exports, whereas Germany buys 10 percent of UK goods exports. The significant levels of bilateral trade means that it is unlikely Germany would be willing to forgo the opportunity for a trade agreement, in fact a trade agreement with the UK, post-Brexit, would be the biggest trade deal, in terms of the value of exports it covers, that the EU would have ever made.

  • Justin Protts – EU Research Fellow

 

Photo Credit: Humberto Acevedo