The Briefings for Britain team set out some points below to consider if Article 16 is triggered and the EU then goes down the route of retaliation by suspension of the Trade and Cooperation Agreement (the TCA):
- We never liked the TCA and doubted its durability, calling it an ‘experimental peace’.
- We said that the EU would ‘be happy to threaten to collapse the deal if necessary’.
- Claims by Remainers that the TCA collapse will lead to ‘much higher’ tariffs are inaccurate. The weighted average EU external tariff the UK would face is only about 3%. The problem areas would be highly concentrated, in food exports and cars (some special adjustment measures might be needed here). But the UK is a large net importer of both from the EU – so if the UK mirrored EU tariffs in these areas, the EU would suffer bigger losses.
- The EU enjoys an overall goods trade surplus with UK of around £90 billion a year. The EU is the big winner from the TCA, which did very little for services, where the UK has an edge.
- The UK might lose around £10bn per year in exports to the EU from a 3% tariff and with trade elasticity of 2 (this is a conservative estimate, the elasticity may well be lower). Some of this trade would be diverted, so the net loss would be somewhat lower, maybe one half or one third of this estimate. There are unlikely to be additional losses from non-tariff barriers, since the TCA did little in this area. It is a very thin deal, as we have observed before.
- EU exporters have benefited so far from fewer customs processes on goods sent to the UK. These are being fully implemented from 2022, so EU trade flows to the UK are likely to be impacted. However, UK exporters, who have already had to adapt to the full panoply of EU controls, would not be affected.
- Irish bravado on Article 16 and retaliatory measures looks misplaced. Ireland would be the biggest loser among the EU27. It has a large export trade with UK (c. 10-11% of total), heavily weighted towards food and drink (33% of Irish food and drink exports are to UK, 44% of them beef), and this is where mirrored tariffs would hit hardest.
- The theoretical risk of ‘damage’ to the Single Market with an open border and no Northern Ireland Protocol is very small indeed under a zero-tariff and quota deal between UK and EU (the TCA). The TCA deal limits potential damage to the possible leakage into the EU of third country goods, on which UK/EU external tariffs differ. With WTO tariffs, the risk actually grows significantly. Indeed, it might encourage a lot of cross-border shopping if various goods, including well-known UK branded food (which is popular in the Irish Republic) are suddenly much cheaper in Northern Ireland.
- Encouraging UK business to divert trade away from EU faster is a good thing anyway, because the EU market is stagnant. The volume of UK goods exports to the EU has grown extremely slowly in the last twenty years.
- Claims (most recently by the OBR) that lower trade with the EU means big negative effects on UK productivity are not supported by the evidence, as we have repeatedly noted. Indeed, reorienting the UK economy towards faster-growing parts of the world might be positive for productivity in the long run.
- Reducing reliance on the EU is also positive for a more stable future relationship, since it weakens the EU’s ability to threaten border disruption to get its own way instead of negotiating in good faith.
- No TCA also means that the UK should probably terminate the Withdrawal Agreement as well. That would save many billions over the next 10 – 20 years (at least £40 billion – £800 million was paid to Brussels in Q2 2021 alone). This also removes unpalatable areas of lingering EU influence i.e. over citizens’ rights and the role of the ECJ.
- Obviously, ending the Northern Ireland Protocol is a big positive for NI itself, because as it stands, the Protocol could cost NI citizens 2% of their income (or more) if it were ever fully implemented. The likely political destabilisation which would result is something all parties should be trying to avoid.
- Dumping the TCA would also allow the UK to end EU access to British fishing waters. This would be worth several hundred million pounds per year in extra catch for UK fishermen.
- The EU has to give 12 months’ notice to end the TCA, but is proposing the immediate implementation of retaliation. This would mean the immediate implementation of counter measures by the UK (especially on fishing).
- The key thing is not to get dragged into another EU waterboarding exercise (aka negotiation) on the TCA. The position is very different now that the dust has settled. There is plenty of time for the UK to prepare for a WTO trade relationship with the EU – the hardest part of this for most traders, involving new border processes and costs, has already been done.
- The UK should concentrate on new trade deals, deregulation and getting rid of costly EU red tape, aggressively shifting trade away from the EU (especially France), tax reform to attract FDI, and rolling out the new smart border and Single Trade Window.
- In view of the above, perhaps the UK should consider announcing its withdrawal from the TCA first…
