Brexit & “They need us more than we need them”

The following is a fact and informed assumption based article.  It is not about patriotism, optimism, talking the country down or any other emotional aspects but simply a reasoned, logic based argument.

lilico

Andrew Lilico has produced a report on “Seven key British perspectives on the Brexit negotiations“.  (See this additional blog for a point by point discussion on the article) Lilico as I understand it is a key “thinker” on the brexit side, however the 7 perspectives boil down to:

  1. They need us more than we need them because…
  2. We can afford a loss in GDP more than they can and therefore…
  3. We can, if necessary, walk away with no deal

We do not accept that the UK “inevitably has the weaker hand” in Brexit trade negotiations … Even were it true that the economic damage to the UK would, in GDP terms, be larger than for the EU … we think UK voters and politics will be more able to tolerate losing some GDP, in the short-term, than EU voters and politics will be. We believe our system and economy are solid, whilst the EU’s teeters on the brink. We can bear it. They can’t.

This is important so I’ll emphasise this. This entire article assumes, logically, that no deal is worse for the EU than it is for us and further, that we could, if necessary, walk away with nothing.

If this is true, we have a strong hand.  If not, we’re bluffing, and we will be caught out.

So let’s examine this, step by step.  Many figures, quotes taken from fullfact.org

EU/UK Trade position

It is true that there is a large trade deficit between the EU & UK:

The value of trade to the UK and the rest of the EU—we exported about £230 billion worth of goods and services to the rest of the EU in 2015, according to UK data, while the rest of the EU exported somewhere around £290 billion to us.

It is this £60 Billion deficit that drives much of Leave thinking on why they need us more than we need them.  However, If you look at that deficit on a country by country basis March 2017 Trade with other European countries RB

it becomes clear that the deficit is hugely skewed towards Germany.  Only 5 in 27 nations have a surplus of more than £5 Billion.  Germany may need a deal (more on this later) but for most countries it’s much less of a concern, if it is a concern at all.

This becomes even clearer when we look at relative market sizes.

44% of our trade goes into the EU, only 7% (admittedly some figures put it higher) of their trade comes to us.   It’s important to understand, every individual country gets a veto on the final deal so all 27 must be convinced it’s in their best interest.

And this doesn’t take into account the 50 trade deals that the EU has with the rest of the world and which we have access to.  Perhaps 15% of our non EU trade operates via those EU deals.

So.  44% + 15% = 59% of our trade goes through the EU. Let’s say 60% of total UK trade.

And given the argument over exact numbers let’s say EU trade to UK is 10% of total EU trade

If these figures hold, let’s run through a “no trade deal” impact scenario.

Impact of no deal

The following is greatly simplified but, as the government has failed to estimate the impacts of the no deal scenario it’s probably as good a picture as any.  The day after March 2019, if no deal is in place we lose access to the Single Market, the Customs Union & the 50 additional trade deals the EU holds.  See below for more on this.

  • UK – Trade will not cease with the EU and the other 50 countries, but it will reduce.  Let’s assume a reduction of 25%.
  • EU – The EU has a surplus and therefore it will lose more trade than we do, however, it will likely still have access to those 50 trade agreements.  But we’ll say 35%.

This is a simplification as we don’t know the exact mix, what sectors will be affected more or less etc. however 25% loss for UK, 35% loss for EU seems reasonable in the event of a no deal scenario and on the face of it shows they need us more than we need them. However:

  • For the UK – 25% of 60% total trade is 15% – a loss of 15% of our total UK wide trade.  This is significant by any stretch, its about £75 Billion in losses.
  • For the EU – 35% of 10% is 3.5%. EU losses are a fraction of ours.

However that isn’t the whole story.

That 25% of trade losses (as mentioned, around £75 Billion) will create a demand gap in the EU and 27 EU countries will have friction-less Single Market access to it.  Cars that are no longer sold to Italy by the UK can be sold by France or Germany.  Every EU country will be perfectly placed to go after that £75 Billion in lost trade and if they capture half of it their losses shrink very quickly to 2% or less.

How about the UK? Well, we will have no markets available to us after March 2019 that we don’t have today.  There is no new opportunity or opening in our markets that we can use to fill this 15% gap.  Any new trade deals will be several years out and no-one, not even the Leave Leadership, now expects us to sign deals of any size on the day we leave.

Different % figures can be used however in any scenario the impact on the UK of no deal is magnified in comparison to the EU as they are 4 or 5 X more important to us than we are to them, as a proportion of our total export economies.  And as mentioned, we are even less important to most of the 27 who barely trade with us but who also get a vote on the final deal.

However even that isn’t the whole story.

The country with the single biggest surplus is Germany who have huge reserves & will support the EU.  We are running at a deficit and can’t even afford our NHS.  We don’t have a Germany in our corner.

Conclusion

It is simply wrong to say the EU needs us more than we need them, or that we can handle a 15% loss in total trade whereas they cannot absorb a loss of 2-3.5%.  Again, Lilico is guilty of taking a UK centric view which is based on a misconception of our actual bargaining power.

This is not helpful as clearly the UK needs a good deal with the EU, and fooling ourselves that we can simply wait for the EU to come to us does not help the UK at all.

Now, all the above might be “delusional”. But it is the British perspective. And if other countries don’t grasp that, there’ll be a mess.

is the closing comment in the article, which essentially means “pander to our illusions, or else”.

Many will respond “ahh but of course we’ll get a deal” – that isn’t the point.  The point is we need a deal far more than the EU does and we cannot walk away without one, to do so would cause us far more pain than the EU.  Therefore, we will take what we are given or we will walk away with nothing.

The more we tell ourselves otherwise, the greater the chance we will walk away with nothing.

Existing EU trade deals post no deal scenario

The EU has 50 trade deals in place with the rest of the world. The UK cannot sign trade deals with non EU countries whilst in the EU, in fact technically it’s illegal to even negotiate and so it will take some time to resign those trade deals to the UK.  This is not a given – a trade deal signed with a market of 500 Million people is not as attractive as one signed for 65 Million.

Some deals may be signed on day one, however the more likely scenario is that we will have to re-negotiate many of those deals, likely on less favorable terms.

We have to assume a significant level of disruption to this trade following a no deal scenario.  Typically the impact of this is ignored by Brexit supporters.

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