Brexit Would Hand U.K’.s Trading Fate to Others

Outside the EU, Britain could find many countries weighing in on its trade arrangements

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The Luna Maersk container ship made its way toward the port of Felixstowe in the U.K. earlier this year. Britain’s trade arrangements would come into question if advocates of leaving the EU prevail in a June 23 referendum. Photo: Chris Ratcliffe/Bloomberg News

Stephen Fidler

The Wall Street Journal

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Biography Stephen Fidler
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Updated June 10, 2016 1:37 a.m. ET

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Many of those people who intend to vote to leave the European Union in this month’s U.K. referendum say they want to claw back control over British affairs from Brussels. The irony is that a decision to exit the EU would put the U.K.’s fate as a trading nation into the hands of dozens of foreign governments.

As Britain debates what type of trading relationships it would have with the rest of the world after an exit, here’s the thing: Other countries get a big say too, and it is hard to say in advance what their motivations would be.

“The major problem of ‘Brexit’ is the illusion of control,” said Otilia Dhand, Brussels-based analyst for the Teneo Intelligence consulting firm.

In negotiations over trade between the U.K. and the rest of the EU, each country has a veto, and outcomes are therefore not in the hands of the U.K. or even of Germany.

“It opens up a lot of questions which are not about Britain,” she said.

ENLARGE

Rows of new automobiles sat parked at the British port of Bristol in December. Photo: Chris Ratcliffe/Bloomberg News

Many campaigners for exit say other EU governments would be “shooting themselves in the foot” by obstructing open trade, post-exit, with the U.K. They say German car manufacturers, among others, would surely want tariff-free access to the British market.

Yet not every economy in the EU is an export behemoth like Germany, and governments would have other issues to consider. Politicians and officials in Brussels, for example, worry that delivering a deal that looks too sweet for the U.K. could tempt other countries down the same path, risking a larger-scale disintegration of the EU. That prospect, in their view, could spell much more damage to the European economy than if the British exit on tough terms.

In a bid to minimize prospective economic disruption, some pro-exit British politicians have revived the idea of a Norway-style arrangement. The idea would be for the U.K. to slot into the European Economic Area, which includes the 28 EU members along with Norway, Iceland and Liechtenstein.

That would in effect keep the U.K. in the single market—with the drawback that it would have to pay a membership fee perhaps greater than now, as well as accept free movement of people and a swath of EU regulations over which it would no longer have any say.

Apart from this arrangement being unacceptable for many who will have voted to leave the EU, there is another issue: Thirty other governments would have to agree to it, each one wielding a veto right.

Some of them might balk, particularly if the EEA becomes, as some Leave supporters have suggested, just a staging post to Britain eventually pulling out of the single market entirely.

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Yves Herman/Reuters

A post-exit U.K. could also decide it wouldn’t need a special deal with the EU—now responsible for about 47% of the country’s trade in goods—or indeed with the 58 other economies with which the EU has negotiated trade agreements, responsible for a further 13%.

Instead, it would just rely on its membership of the World Trade Organization, which governs world-wide trading rules among its 162 members. That would mean higher average tariffs on British exports, but trade wouldn’t grind to a halt.

But the U.K. can’t just step into a deal with the WTO, because its trade arrangements with most countries, including the U.S. and China, have been negotiated via its membership of the EU.

“Key aspects of the EU’s terms of trade could not simply be cut and pasted for the U.K.,” WTO Director-General Roberto Azevêdo said in a speech in London this week. “Therefore important elements would need to be negotiated.”

Should the U.K. remain in or leave the European Union? That's the question the British public will decide in a referendum on June 23. WSJ's Niki Blasina explains the debate and what's at stake.

Indeed, the U.K. would have to secure an agreement with the 161 other members on a proposed schedule covering an extensive list of issues from tariffs and quotas, agricultural subsidies, trade in services, movement of people and public services.

That has never been easy in an environment where most governments are, in the words of one senior official familiar with trade negotiations, “driven by politics and mercantilism.”

Nobody knows in advance what the timeline would be, but experience suggests an agreement could take years. Also unknown: what would happen if the U.K. left the EU without securing an accord at the WTO.

“If you need to complete a deal quickly when the other side can wait, you are negotiating from a very weak position,” Mr. Azevêdo said.

Some Leave proponents have suggested a course that should speed these negotiations: unilaterally reduce import tariffs to zero. The U.K. could further simplify talks by abolishing all agricultural subsidies and making other concessions to open its economy.

This approach—so far taken in the world only by Hong Kong, Macao and, except for some alcohol tariffs, Singapore—would cut costs of imports in the U.K., but make a mess of the country’s farming and manufacturing industries.

Beyond that it would make it nearly impossible for Britain, having unilaterally given away its negotiating chips, to persuade other countries to join it in trade agreements.

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17 comments

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Olesya Reyenger subscriber

Unity among neighboring states does not promote prosperity. It never did. Competition, fair and fierce, leads to better life for all, not only the winners.

Andrew Ash subscriber

You can be sure that the EU will find ways to punish the UK if they vote/try to leave. They will want to make an example of the UK as a cautionary tale to any other members who may be thinking about an exit.

Warren Hurt subscriber

The EU was a bad idea in 1999. It is a miracle it has held together this long. You can have sovereignty or unity, not both. Greece voted 60% to be out. The ECB laughed, smacked the little economy on the back of the head and said "shut up" and take what we give you.

If England votes BREXIT, they will be the ones doing the smacking. And Germany and Brussels are scared to death of that, cause in the end. The EU is a house of cards built on quicksand.

STEVEN FRANKEL subscriber

"Brexit Would Hand U.K’.s Trading Fate to Others"

But it won't be the lead bottoms in Brussels that will shackle the UK with all manner of obstacles.

Laslo Olah subscriber

This entire piece could be summarized like this:

"Brussels is scared to death that the EU is disintegrating. But they are stupid and arrogant enough to understand their own problem."

...“The major problem of ‘Brexit’ is the illusion of control,” said Otilia Dhand, Brussels-based analyst for the Teneo Intelligence consulting firm..."

A "BRUSSELS-BASED" analyst; now that gives a lot of credibility to her.

MARK SOWA subscriber

If the EU pushes back after an exit, maybe the Brits could remind them of who bailed them out in 1944!

well, maybe they shouldn't emphasize that to the Germans.

Helena Murrell user

Hello - we are determined to do the right thing - from Yorkshire to Scotland to Wales to Penzance via East Anglia. We want the world to catch up - the sooner the better. We want everyone to get on board and adapt.

Mr Don Brazier - we are going to have a 'British style deal' - the average British voter does not know about macro economics - maybe that is their strength.

Kevin Ryan - commentor on this feed - saying "Besides, by intending to leave the EU, the UK will be in breach of Article 3 of the Agreement - not the best basis on which to try and get back inside of it..."

I think Mr Ryan is not really aware of the contracts and treaties in detail.

John Pound subscriber

'That has never been easy in an environment where most governments are, in the words of one senior official familiar with trade negotiations, “driven by politics and mercantilism.”'

To all "fair" traders - this is how governments define "fair".

Free trade involves neither of the above...

Philip Crawford subscriber

The idea that EU car makers won't want tariffs on sales of cars to the UK is typical of the nonsense spouted by Brexiteers who are unencumbered by the facts. Over 90% of UK car imports are from the EU (the remaining 10% is shared equally by Japan and Korea), so the EU manufacturers would actually be glad to have tariffs on cars. It would have no impact on their sales to the UK as they have an effective monopoly of the categories they sell in to, while adding tariffs to the UK car exports to the EU (the UK is currently the second biggest car exporter in the EU after Germany) will encourage manufacturers to move UK production to the rest of the EU especially Germany.

I find it amazing how many people conclude that something is "obvious" without looking at the numbers.

Thomas Leaver subscriber

I strongly beg to differ with Mr. Fidler. The EU was a great concept, only to fail in its implementation by the national politics and mercantilism/protectionism of its member states and the huge mistake of placing everyone (thank God not UK) under one currency and one central bank, for what is now 27 disparate economies. The only to benefit is Germany, until the banks go bust financing debtor nations buying their goods and services. The ship is sinking and the leadership in the EU is too self serving to do anything about it. So Great Britain, my adopted country, has to take a leadership role in fending for itself. At least if we go down, it is through our own accountability and line of sight responsibility, not because of some autonomous bureaucrat in Brussels or a committee of 28.

Pete North subscriber

Plenty wrong with this article. It's a collage of political memes and soundbytes rather than informed commentary. The complexity of the EU relationship makes it all but impossible to negotiate full separation in the mandated two years therefore both sides will use existing legal instruments and a transitional deal to allow a gradual phasing out of complex systems.

One legal instrument in this process is the presumption of continuity as set out in the Vienna Convention on Succession of States in respect of Treaties.

It would mean remaining in the EEA as a departure lounge. What that means is a genuine emergency brake on freedom of movement which is unilateral and it means we have a free vote and a veto on all new rules. The reason being that the vast majority of technical rules and regulations are not actually made by the EU. They are in fact made by Codex, UNECE, IMO, ILO and many other global bodies. Presently the UK is forced to adopt the common EU position.

Kevin Ryan subscriber

@Pete North But the author has pointed out that after Brexit, the UK's membership of the EEA would be subject to veto from 30 countries.

Do you dispute that?

The EEA Agreement is specifically between EFTA states and EU member states (see the definition of Contracting Parties). After Brexit, the UK will be neither.

Besides, by intending to leave the EU, the UK will be in breach of Article 3 of the Agreement - not the best basis on which to try and get back inside of it...

Hello from England - I doubt whether Miss Otilia Dhand has any experience of negotiating multi-million businesses deals with BMW or even tea from China. I think we can safely ignore what she thinks - she is in the bubble that is Brussels. We will see how we manage to organise things after we Leave.

Richard Bassett subscriber

Complete nonsense from the outset which demonstrates that Mr. Fidler hasn't got a clue about how the world works. Every trade agreement, indeed every transaction, is a two way street; willing buyers and willing sellers. Both British consumers and British producers will continue to buy and sell as individual consumers and producers around the world choose to do so.

This is undboutedly the worst piece that I have ever seen in the WSJ.

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